Modi

Black Money and Chaos

The chaos created by demonetization is not because of a failure in implementation. It could not have been avoided by calibrating ATMs on time. It is a function of how much of India’s black money is held in cash.
To understand this, consider a thought experiment. Suppose that there was no cash black money in India, and yet the government, for some vague reason, announced demonetization. Would there have been a similar level of chaos?
Or consider another thought experiment. Suppose that the government announced demonetization, but also announced that the 500 and 1000 rupee notes could be exchanged at the bank without limit, no questions asked. Would a similar panic have spread through the economy?
My answer to both questions is no, and it would stay no even if you told me that in both thought experiments, the government was as unprepared with the task of ATM calibration as in the real world. That is because in both those situations, shops would continue to take the demonetized notes even though it would be illegal to take them.
In the real world, shops are refusing to take those notes, not because it would be against the law (we aren’t a very law-abiding society), but because of the difficulty of converting them to legal tender. This difficulty is because of the existence and quantum of cash black money (thought experiment 1) and the difficulty of laundering it (thought experiment 2).
Because of these two factors, the demonetized notes are trading at a discount. Because of this discount, there is a huge impact on the economy. Remember that the black economy is also a part of the economy, and a hit on the black economy is necessarily an attack on the economy, and the people affected aren’t necessarily, or even primarily the holders of black money.
Another way to say the same thing is to note that the discount on the demonetized notes affects everyone, not just those who hold unaccounted money. It affects daily wage labourers, it affects the supply chain for food, everything.
My initial reaction to demonetization was that it was a mildly positive move, but ultimately more of a PR stunt rather than one that would have a large impact one way or the other. That is because my thinking ran on the lines of ” Who keeps their black money in cash?” I thought was that people mostly maintained only their working capital in cash, and as a great believer in the efficacy of markets, I thought that money laundering channels would quickly take care of the black money that was in cash. The net result would be a PR victory for Modi, a one-time shock to the cash economy and a net cash transfer to the poor, as it would be the poor whose Jan dhan accounts would be used to launder all the black money.
From the chaos that is occurring, it appears that I was wrong about how much black money is stored in cash. Of course, I don’t have a baseline level of how much chaos was expected to compare the current level with. But the point is that if you believed that a lot of black money is stored in cash (as against circulated as working capital and laundered before storage) you should have expected a much higher level of chaos.
A full model of how much chaos to expect from the demonetization would consider:
  1. How much black money is in cash
  2. Efficiency of the laundering channels that will develop (The more efficient the channel, the quicker the economy will recover)
  3. How much of the remonetized cash will be sucked back into storing black money
  4. How’s quickly the Banking system can be remonetized with the new notes.
It looks like Modi has a similar mental model of demonetization. The government has flipped and flopped multiple times, but it has been consistent in one thing, which is that it had imposed ever tighter restrictions on changing money over the counter.
This makes no sense if you believe that the folks changing old 500 notes are the unbanked poor, but makes complete sense if you believe that it’s a channel to launder demonetized notes into remonetized ones AND if you believe that those notes will go back to black money storage. The problem though is that anything that hurts black money storage (#3) will also hurt the circulation of black money (#2) and this puts pressure on #4 even more.
I don’t know if this experiment will succeed. As I write this, it is the end of November and the ATMs around me are empty. If people are unable to withdraw money when they get their salaries in the first week of December, I expect hell to break loose.
But what this experiment has taught us is not, as one article put it, how much India runs on cash, but how much of India’s unaccounted money is stored in cash.

The Women’s Reservation Bill is a Bad Idea

A bill to reserve 33% of seats in legislatures for women would be a bad idea at any time; it is a terrible idea when a popular leader like Modi, with tendencies towards authoritarianism, is Prime Minister.

A characteristic of the Parliamentary System is that it tends to weaken the power of parliaments over time. This is particularly true when the nation is led by a strong and charismatic leader who can run a presidential-style campaign. In the General Election, voters want to elect this leader as Prime Minister, but his name is not on the ballot. Instead, they have to vote for the leader’s candidates in their constituencies. This means that the candidates owe their careers to this charismatic leader, and they don’t have to be very capable leaders themselves.

What I have outlined above may be called the Lamp Post Theory of Parliamentary Democracies, after the popular saying that Nehru was so popular that even a lamp post standing for the Congress had a good chance of election to the Lok Sabha.

Now, India is such a large, heterogeneous and unpredictable country that lamp post phenomena have not lasted for long. Yes Nehru was very popular, but towards the end of his career he was faced with strong grassroots state leaders who were electing chief ministers he was not fully comfortable with. Indira Gandhi managed to gain dominance over her party and the country. This, she managed by stamping out local leadership from the INC. Eventually, she too lost popularity, and her party is paying the price for not cultivating strong local leadership.

After the recent General Election, much analysis has been wasted on whether there was a Modi wave. I believe that the answer is obvious. Modi was very popular, probably the most popular leader India has seen in the past three decades. But he could not have won the elections without skillful alliance-building. He was able to negotiate alliances with other parties like the TDP from a position of strength. His popularity attracted other popular local leaders, both within and outside the BJP, and they worked with him rather than at cross purposes.

So yes, although Modi is a strong leader and has been handed what is a decisive mandate by the standards of the past 30 years, he has not acquired the kind of dominance Gandhi did. The BJP still has a mind of its own, the RSS is a very autonomous body and local leaders are still important to win elections.

If I were Modi, how would I move to acquire that kind of dominance? Modi has already moved to gain control over the BJP. He has forced some leaders into retirement, he has denied tickets to potential thorns on his side. But he has had to make compromises. He couldn’t sideline Sushma Swaraj, for example.

That is where a Women’s Reservation Act will come in handy. The Act will reserve 33% of seats in all legislatures for women, and these seats will change every election.

If you are a popular local male leader, there is a 50% chance that your seat will get reserved for women in the next election. You are at the mercy of your party’s leadership to provide you with a seat elsewhere, a constituency where you may not be as popular. Right now, your popularity provides insurance against that happening. If the party leadership denies you a ticket, they risk losing that seat, either because you can stand as an independent and win, or because the opposing party can put up a strong candidate. But now, because the seat is reserved for women, the party leadership can be assured that all candidates will be newbies. As a result, the importance of the local leaders will reduce and the charisma of a strong leader will be what wins elections.

What about women leaders? Their lot will be worse, for two reasons. First, they will be shunted from constituency to constituency and will not be given time to build a local base. They will be perpetual newbies. This means that they will be even more dependent on the national leadership to win elections. Second, because they will end up always fighting other newbies, they will be unable to build up a profile – for example the fight Smriti Irani put up against Rahul Gandhi, which raised her profile significantly, will be a thing of the past.

All MPs will be at the mercy of the party leadership. And when the party leadership is controlled by a popular and charismatic leader like Modi, you can imagine the consequences.

For these reasons, the Women’s Reservation Bill is a bad idea. The Anti-Defection Act, passed 30 years ago, grievously injured parliamentary democracy in the country. This will kill it off completely. We will end up with presidential democracy without a legislature to check the powers of the chief executive. I am in favour of the presidential system, but this is not the way to achieve it.

Gujarat Predictions

Two contradictory predictions about Gujarat:

  1. Modi will win comfortably, because he was never in trouble. It was media bias that made journalists see rebellions where there were mere rumblings.
  2. The exit polls are overestimating Modi’s votes for the same reason they underestimated Mayavati’s votes  – those who voted against him are less likely to say that they did.

Which is your pick?