ARGUMENTS IN CIRCLES - EVERYDAY AFTER DEMONETISATION

by R.Mohan
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New and newer lessons in economics and politics are being dished out every day by persons of various hues. The intention here is not to name them and attack, nor to add another page to these lessons. But we need to unlearn a few things taught in recent discourses. Let us take a few minutes to have a preliminary check of the Hypotheses that are being floated.

HYPOTHESIS 1. There will be more money for the governments that to spend on social welfare schemes as banks are awash with cash and taxes will increase in a cashless economy.

This is a beautiful and appealing hypothesis, though its direct connection with sudden demonetisation is highly questionable. The first question is how do money in banks become available to the government for spending. By elementary principles, banks will try to lend money to eligible borrowers at a higher interest rate than what they pay to depositors. That is how they make a profit. If economy is down and borrowers are not forthcoming, as their expectation of future growth is low, banks prefer to invest the excess funds in safe sovereign government securities. This is what that had happened since November 8, till RBI intervened to impound the 100 percent  of chess deposit as compulsory interest free Cash Reserve Ratio under section 42 of the Reserve Bank of India Act,1934. In this scenario, how has the excess cash helped more spending on social sector schemes? The government could have spent more on social sector schemes through budget and borrowed from market directly if necessary. However, this was despised as fiscal profligacy and indiscipline for wasteful spending .Now this is being glorified after compulsorily taking cash away from public by making 86 percent of the currency not as legal tender. Borrowing through circuitous means is portrayed as a great economic innovation after forsaking the far easier route of sovereign market borrowing through issue of government securities.
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The second argument is that tax revenue is going to increase. The indirect taxes in India are largely dependent on private consumption expenditure. This is has been coerced into a slowdown and all States have realised that their tax revenues are going to decelerate forcing them to cut down expenditure  in order to adhere to mandated fiscal and revenue deficit targets. The benefit in direct taxes, expected from anti black money drive, if any, can take two years or more to show up, except in cases where there is sudden rise in voluntary compliance. The government's confidence can be tested only if latest data are known. As of now both arguments of Hypothesis 1 rest on extremely fragile grounds.

HYPOTHESIS 2. Government is leading the poor in a battle against the rich and the corrupt.

This is a carefully woven political narrative, sensing that the neo liberal crony capitalist domination is drawing the ire of many sections in the society. Instead of tackling this straight, Placebo is being given. Here, the state is shown as leading a revolution for the poor and it is propagated that in the interregnum their suffering is inevitable. This narrative is woven, when state is helpless or does not have the will to resolve the social tensions unleashed by the capital' s hegemony. The scheme for granting immunity to the rich, who have unaccounted money, is ironically called Garib Kalyan Yojana! This narrative needs to be seen through.

To summarise in highlight, we are In a circular argumentative trap. Demonetisation was not needed for doing any of these. But demonetisation provided the ground for these measures to be preached by the establishment, which otherwise had abhorred these economic and political ideas, as fossils or relics of an outdated era. The need of the hour is that the genuine progressive thinkers and activists should come out of this circular trap and argue the case for a more proactive pro poor role of the state so that vulnerability induced by finance capital is mitigated at least partially. Placebos only divert the attention and do not meet the issues.