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Are Indian businessmen being unfairly targeted?

By Girish Menon

Following revelations in the suicide note of V G Siddhartha - the founder of Cafe Coffee Day, the corporate world has started a whispering campaign that Indian businessmen are being unfairly targeted by government bureaucracies. This piece will try to examine the elephant in the room.

Indian businessmen are not one cohesive group. There are many sub groups varying in size and population; from the one man tea vendor to Ambani who aspires to be the biggest tycoon in the world. Not all business-persons receive the same treatment from the governments they have to encounter in their daily endeavour.

As far as the Ambanis are concerned, it was rumoured that his office would receive a copy of any government initiative even before it was announced in parliament. Some even suggest that policies are often drafted in their offices. Clearly, such businessmen are like the Goldman Sachs of the USA i.e. too big to fail. Rivals of Ambani envy the unfair distribution of advantages to this group. However, they don’t want it to be stopped but wish they could replace him instead. This group is large and growing.

If the free market mantra is to be applied then governments should not be indulging in such behaviour. This logic states that governments should recognise property rights, make necessary rules and let citizens pursue their self interest. They should not favour any businessperson.

Economist Ha Joon Chang attributes the growth of Toyota, Samsung and many other global MNCs due to the nexus between governments and businesses. He suggests that developing countries follow this strategy else their domestic firms will lose out to already existing western MNCs. Others term this government corporate nexus as crony capitalism.

The Indian corporate world has enjoyed the benefits of crony capitalism since 1947. Under the socialist policies till 1990s the Tatas, Birlas and Bajajs were among the few recipients of licences to do business. In the 40 years of their protected status they did not produce any world beaters. They even formed ‘The Bombay Club’ to lobby against the opening up of the Indian economy.

Even after the Indian economy opened up corporates lobbied the government to make arbitrary rules that gave them an advantage over their rivals. These corporates received loans from government banks and even more loans to avoid loan defaults. It is almost thirty years since the opening up of the economy and yet there are no world class products that have emerged from these corporates. Often, such corporates have only aspired to the takeover of monopoly public sector firms so that social profit can be converted to private profit.

However, the above group do not represent Indian business-persons. The largest group of Indian business-persons run small and medium enterprises. They definitely have a rightful claim to harassment by the government. They are victimised by the government’s bureaucracy in so many ways that I am surprised they still continue to do business. S Gurumurthy, the RSS ideologue on the board of the Reserve Bank of India, is right when he advocates that the Indian government should ease the conditions of doing business for this large group. Demonetisation was a recent  tsunami that further overwhelmed this group of drowning businesspersons. Often, their only plea is that their outfits should be outside the scope of government bureaucrats. And there is some merit in their argument.

It is an irony that the pleas of persecution by large Indian corporates are being aired when the real victims of government harassment, i.e. the small and medium enterprises, die a silent death. It used to be said of the Christian church,’The church complains of persecution whenever it is not allowed to persecute’. The cries of India’s large business houses seem to echo the Christian church.

India Business Role Models are Outed as System Manipulators

The Rafale Mystery Deepens : Why did Dassault Invest in An Obscure Anil Ambani Company?

Interview with Ravi Nair - the person behind this story.

Exclusive: Post-Rafale, Dassault Investment in Inactive Anil Ambani Company Gave Reliance Rs 284 Crore Profit

Without any of the publicity which accompanied its smaller investment in a joint venture with Anil Ambani as part of the Rafale deal, the French firm has paid nearly 40 million euros for a 35% stake in an obscure Reliance company.

By Rohini Singh and Ravi Nair in The Wire

New Delhi: Even as Dassault Aviation and Anil Ambani’s Reliance group battle allegations that extra-commercial considerations drove their joint venture on Rafale, regulatory filings in France and India reveal that the French defence major followed its JV with an investment in 2017 of approximately 40 million euros in another Anil Ambani venture that is loss making and has almost zero revenues. The investment translated into a Rs 284 crore profit for the Ambani group company, Reliance Infrastructure, which sold shares in a subsidiary, Reliance Airport Developers Limited (RADL) at a premium.
It is unclear how the valuation for the RADL stake was reached between the two groups or why Dassault would buy a substantial share in an unlisted company that has little to no revenues and has nothing to do with Dassault’s core business.

Public filings by Reliance Infrastructure, a Reliance ADAG group company, show that it sold a 34.7% stake in RADL, a wholly owned subsidiary, to Dassault Aviation in FY 2017-18. The terms of the sale are not known but Reliance said it made a profit of Rs 284.19 crore on the sale of 24,83,923 shares which had a face value of Rs 10 each.

Reliance Airport Developers posted losses of Rs 10.35 lakh for the financial year ending March 2017 and earned revenues of Rs 6 lakh. In the year ending March 2016, the firm had no revenues and posted losses of Rs 9 lakh.

The company has stakes in a clutch of subsidiaries owned by the group. Most of them are loss making and are airport projects that were awarded by the Maharashtra government in 2009 for Rs 63 crore. A Business Standard report dated October 2015 quoted government officials and ministers saying that due to lack of progress in developing these projects by the company a decision was reached to take back the airports. The company also reportedly wanted to get rid of its stakes in these airports but a news report from January 2017 indicated it had changed its mind.

Ironically, while the Maharashtra Airport Development Council (MADC) was prepping to take back charge of the airports due to dissatisfaction with RADL’s progress on the projects, it speedily allotted 289 acres of its land to another group company the same year.

Dassault Aviation’s annual report for 2017 mentions the firm’s acquisition of ‘non listed securities’ including a 34.7% equity participation in Reliance Airport Developers. “In 2017, we also strengthened our presence in India through an acquisition of a 35% stake in Reliance Airport Developers Limited, which operates in the management and development of airport infrastructures,” its report said.

Oddly, the annual report of Reliance Airports posted on the Reliance Infrastructure site notes that Dassault Aviation now holds 34.79% of ordinary shares but when it comes to describing the terms and rights attached to the equity shares, the details have been blanked out.


Screenshot of RADL annual report.

The transaction finds an indirect mention in the Reliance Infrastructure annual report, buried in Note 43 under the exceptional items head, as “profit on sale of investment in Reliance Airport Developers Ltd” of Rs 284.19 crore.

In the Dassault report, the net book value of securities in RADL is stated as 39,962,000 euros. By contrast, the net book value of its securities in DRAL – the joint venture with Reliance for the Rafale – is just 962,000 euros, though presumably it will grow.


Reliance Infrastructure, Annual report for FY 2017

In a recent interview to the Economic Times, Dassault CEO Eric Trappier said Rs 70 crore had been invested in Dassault Reliance Aerospace Limited, Dassault’s JV with the the Anil Ambani group. Of this only 49% is Dassault’s stake.

Filings by Dassault Aviation in France show that besides the Rs 22 crore that Dassault pumped in as equity, it has also given a 4 million euro loan to the JV which roughly converts to Rs 32 crore in Indian rupees. This money, a source in the Anil Ambani group told The Wire off the record, was used by DRAL to pay for its hangar at Mihan. In his interview, Trappier did not mention the money spent for the purchase of a 35% stake in RADL.

How the land was acquired

Prime Minister Narendra Modi announced the Rafale deal on April 10, 2015. In July 2015, Reliance Aerostructure applied to the Maharashtra Airport Development Council for land in its Mihan SEZ in Nagpur. It was allotted 289 acres in August 2015 for Rs 63 crore.

The company later said it would take only 104 acres. While the allotment was done in August 2015, Reliance Aerostructure only paid the dues it owed on July 13, 2017, after missing several payment deadlines.

Reliance Aerostructure was incorporated on April 24, 2015, days after Modi announced the Rafale deal. It was also given a license to manufacture fighter aircraft by the defence ministry in 2016, which opposition parties allege is in violation of government guidelines.

Support journalists who are unafraid to ask tough questions. Just Rs 7 per day from readers like you will keep The Wire going. Click here for more details.

Filings for financial year 2017 show that Reliance Aerostructure received an inter-corporate deposit of Rs 89.45 crore from Reliance Infrastructure, the same year that Dassault aviation bought 34.79% of Reliance Infrastructure’s stake in Reliance Airport Developers.

From the sequence, it would appear that Reliance Aerostructure used the money received from Reliance Infrastructure to settle its outstanding Rs 38 crore payment with MADC for the land allotted. The dues had been outstanding for more than a year. Filings by Reliance Aerostructure state that the company’s “net worth has been eroded” but was kept as a going concern because of adequate financial support from its promoters. In FY 2017, Reliance Aerostructure posted a loss of Rs 13 crore. The year before that, it posted a loss of Rs 27 crore.

In a recent interview to CNBC, Dassault CEO Eric Trappier had claimed his company chose Reliance ADAG as its offsets partner because it had land available next to an airport. However, the land was only given to Reliance by the state government after it had reached an understanding with Dassault to collaborate on the Rafale.

According to a Dassault press release, Reliance Aerostructure’s joint venture with Dassault Aviation – Dassault Reliance Aerospace Limited (DRAL) – was formally incorporated in 2017 but goes all the way back to April 2015.

The land contribution agreement filed by DRAL with the Registrar of Companies dated July 12, 2018 talks of a sub-lease agreement between Reliance Aerostructure, DRAL and Dassault Aviation. According to this agreement, DRAL, the joint venture partner, would pay Rs 22.8 crore to Reliance as premium for 31 acres of leased property to the joint venture. This debt was converted into “non cash consideration” for 22.8 lakh equity shares of the company. Therefore, the land allotted by the Maharashtra government was used to pay for Reliance’s equity stake in the joint venture company. Dassault aviation gave Rs 21.09 crore cash for its equity stake in the firm.

The Wire has contacted Dassault and Reliance ADAG seeking greater clarity about the land transaction and Dassault’s wider dealings with the Reliance ADAG group, including the valuation of its investment in Reliance Airport Developers Ltd. The story will be be updated with their responses when received.

Note: In an initial version of this article, the euro figure corresponding to RADL’s stated profit of Rs 284 crore was mistakenly stated as 4 million at the prevailing exchange rates in 2017. It is actually 40 million.

Big Business Strikes Again, this Time Through Modi Government's Assault on RBI

The unprecedented invocation of Section 7 is not in enlightened public interest – it is a brazen move to force the RBI to open bank funding to desperate corporates.

M K Venu in The Wire.In

Reserve Bank of India Governor Urjit Patel with former governor Raghuram Rajan in the background. Credit: Reuters/Danish Siddiqui 

The business cronies of this government have done it again. And they manage such coups each time with unfailing precision. This time, the Centre has taken the unprecedented action of sending a direction to Reserve Bank of India (RBI) under Section 7 of the RBI Act, the first step in a process of virtually issuing a diktat that the central bank must do whatever is necessary to resolve the potential credit freeze in the non-banking finance sector and relax norms for lending to small business.

The RBI over the past year placed lending restrictions on weaker banks, where non-performing assets (NPAs) and other warning indicators were much higher than normal, consequently eroding much of their capital. You can be sure once these norms are relaxed by an RBI under duress, bank funds will start flowing again to the cronies directly or indirectly because moneys are essentially fungible.

I’m told that one celebrated big business promoter from Gujarat, who is known to travel with Prime Minister Narendra Modi on official trips abroad, is currently borrowing short-term money at over 18% to meet his past loan servicing needs.

But once RBI relaxes the current stringent lending norms for banks and adequate liquidity is provided to trapped NBFCs, select big business cronies – owing nearly Rs 4 lakh crore to banks – will continue to get access to funds. In any case, these powerful promoters have managed to avoid going into bankruptcy proceedings as mandated by the RBI’s circular of February 12, 2018. Some of the power projects of the Adani Group, Essar, the Tatas and so on, who have repayment overdues of over Rs 1 lakh crore, are currently being given a fresh lease of life.
So make no mistake, the unprecedented invocation of Section 7 of the RBI Act, never done since independence, not even during the financial crises of 1991 or 2008, is not guided by enlightened public interest as the finance ministry may claim.

It is a brazen move to force the RBI to open bank funding to desperate corporates who need to save themselves so that they are also in a position to give the necessary funds to political parties via anonymous electoral bonds.

Also read: Modi Government Invokes Never-Used Powers to Direct RBI Governor: Reports

These corporate groups and their promoters remain immortal and untouched through all regimes. They manage to get a share of juicy defence contracts even while they owe over Rs 1 lakh crore of overdue loans to banks. Modi will also have to answer why a select group of promoters are getting special treatment by avoiding the RBI circular of February 12, 2018. Is there pressure on the central bank to dilute its rule which mandates that all borrowers above a certain level have to enter bankruptcy proceedings? Is a special dispensation being created for cronies?

These questions will surely haunt the Modi regime in the run-up to the 2019 elections. The sheer power exercised by these business houses is now becoming more and more apparent and naked.

Earlier these powerful forces ran a campaign against Raghuram Rajan and ensured he didn’t get an extension because Rajan had sent a list to the prime minister’s office (PMO) of politically-connected promoters who may have fraudulently diverted bank loans for purposes others than the financing of their projects.
Rajan had asked for a multi-agency probe against these errant promoters because RBI felt it alone did not have the wherewithal to do it. An RTI application by The Wire confirms that the list was sent in 2015 and the PMO is refusing to part with it even to a parliamentary committee headed by BJP leader Murli Manohar Joshi after several reminders.

Also read: Exclusive: RTI Confirms Raghuram Rajan Sent Modi List of NPA Defaulters, Action Taken a Secret

So, it is clear the government is hiding something and is now feeling impelled to get rid of the RBI chief by initiating action under the never-before-used Section 7 provision.

RBI governor Urjit Patel cannot heed the Centre’s directive as it would lower the dignity of the institution and erode the integrity of some of the tough decisions that the central bank has taken to clean up the banks and bring errant promoters to their heels. If Patel quits, India will become a laughing stock among global investors and the money markets could see unprecedented volatility. Remember, in his speech last Friday, deputy governor Viral Acharya had invoked the 2010 Argentine example where the central bank governor there resigned in protest after the regime tried to force him to part with the institution’s reserves to fill the government’s fiscal gap. The markets went for a toss after that in Argentina.

There is a strong parallel here as the finance ministry is also coercing the RBI into parting with a part of its contingency reserves (over Rs. 2.5 lakh crore) to meet the Centre’s growing fiscal deficit in an election year. All this is happening under the shadows of high oil prices, a growing current account deficit and a weakening rupee.

If the RBI governor resigns in these circumstances there could be huge repercussions. The invocation of Section 7 of the RBI Act is, therefore, an act of desperation that is bound to boomerang on the Modi government.

The Billionaire Raj: A chronicle of economic India

Meghnad Desai in The FT 

India is now one of the world’s economic hotspots. Stock images of starving children, miserable peasants and cheating shop owners have been augmented with those of high-tech development and booming cities. India is now the world’s fastest-growing economy. It is about to become the third-largest economy — at least in terms of purchasing power dollars if not yet real ones. Foreign investors are rushing in. In The Billionaire Raj, James Crabtree has written a compelling guide to what awaits them. 

To make India more accessible to the western investor, Crabtree draws an analogy between America’s Gilded Age at the end of the 19th century — that plutocratic moment of the Vanderbilts, Goulds, Rockefellers — and the newest of India’s billionaires. Did you know that India now has more billionaires than Russia? 

This sudden enrichment was the result of the long boom of globalisation from 1991-2008. India had initiated reforms to escape from four decades of conservative socialism, initiated by Jawaharlal Nehru, which did not trust private business and put the state in command. The Indian state is inefficient as it is, but disastrous in running business. Its airline Air India has racked up billions in losses; its banks are mired in non-performing loans. 

In 1991, Manmohan Singh, then finance minister, bit the bullet and began to liberalise the economy. Tariffs were cut, import licensing was removed, and the rupee was devalued twice within a week. He had little choice because India had run out of foreign exchange reserves and had to pawn its gold to secure a loan from the International Monetary Fund. 

The reforms took time to work but, from 1998 onwards, the economy secured high single-digit growth rates, triple the so-called “Hindu growth rate” of 3 per cent per year that prevailed during the first 30 years of independence. With a decade-long growth spurt from 1998 to 2008 came the vast fortunes generated in a crony-capitalist relationship between the ruling Congress party and its private sector clients and financiers. Crabtree, a former FT Mumbai correspondent, gives us a detailed treatment of the links between the politicians needing money to finance elections that were both costly and cheap. (The 2014 elections cost $5bn — or $6 per voter.) 

Crabtree gives entertaining portraits of some billionaires. The opening chapters cover Mukesh Ambani and his towering residential extravaganza Antilla, the most expensive house ever built in India, which now dominates the Mumbai skyline; the fugitive Vijay Mallya, a drinks tycoon who was once known as the King of Good Times; the reticent Gautam Adani, an infrastructure entrepreneur who owns ports, mines and refineries. Dhirubhai Ambani, the patriarch of the Reliance group, figured out how to negotiate government regulations and expand his business while keeping the ruling party on his side. Mallya went so far as to be voted into a seat in the Rajya Sabha, the upper house of parliament, after a reported donation of 550m rupees ($10m in those days). Adani prospered in Gujarat with the reported blessings of Narendra Modi while he was chief minister of the state in India’s north-west, where the politician enjoyed both a clean reputation and business-friendly credentials. 

Crabtree shows both how deep corruption reaches into electoral politics — but also how functional it is 

Beyond the personalities lies another part of the puzzle. Corruption has gone deep in the system. Elections cannot be financed with just legally declared donations. The donors want to escape attention of the tax man, as do the party leaders. It is a symbiotic relationship. Not even Prime Minister Modi, as he has been since 2014, is about to change it, though he has moved against crony capitalism. Armed with an electoral majority, he has set about breaking the political mould, ending the near 70-year hegemony of Congress. He has sundered the crony ties that the top echelon of government enjoyed with the “promoters” of infrastructure projects during the Congress years. Back then the nationalised banks had to lend money to a favoured few and it was understood that the money would not be repaid. No more. Insolvency procedures have been toughened. Debtors can no longer shield their assets from creditors. It was this that sent Mallya abroad. 

This book was written before these drastic changes. But whether he wins or loses the next elections, Modi has made revival of crony capitalism difficult. 

There are also other concerns. Crabtree worries over Modi’s dual persona as a development enthusiast as well as a Hindu nationalist. The fear is that this may increase intolerance towards minorities — Muslims and Christians — and disrupt peaceful economic progress. 

Crabtree’s vivid portrayal of the corruption of politics is very informative, and thought-provoking. He travels the country to show both how deep corruption reaches into electoral politics — but also how functional it is. When an economy is regulated, riddled with permits needed to do business, a few palms may need to be greased. A payment — or rent, as economists call it — may be required. But the rewards are considerable. The corruption market works. It may be immoral but it is not inefficient. 

It would be better if India became less corrupt. Crabtree thinks so. That would require a lot of courage and an ability to pursue radical reform. The leader who embarks upon it risks unpopularity — as Modi is now finding out. 

These are matters that cannot be settled in a single book. Crabtree has given us the most comprehensive and eminently readable tour of economic India, which, as he shows, cannot be understood without a knowledge of how political India works.

My predictions for 2018

1. Britain will do well in the negotiations this year. The final agreement will be a soft Brexit which the Remainers desire. There will be some restrictions on the free movement of people, something which the EU could have given to David Cameron to avoid all these complications.

2. Vijay Mallya will be extradited to India, he will remain unconvicted,  yet he will have to cool his heels at Tihar Hotel for some time to show that the government will take action against powerful businessmen.

3. Like Anil Ambani, the A listers with huge Non Performing Assets will carry out some debt restructuring. However they will not be named and shamed nor will they be rid of their business ownership.

4. England will win the Football World Cup.

5. Corbyn will not become Prime Minister as the Tory Party will do enough to stay together.

6. China's CPEC will run into bigger problems.

7. The Pakistan military will initiate peace proceedings with India.

Modi Songs

The East India Comedy

Shashi Tharoor on India's Demonetisation Disaster

Change comes in many forms to different countries. Some embrace change, some resist change, and some have change thrust upon them. Take India, which was plunged into chaos on the night of November 8th, 2016, when Prime Minister Narendra Modi, in a 48-minute address, announced that some ₹14 trillion worth of ₹500 and ₹1000 notes (roughly $7.50 and $15.00)—amounting to 86 percent of all the currency in circulation in
India—would become illegal as of midnight. People would have until the end of the year to deposit them in bank accounts (and pay whatever taxes and fines the authorities decided to impose on them), but they were no longer legal tender.

This unexpected shock-and-awe announcement, Modi said, fulfilled a declared campaign objective to fight “black money” or, put another way, cash made from tax evasion, crime, and corruption. The prime minister declared that his announcement would not only rid the nation of black money, it would render worthless the counterfeit notes that were reportedly printed by Pakistan to fuel terrorism against India.

The initial stunned reaction was followed by a panicky scramble to unload the expiring notes: the very night of the announcement, people rushed to petrol pumps to fill up their tanks, jewelers tripled their sales, and loans were hastily returned. There were unexpected consequences too: housewives who had salted away their savings in biscuit tins for a rainy day found their years of thrift would soon be worthless. In most cases, even their husbands had not known how much their wives had saved.

But within days the real result of the Modi announcement became apparent—the severe disruption of normal economic activity. Inept implementation made a mockery of the initial shock-and-awe. Not nearly enough new currency had been printed before the announcement (some estimates were that only 4 percent of replacement currency was printed), so banks did not even have a fraction of the money needed to meet consumer demand for new notes. Long queues snaked in, outside and around banks, foreign exchange counters (including at the international airport), and ATMs to change the old notes and withdraw new ones.

But the ATMs were largely empty, since the new notes had been made in a different size from the old ones and did not fit the existing ATMs. These needed re-calibration, a process that took tens of thousands of engineers several months to complete. The Government had not thought of making the new notes the same size as the old to avoid this obvious problem.

An additional complication was the fact that there are not enough ATMs in India: the country disposes ofonly 20 ATMs per 100,000 people, as compared to 77 in China, 114 in Brazil, and 279 in South Korea. Even South Africa has 70 ATMs per 100,000 people.

In the meantime, thanks to the slow speed of the Mint’s presses, cash was in short supply. Banks did not have enough money and so restricted withdrawals to small amounts of cash that most customers found insufficient. Though the permissible withdrawal limits kept changing, being raised and lowered confusingly, they went up with time—provided the bank had the cash available when one asked for it.

Such restrictions are arguably illegal—under which provision of law can an Indian citizen be denied access to the money in his or her own account? When, in Parliament, I asked the Finance Minister to name one country in the world that disallows people from withdrawing their own money from a bank, he could give me no reply.

Thirty days after the prime minister’s speech (in which he had asked the public to bear with inconvenience for just 50 days), only 30 percent of the currency in circulation had been restored. The Reserve Bank of India (RBI) told the Public Accounts Committee of Parliament on January 18th that it was up to 60 percent. The State Bank of India estimated that it would go up to 70 percent by the end of February.The Government’s own annual Economic Survey 2016–2017, released on February 1st, then claimed that replenishing the cash supply will be complete by March 2017—but that target too slipped. Cash shortages remained for months more; the rate of printing new ₹500 notes fell below target. It took another three months to remonetize the banking system.

The initial replacement notes all came in the form of an unusually high denomination (₹2,000 or $30) that most people did not find useful—especially since the government’s failure to print additional quantities of smaller notes meant that for weeks no one was able to make change for a ₹2000 note. Since over 90 percent of all financial transactions in India are made in cash, and over 85 percent of workers are paid their incomes in cash, the everyday economy was brought to a standstill in the last two months of the year. The recovery in the new year was slow, and official figures showed a marked slowdown in the country’s growth rate in the first quarter of 2017.

If this points to an appalling lack of elementary planning on the part of the government, the broader consequences have been far worse. The economy has plunged into chaos, and the decision looks more like a miscalculation than a masterstroke.

The lack of cash reduced both consumption and demand across the board. A booming economy that boasted the highest growth rate in the world suddenly became a cash-scarce economy. Production went down in all sectors. Small producers could not get working capital to keep their businesses going, and many had to shutdown. Daily-wage workers (a large majority of India’s labor force) lost their jobs because firms did not have the cash to pay them.

 All indicators—sales, traders’ incomes, production, and employment—were down in November/December 2016; India’s GDP, as estimated by former Prime Minister Manmohan Singh, will shrink by around a full percentage point for the fiscal year. At the end of January, former Finance Minister P. Chidambaram went further, saying that he expected the rate to be no more than 6 percent in 2017–2018 and 6.5 percent in 2018–2019, extending the bad news by another two years.

The Economic Survey 2016–2017 released on January 31st by the Chief Economic Advisor to the government itself states that demonetization is an aggregate demand shock, an aggregate supply shock, an uncertainty shock, and a liquidity shock. It says that the cash crunch “must have” affected the informal economy, which accounts for nearly half of the overall GDP and about 80 percent of the employment economy—one which runs on cash.

India’s unemployment rate has shot up to a five-year high of 5 percent in 2015–2016. According to the All-India Manufacturers’ Organization (AIMO), macro- and small-scale industries and traders have incurred 60 percent job losses and a 47 percent revenue loss because of demonetization. Not only are small-and medium-sized enterprises shutting down; medium and large infrastructure companies surveyed by AIMO have reported a 35 percent drop in employment and a 45 percent drop in revenue. AIMO estimated even higher losses of jobs and revenue by the end of March.

Current estimates tell us that real estate, construction, and infrastructure, which provide the most employment after agriculture, are set to lose over 100,000 jobs in 2017. The eight lakh crore (₹8 trillion) construction industry, which employs 45 million people, has virtually ground to a halt, with a drop of 80-90 percent in income.

There has been an inventory pile-up due to low consumer demand. Local industries—footwear in Agra, garments in Tirupur—suspended work due to a lack of money. Several enterprises are now struggling to their feet, whereas many have not been able to resume at all.

The informal financial sector—rural moneylenders who provide loans that amount to 40 percent of India’s total lending—has all but collapsed.

R ural India is in bad shape. The fishing industry, dependent entirely on cash sales of freshly-caught fish, has been deeply affected. This is even affecting coastal security, as I pointed out during Question Hour in Parliament, because the cash shortage has dramatically reduced the number of boats going out to sea to about 10 percent of previous levels, thereby reducing the number of eyes and ears available to our intelligence agencies monitoring suspicious activities in our waters.

Traders are losing perishable stocks and farmers have been unloading produce below cost—since no one has the money to purchase their freshly harvested crops. Peas that Punjabi farmers sold at ₹30 a kilo only a year ago were brought down to seven rupees a kilo two months after demonetization.

The liquidity crisis has deeply affected farm production, farm prices, and agricultural credit repayments.A study by two economists at Delhi’s Indira Gandhi Institute of Development Research found that in mid-November 2016, deliveries of rice to rural wholesale markets were 61 percent below usual levels, soybeans were down 77 percent, and maize nearly 30 percent. The winter crop could not be sown in time, because no one had cash for seeds, and the resultant harvest was lower than projected.

 All this has been hugely destabilizing in the short term. The prime minister asked people to be patient for 50 days, but those 50 days are long gone and it is clear that the process will take much longer before normal money supply is restored. As for the long term, as former Prime Minister Manmohan Singh trenchantly observed, quoting Keynes, “in the long run, we are all dead.”

The story of demonetization was of unnecessary suffering throughout the country. As ordinary people clutching their savings wasted hours standing patiently in queues that offered no assurance of money at the other end, fatalism battled with exasperation. Stories of individual tragedies were reported daily—of hospitals turning away patients who only had old notes, children not being fed, middle-class wage-earners unable to buy medicines for the sick, and as many as 135 people reportedly dying after collapsing in bank queues or committing suicide. Ironically, the rich—more likely to hold credit cards and be “cashless”—have been relatively unaffected; the main victims have been the poor and the lower middle-classes, who rely on cash for their daily activities.

Thus, those at the bottom of the economic pyramid are the principal victims of this supposedly “pro-poor” policy. Yet they have reacted with stoicism, swayed by the government’s assiduous public relations messaging that portrays their difficulties as a small sacrifice for the nation. “If our soldiers can stand for hours every day guarding our borders,” one popular, and hugely effective, social media meme asked, “why can’t we stand for a few hours in bank queues?”

The impact of the demonetization in terms of the cash deficit and its consequences has been particularly severe in Kerala, the state I repre­sent in Parliament, because of the distinct character of its banking sector, in which the cooperative sector and Primary Cooperative Societies play a central role.

Overall, the cooperative banking sector is much more active and vibrant in Kerala than elsewhere in India. As a result, over 70 percent of the deposits in cooperatives in India come from Kerala; over 70 percent of the non-agricultural loans and advances made in India are made in Kerala; and over 15 percent of agricultural loans and advances disbursed in India are disbursed in Kerala. But the Reserve Bank of India prevented all 370 central district cooperative banks and 93,000 primary agricultural credit societies in the country from depositing or converting old notes after November 8th, 2016.

Keeping the cooperative banks and societies out of the note exchange process was particularly damaging for Kerala. Dairy, agriculture, and the market for fish have all been severely affected.

Tourism, vital for India’s economy, was hit hard, albeit briefly. Foreigners have been spared tragedy but not inconvenience, for they were only allowed to cash a hundred dollars a day and often had to go from bank to bank to get the money. In November 2016, for instance, tourists returned without seeing the Taj Mahal because their notes were not accepted at the ticket window, and travel plans were curtailed by lack of new money.

Tourism works by word of mouth: how will one regain the trust of foreigners that have already spread the word of their harrowing ordeals in demonetizing India?

While it is clear that the government had not done its homework before launching the scheme—and in a manner typical of the Modi Administration, had consulted very few officials within it—it is not the prime minister’s style to be on the defensive. His propagandists boasted of a “surgical strike” on black money, corruption, terrorism, and counterfeiting. Over time, it became painfully clear that those objectives had not been met. A “surgical strike” is supposed to be precisely targeted, but it is clear that the collateral damage is so extensive that the pain it has inflicted outweighed any tangible gain, at least in the short term.

In the beginning of December 2016, new victims surfaced, ranging from salary earners trying to get money out of their bank accounts and pensioners unable to receive their monthly allowances, to fathers and brides unable to finance long-planned weddings at the peak of the Hindu marriage season. As late as the end of January 2017, Indians were surviving on less than half the cash that had been in circulation at the beginning of November 2016. Shockingly, this was all happening in a country where cash represented 98 percent of all transactions by volume and 68 percent by value. While the cash is now largely back in circulation, memories of demonetization have shaken many people’s faith in the currency.

Indeed, the Modi government itself has effectively conceded that demonetization has failed and has had a severe adverse economic impact on India. In its list of achievements touted in the Economic Survey 2016–2017, the list takes note of assorted schemes continued from the previous regime, but fails to mention demonetization. The Survey also accepts that demonetization resulted in “growth slow[ing], as demonetization reduced demand (cash, private wealth) [and] supply (reduced liquidity and working capital and disrupted supply chains), and increased uncertainty” and “job losses, decline in farm incomes, social disruption, especially in cash intensive sectors.” To this must be added the economic cost of printing and replacing notes, estimated at ₹1.25 trillion.

Unfortunately, there is no evidence that any of the declared objectives of the scheme will be attained. In a largely cash-fueled economy, all cash is not “black money” and all black money is not cash. In fact most of India’s black money has been invested in real estate and other forms of property, gold and jewelry, investments in property abroad, and “round-tripping” that has seen the money return to India’s stock market as “foreign investment” via countries like Mauritius. The Modi move, therefore, touches only a small proportion of black money assets.

Worse, the government had hoped that the sudden move would eliminate a large portion of the black money holdings altogether from the government’s liabilities, since it was assumed that many hoarders would destroy their money rather than attract the attention of the taxman by declaring it. Various agencies of the government had initially estimated that around 25 to 35 percent of the demonetized banknotes would not be deposited by the stipulated dates. On November 23rd, 2016, the Attorney General of India told the Supreme Court of India that the government expected that notes worth four to five lakh crores (some $800 billion) would be rendered worthless by not being deposited.

But those who held large quantities of black money seem to have been more resourceful than the government and have found creative ways to launder their money, with the result that most of the estimated black money in circulation has flooded into the banks. Some well-placed friends of the ruling party were allegedly tipped off before Modi’s announcement, leading to suspicions that the well-connected may have had time to dump their black money stocks. Though the Reserve Bank of India has so far refused to release official figures, claiming to a parliamentary panel that they are still counting the old notes received, experts agree that the amount of black money that will eventually be wiped out will fall significantly short of the initial estimates. Indeed, there may be no liability write-off at all.

It has been widely reported that, by the end of December 2016, around 95 to 97 percent of the demonetized notes in circulation had reached the banking system. Indians abroad and the Central banks of Nepal and Bhutan, which keep some of their foreign exchange reserves in Indian currency, hold a part of the remaining notes. The actual value of notes rendered worthless will be known only after June 30th, 2017, which is the deadline for Non-Resident Indians to exchange any demonetized cash that they may hold at specified offices of the RBI. 

However, it already appears to be clear that a maximum of only two to 3 percent of the demonetized notes will remain undeposited, unequivocally indicating that the demonetization exercise has failed to achieve its primary objective of cleansing the economy. The RBI Governor has conceded that there is no impact at all of demonetization on the RBI’s balance sheet.

And since corruption seems to be a way of life in India, it will not be long before the old habits of under-invoicing, fake purchase orders and bills, reporting non-existent transactions,and straightforward bribery all generate new black money all over again. The government’s plan is therefore likely to be ineffective beyond the short term, since it does nothing to control the source of black money.

Indeed, in the first six weeks after demonetization, the Income Tax Department announced it had seized ₹5 billion in unaccounted cash from people hoarding currency they could not explain.Strikingly, ₹920 million of their seizure happened to be in brand new ₹2000 notes! Cases of corrupt officials, including bank managers, being caught red-handed in illegal transactions have been reported, all of which involved the new currency. Some bank managers worked from 9 am to 5 pm telling people they had no money, and then from 5 pm to 9 pm gave money through the back door to money launderers for a fee.

Though I am by no means tarnishing all bank mangers for the sins of a few, the fact is that in its drive against corruption the government has created new forms of corruption. Black money clearly continues to be generated—it has merely changed its color and shape. Black money has become white by way of pink! And, of course, ₹2000 notes will take up less space in the briefcases of the corrupt than ₹1000 notes did.

The Prime Minister’s other declared objectives have not been met, either. Demonetization is not a necessary exercise to achieve the objective of thwarting counterfeiting, and the government’s citing of such an aim displays considerable overreach. Media reports confirm that counterfeit bills of our freshly designed currency notes are already in circulation. This could, however, have been prevented by enmeshing strong security features with the design. It seems that the government has missed the opportunity of ensuring the adoption of such security features in the new ₹500 and ₹2000 currency notes that it launched post-demonetization. This indicates a lack of foresight and inadequate planning on the government’s part. There appears to be no special new watermark, no security thread or fiber, no new latent image, and certainly no nano chip, as BJP supporters were boasting on social media!

Will a mere change of color and size render the notes safe? Shockingly, RBI has admitted that three different versions of the ₹500 note have been printed in haste. If all three versions are authentic, one can reasonably assume that this is going to confuse the public and make it easier for counterfeiters to get away with their own fake versions.

B ut still, how big of a problem is this? A study conducted by the Indian Statistical Institute in Kolkata, under the supervision of the National Investigation Agency, estimated that the value of fake Indian currency notes in circulation was about ₹400 crores, which amounted to only roughly 0.03 percent of the withdrawn currency.

It also indicated that the ability of banks to prevent counterfeit notes being deposited was limited, since their machines often fail to identify fake notes and bank tellers—overwhelmed by the pressure of the astronomically high level of deposit activity in the 50-day window period—could not make the manual effort to identify fake notes.

As a result, every indication suggests that several fake currency notes have slipped through into the banking system and become legitimized. Thus, far from hurting counterfeiters, demonetization may have helped legitimize fake currency by having it exchanged, amid the chaos, for new notes.

Prime Minister Modi also cited among his objectives the undermining of terrorist and subversive activities. He even went so far as to say, on December 27th, that “through the note ban, in one stroke, we destroyed the world of terrorism, drug mafia, human trafficking and the underworld.”

But empirical evidence collated from data on terrorist strikes and fatalities from the Global Terrorism database and the South Asian Terrorism portal shows that it is very difficult to establish a causal relationship between the number of terrorist strikes on Indian soil and the absolute levels of currency in circulation. In any case, we are seeing reports of terrorists being caught or killed in Kashmir in possession of large quantities of new notes. So where is the claimed effect on terror financing?

Meanwhile, the goalposts kept shifting: the Reserve Bank of India issued no fewer than a hundred notifications on demonetization—some 138 in 70 days until I stopped counting! Each of these was intended to tweak an earlier announcement. Many are referring to this once-respected institution as the “Reverse Bank of India” for its frequent reversals of stance on such matters as the amounts of money permissible to withdraw, the last legal date for withdrawals, and even whether depositors would have their fingers marked with indelible ink so they could not withdraw their money too often.

Demonetization has caused serious and seemingly lasting damage to India’s fledgling financial institutions, most notably the RBI, which conspicuously failed to exercise its autonomy, to anticipate the problems of Modi’s scheme, prepare its implementation better, and to alleviate its impact. The United Forum of Reserve Bank Officers and Employees wrote to the Government on January 13th, 2017, pointing to “operational mismanagement,” which has “dented RBI’s autonomy and reputation beyond repair.” The inexplicable silence of its governor, Urjit Patel, has reduced him to a lamb. But this “silence of the lamb” is eating India’s citizenry alive.

In one recent change of declared objective, the prime minister and finance minister are now talking about moving India to a “cashless society”—an idea and a phrase that was not mentioned even once in Prime Minister Modi’s original November 8th, 2016, speech. (This was hastily amended to a “less cash” society when the absurdity of the proposition was widely pointed out.) But they seem blissfully unaware of the fact that over 90 percent of retail outlets do not even have a card reader at the point of sale, that half of India’s population is unbanked—India is home to 21 percent of the world’s unbanked adults—and that the overwhelming majority of their nationals still function in a cash economy. In fact, 97 percent of retail transactions in India are conducted in cash or check. Few consumers use digital payments: only 11 percent used debit cards for payments last year. Only 6 percent of Indian merchants accept digital payments. And fewer than 2 percent of Indians have used a mobile phone to receive a payment, compared to over 60 percent of Kenyans and 11 percent of Nigerians.

As columnist T.J.S. George asked: “Are we to assume that daily wage earners, small-time farmers and sundry hawkers who don’t even know what is a bank will be happy to see the country getting rid of cash, rather than vague things like illiteracy and poverty?”

The plain fact is that the digital infrastructure for “cashlessness” simply does not exist in India.The aforementioned Economic Survey acknowledges that digital transactions face significant impediments.

Though the government hopes many will use their mobile phones for cashless payments, the Survey enumerates approximately 350 million people without cellphones (the “digitally excluded”); 350 million with regular “feature” phones, and 250 million with smartphones. A mere 34.8 percent of the country has internet access, and there are around 200 million users of digital payment services. A 2015 World Bank study of bank-account usage and dormancy rates across different regions found that only 15 percent of Indian adults reported using an account to make or receive payments.

In such an environment, a cash scarcity is economically crippling. Moreover, most mobile applications and internet banking websites are largely available in English, a language not understood by a majority of the people.

There are also appalling deficiencies in cyber-security. Ours is a country where cyber-crime flourishes; the government’s drive for cashlessness may be creating new vulnerabilities and new victims. Expecting India to become a “less cash” economy at this point is like removing 86 percent of a person’s blood circulation and then asking him to dance.

Studies confirm that most Indians who use cards use them just to withdraw cash from ATMs; making payments by plastic is still something of a novelty. Multiple stories—which might have been hilarious, if they were not so pathetic—have been told of people patriotically trying to use plastic at the few outlets that do accept cards and being told “the server is down”; of salesmen frantically rushing out onto the street from their shops with card-readers in hand hoping to catch a better signal; and of single transactions taking a dozen minutes because the card-reader keeps breaking down in mid-execution.

India offers some of the slowest broadband speeds in the world, and at least a third of the population has no reliable electricity supplies. It is all reminiscent of Marie Antoinette: “if they do not have cash, let them use plastic!”

The Government seems to be engaged in an exercise to furnish the penthouse of a building whose foundations it has not yet dug. As the Harvard Business Review noted, “India’s digital state (it ranked 42nd out of the 50 countries we studied in our Digital Evolution Index), does not engender the threshold of trust needed for cashlessness to take hold in a meaningful way.”

Worse still, there is a transaction cost involved in each digital payment that is absent in any cash exchange—so using “less cash” actually involves more expenditure for the payer. This obviously affects ordinary citizens who are used to cash, which involves no transaction costs for them. It is also expensive for merchants to adopt digital payments, which affects them adversely. Merchants highlight the high cost of even trying out these machines as a factor that is driving down interest in acceptance of digital payments. “I was thinking of installing a card machine at my store. But the banks asked for a ₹5,000 deposit,” said one merchant in a recent study.

The government is doing nothing to ensure point-of-sale machines are made available to traders, small retail outlets, and small and micro enterprises, free of cost, as I suggested in Parliament, or to remove charges for all cashless transactions.

The financial implications of moving to a “less cash” economy have raised related concerns. Dark suggestions have been made that the real beneficiaries of demonetization are the handful of companies that specialize in digital payments, especially by mobile phone. (Only 2 percent of India’s nearly one billion mobile phone users have ever used their phones to make digital payments; although this figure began shooting up after demonetization.) In addition, digital transactions, by leaving a traceable record, add to the state’s ability to monitor individuals’ expenditures. As former Finance Minister P. Chidambaram asked,

why should a young adult be forced to disclose that she bought lingerie or shoes or he bought liquor or tobacco? Why should a couple be forced to leave a trail of a private holiday? Why should an elderly person leave a record that he bought adult diapers or medicines for his ailments? Why should the government or its numerous agencies have access to our lives through access to Big Data?

These are serious questions that call into account the Government’s insouciant announcement of objectives that were never presented to Parliament for approval until three months later, when the policy was irreversible and the damage had already been done.

Equally serious is the continuing concern about the legality of the government’s action. The entire demonetization exercise had been conducted by the issuance of gazette notification no. 2652 by the Joint Secretary, Finance, under Section 26(2) of the Reserve Bank of India Act of 1934. This provision gives the Union government the limited power to demonetize certain series of the country’s currency through a notification. This provision does not, however, give the government the power to freeze bank accounts through limits on cash withdrawals, disrupt normal banking operations, and impose mandatory disclosure requirements (such as identity cards) while depositing cash into bank accounts or exchanging old notes.

The relevant provision of the aforementioned Act unambiguously states:”(1) Subject to the provisions of sub-section (2), every banknote shall be legal tender at any place in India in payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government.”

This means that the money every Indian holds in her hand or in the bank is a debt guaranteed by the government to her. Currency thus represents a ‘public debt’ owed by the government to the holders of banknotes. “I promise to pay the bearer of this note ...” vows the RBI Governor on every Indian currency note. Every currency note is a contract between the bearer and the state, something that has been signed in good faith and ratified by the prevailing law of the land. The questions that then arise—and have still been left unanswered by the government and the courts—include: Can this contract be repudiated unilaterally by the state? On what legal grounds can the RBI write off notes that it had promised to honor?

And while we are considering the issue of legality, why has the RBI not placed in the public domain the Minutes of the RBI meeting of November 8th, 2016, that was supposed to have requested the prime minister to make the announcement he did? Is it for fear of revealing the real nature of the meeting would only confirm the Bank’s surrender of its autonomy to the government? Only eight out of 21 Directors attended, and four of them were officials. Only four independent Directors were present.

This entire decision-making process was a Government exercise trampling on the autonomy of the RBI, rather than a decision of the institution meant to be in charge of India’s monetary policy.

Among the longer-term effects of this monetary disruption have been unemployment and severe dislocation of India’s informal economy; the collapse of many marginal businesses unable to survive the ongoing loss of income; severe reductions in crop yields and problems pertaining to agricultural credit; and the accelerated flight of investment out of India.

Even more worrying is the prospect of a long-lasting decline in India’s so-far robust economic growth, and the danger that it will push more Indians who were in the process of escaping poverty right back into it.

The burden of demonetization has undoubtedly been regressive, as it has most negatively affected the poor and the unbanked, which have had to lose their daily wages to stand in queues or have lost their jobs because of non-functioning markets; and they are the ones who are expected to transform their financial habits. The truly cashless are the poorest Indians, who depend on cash for their daily survival: as the Harvard Business Review puts it, “this unfortunate crisis is a case study in poor policy and even poorer execution. Unfortunately, it is also the poor that bear the greatest burden.”

While many Modi fans are blaming the implementation rather than his intent, the fiasco was inherent in the design of the policy.

It is clearly a “symbolic” policy—high ambiguity, high conflict, top-down, centralized, and authoritarian. There was no “policy skeleton,” and, worst of all, no cost-benefit analysis, no evidence that alternative policy options were considered. It is clear no impact study was done, judging by the blizzard of new official notifications every day, tweaking and fixing the regulations.

The government has presided over a non-transparent policy environment that seems entirely unconducive to the creation of a cashless society.

This is a manufactured crisis. The government, for no public benefit anyone can understand, has thrown a spanner into the works of the Indian economy. It is an ill-conceived scheme, ill-planned, poorly thought through, badly implemented, and disastrously executed. Demonetization failed in its stated objectives. Deep rooted problems, like corruption or terrorism, are not amenable to blunt, one-off policy instruments. Demonetization was the equivalent of an “anti-stimulus” policy intervention, and the consequent drag on demand has been significant. The government liked to boast of being the world’s fastest-growing major economy; it is a boast it can no longer make, since, thanks to demonetization, it slipped behind China again.

Modi came to power in 2014 promising to boost growth, create jobs for India’s youthful population, and encourage investment.These objectives lie in tatters with his ill-considered demonetization. He abolished the central government’s Planning Commission to signal that the days of top-down statist control of the economy were over, but his demonetization decision has brought back the worst days of government control. His reputation for being an efficient and competent manager is irremediably stained by the implementation disaster. How long it will take for India to recover is anyone’s guess.