Demonetization:- Explained

Demonetization is an act through which official currency of a state is deprived of its value as legal tender. It is  replaced by new legitimate currency.

Historically, demonetization of currencies by Government have been enacted in response to hyperinflations. For example, Germany under Weimer Republic in 1923, Boris Yeltsin’s Russia on Jan 1998, or North Korea under erstwhile leader Kim Jong on Nov 2009.

But demonetization in India is unique, it is a move towards structural reform, targeted at reshaping public attitudes towards currency with a view to move towards cashless economy. It holds special significance as India is on the cusp of enrolling GST Bill.

Demonetization is unraveled with following intentions:-

1. Elimination of counterfeit currencies which often used by terrorists and smugglers to fund their activities.
2. De hoarding of cash held by corrupt people, generator of large sum of black economy.

The bold and radical move have been initiated to address the two poignant economic and social menace.

The unaccounted and unexchanged black money would leave government with extra money to finance their infrastructure need as well as cash strived banks.

However, 85% of cash in circulation is in 500 and 1000 notes, which has been delegitimised. Now 15% of cash need to do all the task.

Of total money only 27.6% is held with commercial banks as cash and balance with RBI. Rest are in circulation with people of which 85% is demonetized. Such vast sum of currency and their replacement would take quite time. Some thinkers believe it may take as long as 6 months to get normalized.

In such scenario, poor people and middle ranged businessman are left in complete doldrum.

Distant villages where bank branches are not available and where poor don’t have any bank account are specially hard hit.

In country like India where poverty and illiteracy is such a widespread social menace, transition to cashless economy is quite challenging.

Prof Arun kumar, author of The Black economy in India, believes most of black money is held in real estate, bullion and offshore account. A/q him, only 3% of black money hoarders have cash with them. Hence, for such minuscule people creating havoc for entire nation is not justified. They could have been punished by other means too.

Terrorists and drug peddler that often feed on counterfeit and black money can resort to other means to fund their activities like drugs, arms etc. So, actors involving in origin of counterfeit notes should be traced and punished. As if government can create a type of currency it can also be created by others.

Hence, as GOI is monitoring situation in real time basis. It would act to dispel long queue in banks and ATMs.It should equally need to view such concerns as shown above. Its recent enacting of Benami Property Transaction(Prohibition) Amendment Act, 2016 shows firm stand of government against black money.

25 Years of Economic reform :-An overview

​Nothing on Earth can stop an idea whose time has come 

quoted the then finance minister Manmohan Singh unleashing the big bang reform of 1991.

Indeed the chaos over economic downturn due to fiscal deficit, inflation, unemployment etc had reached to its most egregious situation. Thus, reform leading to Liberalisation, Privatisations and Globalisation was an inevitable consequence.
The 25 years of liberalisation had brought the structural changes in Indian economy. It had brought far reaching changes in economics, social, political and Cultural sphere of India. Thought it’s repercussions over shortcomings and ill-effects of liberalisation too has raised questions.
Economy
India has changed its philosophy of economic development from 1991. Earlier it was State which was responsible of development now it was left to individual and market forces.
In many ways it did help India in achieving its development goals . As percentage of people below poverty line reduced from 46 in 1991 to 21 in 2011. Average life expectancy has increased from 58 years to 67. Rural wage increased from Rs 46/day to Rs 276/day.
Service sector emerged as the biggest beneficiar. It grew in leap and bound. Today it contributes around 57% share in GDP at factor cost (current price).
All this resulted in decline of absolute number of poor for the very first time in India going by Lakdawal committee or Tendulkar Committee.
Purchasing Power Parity (PPP) gives a comprehensible ideas on the standard of living and the cost of living in a particular country. When per capita income of Indian is calculated in term of PPP, the standard of living has improved for sure. However the cost of living has risen too. In 1991, per capita PPP was $1,173. In 2014, it rose nearly five times to $5,701. Nevertheless when compared with developed countries India’s standard of living as well as cost of living is quite low.
However, along with rise in income the social – minimum cost of living has increased too, due to increased pollution, industrialisation etc. As per one of Kerala study, the health cost of rich has increased by 250% while those of poor increased by 750% in post reform period.
India’s switching to market economy has ghastly marginalised a section of people. As excess to market need resources at disposal.
India’s growth in agriculture has almostly remained stagnant at around 2%. Its contribution in GDP has decreased from 29% to 15% in 2014. Though it still employs 50 percent of labour.
Contribution of manufacturing sector did not see significant rise. Its contribution remained stagnant at around 15 percent in 25 yrs of Reform.
Hence, overall it hardly had addressed the unemployment issue significantly. As decline in unemployment rate is only marginal from 4.3 in 1991 to 3.6 in 2014. India unemployment rate grew from 6.8 percent in 2001 to 9.6 percent in 2011, according to census data.
Jobless Growth

• At the time of reforms being introduced, majority of work force were :- illiterate, lack of access to any health service, inequality in ownership of land. Such economic and social underpinnings have dragged majority of people from getting advantages of Reform era.
• Such factors proved critical for development in post reform era in country like China, south korea etc.
• Capital intensive nature of modern manufacturing.
• The lack of skill in majority of people forced them to get employed in informal sector. Such jobs have often been described as vulnerable by World Bank.
• Artificial intelligence, computation and other modern technology too are replacing human as a low cost alternative.
• Due to long restrictive labour laws, Companies hiers workers on contract basis. Data from Annual Survey of Industries shows that 13.5 percent of workers in manufacturing sector were engaged through contract in 1991-92 which increased to 34.7 percent by 2011-12.
• The new economy which is more digital is slowly but definitely changing our prospect. JAM (Jandhan, Aadhar, Mobile based subsidy) Trinity and overall emphasis on second generation digital revolution which will spread across economic spectrum from agriculture, rural, healthcare, education etc will create a new avenue of job.
• The government on its part seems to have grasped this change. Hence new thrust areas – such as Digital India, Skill India, Start up India and Make in India – all focus on creating an ecosystem that will generate job.

Structural Issues

• While reforms addressed entry, they couldn’t catalyse exit. The Economic survey of India 2015-16 argues that entry without exit has probably met its limit. In almost every sector of economy, lack of exit is creating huge economic, political and fiscal cost.
• India can’t possibly hope to leapfrog decades of destitution with an unhealthy and untrained labour force. The casualty work both ways :- greater growth leads to improved health and education, but further growth is not possible without reinvesting a substantial portion of the gains in human capital of future generation.
• A strong market economy must effectively rest on an effective State. India on midst of large demographic dividend, which if not tapped could see this great civilization staring at the middle income trap with prolonged human costs.

Social

• Post reform period has seen huge inflow of money. Those at the advantageous position has used it both as tool and means to further amass huge wealth. It resulted in growing inequality as Global Wealth Data book 2014 shows top 1 percent has household Wealth equal to 49 percent in 2014, up from 37 percent in 2001. While those of 10 percent is equal to 74 percent in 2014, an up from 66 percent in 2001.
• Historical ideas of caste and class that justify inequality have been topped up in neo-liberal times with the belief that greed is good. This has resulted in a particularly uncaring middle class and exile of poor from their conscience and their consciousness.
• The reform era has given birth to whole range of aspirational class who look at their entrepreneurship and profession as means to social mobility.
• Respect to talent irrespective of caste and social gathering on same platform due to economic endeavor has to some  extent reduced caste based social stigma.
• Political Scientist Devesh Kapur had documented the rise of Dalit entrepreneurs in India. Dalit historically looked to State and more recently political mobilization as a tool for rectifying Cultural wrongs. While analysing data on a thousand Dalit entrepreneurs, the study brings into focus an entirely new avenue of mobilization where economy play an unparallel role.
• Women employed in organised sector got almostly doubled in the 25 years of Reform. It has empowered women to assert their right and transcend the patriarchal underpinnings.

Political

• Economic growth while preserving the sanctity of non-violent transitions has made election richer and labyrinthine.
• Unbridled flow of money has increased political and corporate nexus. Hence more use of black money in election. Rampant corruption in favour of corporate. Huge write off in budget etc.
• This has resulted in crony capitalism. Such incidence has further fueled inequality.
• Though gradual increase in literacy has made people more aware of their right. It has made political party answerable to people.

Culture

• Globalisation to some extent is a move towards homogenization of culture. Generally glorification of western culture  erodes regional culture.
• MacDonaldism and culture of denim-Jeans and T-shirt have seen an unprecedented level of acceptance leaving behind Indian traditional custom.
• Though Indian soft power too has grown through spread yoga, bollywood etc.

GST – Transforming taxation system in India

Parliament has recently passed the GST Bill (122 nd Constitutional amendment ). It is one indirect tax for the whole nation, which will make India one unified common market.

Touted as the single biggest tax reform in independent India, GST will be a swift move in the direction of one Uniform tax throughout country. Hence also quoted in context as “One nation, one tax”.
Till now centre and state both had their distinct article of taxation as mentioned in the seventh schedule of the Constitution. With the enactment of GST, such multiple taxation by Centre and State would be rolled back.

• Governance of GST
  The Constitutional amendment provides for the setting of the GST council, comprising of both centre and state representative. The council will decide Revenue Neutral Rate(RNR), the rate at which there would be no aggregate loss to the centre and state tax revenue.
  The Revenue Neutral Rate gets converted into three slab GST rate structure depending on exemptions.

1. Essential commodities with minimum rate.
2. Luxury and addictive goods with higher sin taxes.
3. On most goods and commodities, a standard rate will be applied.

It should be noted that Petroleum and Liquor is kept outside the GST.
The single GST rate will be split between centre GST and State GST. The split will be decided by GST council.
Taxation under GST
Credit of input tax at each stage would be available to subsequent stage for value addition. Hence GST is essentially a tax on value addition at each stage. The final consumer will bear only GST charged by  dealer in the supply chain.
There are two component of GST – Central GST and State GST. Both will levy and collect tax across value chain in the state. The input tax credit of CGST would be available for discharging the CGST liability on the output at each stage. Same  provision applies for SGST. Hence there is no cross utilization of credit would be permitted.
In case of inter-state transactions, the centre would levy and collect the Integrated Goods and Service Tax (IGST) on all intra-state supplies of goods and services under article  296(A).
The IGST would roughly be equal to CGST plus SGST.
The exporting state would transfer the centre the credit of SGST used in payment of IGST. The importing dealer will claim the credit of IGST while discharging his output tax liability (both CGST and SGST) in his Own state.
The centre will transfer to the importing state the credit of IGST used in payment of SGST. Since GST is a destination – based tax, all SGST on the final product will ordinarily accrue to the consuming state.
Benefits of GST

• GST will increase tax base. Hence state will have more resources for poverty alleviation and development.
• The GST will facilitate “Make in India “ by making one tax, one India and removing taxation complications. Hence would enhance the ease of doing business.
• It will improve tax governance and end tax terrorism.
• Ease of doing business by facilitating online tax payment and registration.
• Since PAN based monitoring of trade will expose the income and in its little way increase the direct tax collection.

Concerns over GST

• Vertical Imbalance –The mismatch between expenditure and revenue requirements. The centre possessed more revenue but less expenditure whereas the vice versa is true for states
  Horizontal Imbalance – There is disparity in revenue accrued by the states
• GST is essentially a tax on consumption implying that the states in which final consumption occurs, gets privilege of collecting the tax . This has serious implications for manufacturing states such as Gujarat, Tamil Nadu, Haryana etc.
• This will discourage manufacturing state and putting the entire “Make in India” concept in jeopardy.
• Mild pick up in inflation, as hitherto untaxed goods and services will be brought under the tax net.
• A meaningful loss of jobs especially in informal sector as this sector will no longer fly under the radar of the taxman. Hence lot of smaller trader will have huge losses.
• The centre and state will have a fixed share in GST. Thus, in case of natural calamities and matter of state unrest, state will be left vulnerable for revenue crisis. Hence , a straight jacket RNR , which is fine from centre’s point of view leaves the state to bear the grudge of Revenue shortfalls.
• However the enthusiasm shown in the indirect GST lacks in the Direct tax collection.

Indirect tax is regressive and poorer suffers the most. In India tax – GDP ratio is only 16.6 percent much lower than other emerging country (21%).The contribution of direct tax  to total tax ratio has declined from 61%in 2009-10 to almost half in 2015-16. The direct tax to GDP ratio has declined from 6.3 in 2007-08 to 5.47 in 2015-16.
Hence adequate attention on Direct tax should also be given.

Critically analyse Nuclear proliferation

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Nuclear Weapons Ensure Peace on Earth”

A
world without nuclear weapons would be less stable and more dangerous for all
of us – Margaret Thatcher

This line of neorealist thinking has its origins in the cold war period which saw
proliferation of nuclear weapons technology ,both vertically and
horizontally.After USA had conducted its nuclear tests in 1945,within two
decades Russia,UK,France,china also joined the nuclear haves club.In the later
decades india,pakistan and North korea too followed suit.While the nuclear race
in the world gave rise to calls for non proliferation and destruction of
nuclear arsenals ,the supporters of NWT argued that possession of nuclear
weapons ensures peace ,which is coined as nuclear peace.

They claim that the cold war remained ‘cold’ because
the two superpowers USA and USSR both possessed nuclear weapons.This
acted as a deterrent against engaging into a full-blown out war.The development
of second strike capability i.e. ability to strike back with nuclear weapons
against the nuclear aggressor ensured that the ‘deterrence of terror’ is
strong enough to desist any nation from engaging in nuclear adventurism.This is
why even when war seemed imminent like during the cuban missile crisis of
1962,the two superpowers realized the unimaginable consequences it would bring
and chose diplomacy as the way out of crisis.

possession of nuclear weapons gives strategic parity to states which are
weaker in conventional military powers .For example ,Pakistan has claimed.to
have gained that parity with India ,even though in conventional abilities it is
weaker than the latter.this ensures that bigger power doesnt threaten the
lesser.This kind of realism prevails upon the European powers like France and
Britain also,which have not done away with the weapons despite enjoying
protection under the NATO umbrella.

Hence the supporters of nuclear weapons claim that its not the United
Nations which has prevented the third world war,but its the nuclear weapons .

But,we need to define peace properly.How can we say its peace only
because it has prevented the third world war.This seems to be a naive view of
the world order.The basic assumption that nuclear fear ensures peace seems to
be deeply flawed,an oxymoron in fact.The nations live in constant fear of a
nuclear war.The theory of deterrence assumes that the international actors are
rational.But during situations perceived to be existential threat ,they may
resort to knee jerk idiosyncrasies.That is why in our case ,in India,there is a
concern when passions are charged on both sides of Indo-Pak border.

The argument that cold war never became hot because of
nuclear deterrence loses relevance in context of a number of proxy wars the two
superpowers fought.The 1979 invasion of Afghanistan by USSR led to US aiding
and arming Mujaheedins to fight Soviet forces.There were also other theatres of
war in North korea,Vietnam,Georgia etc.

The notion that possession of nuclear weapons makes the powers be them
to behave responsibly also lacks historical justification.The USA in the new
millenia fought two major wars in Iraq and Afghanistan.Russia’s adventurism in
Afghanistan and in the recent past in Georgia clearly point out to
this.Similarly,nuclear deterrence failed to prevent kargil war between india
and pakistan,though both of them had become nuclear powers by then.So,nuclear
powers become responsible actors should not be accepted as thumb rule.

The threat possesed by nuclear weapons is much more.The diffusion of
nuclear technology poses an existential threat .the world lives in constant
fear of the technology being acquired by the terrorist actors.If such
unimaginable proves right then whole humanity shall be doomed ,because they are
neither rational actors nor nuclear deterrence shall work against them.Even the
possession by the states like North Korea which are isolated from the
mainstream of international politics ,is seen as a grave threat ,given the
autocratic regime it is ruled by.

The problem is compounded by another two factors
.First,is the realibility of the technology to find out nuclear testing or
proliferation programs carried out by any country.The world community could
awaken to the North Korean reality when it tested its weapons in 2006.Second is
the transfer of technology by the states which already possess that
technology.It is said that China aided and supported PAk nuclear project to
contain India in the south asian region.

The only solution is to get rid of it.There should be universal
disarmament policy followed for nuclear weapons ,rather than any dicriminatory
regime like NPT ,which divides the world into nuclear haves and havenots.The
global consensus seems very difficult to reach.But rather than Thatcherian
advocacy of nuclear weapons ,what should guide the world community is the
following advice

“Japan
learned from the bombings of Hiroshima and Nagasaki that the tragedy wrought by
nuclear weapons must never be repeated and that humanity and nuclear weapons
cannot coexist”.-Daisaku Ikeda