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The strategy behind the demonetisation drive and how to fix some of the gaps in implementation

With all due modesty, I was one of very few (if not in fact the very first) commentators to suggest, in mid-November, that demonetisation should not be considered a one-off event, and that there is a long-term plan behind it. Now that the dust is settling on the December 30 deadline, and cash availability seems to be limping back to normal, I see no good reason to change my mind.

Since I am no economist and don’t understand technical terms like M0, it is not for me to comment on whether the exercise has been worth the pain in an economic sense. I am a strategist with an interest in technology, and from that perspective, I believe there is solid logic behind this: the kickstarting of India’s growth cycle. Here are two comparisons: one is Deng Xiaoping’s post-WTO boost to China, and the other is how Lee Kuan Yew accelerated Singapore’s growth.

Both those—and perhaps the stories of other tiger economies such as Japan, South Korea, Taiwan—in effect put their economies on a different trajectory than before. There are S-curves in every growth story: when you are starting from a low base, you may experience rapid growth, but eventually that plateaus, before drooping. The key is to give the drooping curve a kick that raises your trajectory to the next level. It is a matter of strategic planning to be able to identify and to jump on to the new curve.

In India’s case, the current curve is the one unleashed by P.V. Narasimha Rao in 1992 through his reforms. The low-hanging fruits from that release of “animal spirits” have given the Indian economy a lot of momentum, raising it to current levels of 7 per cent GDP growth far away from the Nehruvian-Stalinist crawl of 2-3 per cent for decades. But that’s not enough. India needs to aspire to China-like levels of 10-15 per cent growth for a couple of decades to be able to catch up with the rest of the world. Whether we will be able to do so is a moot question, given the various obstacles in the way.

One of the obstacles is poor governance. It is widely believed that a democracy will be unable to match the ruthless efficiency of an authoritarian (Singapore) or totalitarian (China) state. Yet, that is not obvious. In a democracy, voters are guided by self-interest. If there is a choice between someone who can lead them to prosperity, compared to someone who cannot, on an average the voter chooses the former, all other things being equal.

Another major obstacle is terrorism imposed on India by the friendly neighborhood terrorist State, and low-intensity conflict imposed by certain others by proxy with plausible deniability. We should price this into the calculations as an inevitable cost of doing business, assuming a lid can be kept.

A third obstacle is poor infrastructure, both physical and intellectual. The woes of India’s poorly maintained power lines, roads, and ports, are legendary. To some extent some of the wounds will be ameliorated by the GST, which should eliminate excise checkpoints and avoidable delays. The building of new ports, railroads, and airports may also go some way towards fixing the problem. The other problem is much more intractable: the poor quality of our schools and universities. I am not sure there is much hope in the immediate future in this area. We have under-invested, and then shot ourselves in the foot with insane laws such as the Right to Education (RTE).

A fourth obstacle is endemic (and epidemic) corruption. It is true that there is corruption in every society, and it will always be with us. What irritates Indians is ubiquitous petty corruption. As when a middle-class family finds that ancestral property has been magically transferred to a politically connected person. While petty corruption makes anything much harder to do in India, its effects, while repugnant, are less damaging than those of grand corruption. I mean the few hundred rupees a clerk charges to move your application for an electric connection from his desk, as compared to the millions extorted by a politician from an industrialist in exchange for a license.

What is grand corruption? It is not even the moral aspect of it that is a concern—although that certainly is an issue. It is the seriously material damage to the national interest that is the concern. For example, a contractor gets a government engineer to certify that his bridge is safe even if he has used sub-standard material. This is one of the reasons our infrastructure is so dubious: we never know when something will collapse.

Or, when a politician is influenced to order inferior artillery guns. This could cause untold damage when during a war, it turns out our guns or planes or submarines are duds. Or, when a politician takes a bribe to buy nuclear plants that a neutral observer would not recommend.

This, it must be acknowledged, is not an Indian problem alone. In, say, the US, the “pork barrel” is synonymous with politicians manipulating public funds to benefit private interests, or to give largesse to his/her core constituencies at the cost of others. But in rich countries, the difference this makes may be less iniquitous, but it can be a matter of life and death in poorer countries like India.

There are technological quasi-solutions to many of these obstacles, and almost all of them ultimately depend on that wise old saying: “Follow the money”. For, if the money trail can be followed, it reveals a lot. Remember that Al Capone, the famed Chicago mafioso whose plausible deniability was extraordinary, was finally jailed on a tax evasion charge.

In other words, if your spending or wealth is disproportionate to your declared income, you will have to answer to the Enforcement Directorate, which has teeth. Of course, there are clever ways of hiding your loot—you could have the money deposited in your or a relative’s account overseas (harder now that the Swiss are being forced to reveal details about their numbered accounts, although there are still several offshore havens). But the very fact you have to look over your shoulder because you leave electronic footprints is a deterrent.

Gold (especially the smuggled variety) is a popular repository of ill-gotten gains, and it will generally continue to be that way. Real estate may not remain so much longer, if the Benami Act forces dubious owners to fess up or cough up taxes. Thus the opportunity for fresh corruption has been diminished, and that, by itself, can be counted as a victory for demonetisation and a boost for the Indian economy.

But demonetisation has also, alas, demonstrated the weak points in policy implementation. The large-scale leakage of fresh currency notes shows how, in addition to rent-seeking bureaucracy, there is a fair amount of corruption in the banking sector as well, which has doubtless led to fraud, embezzlement, money laundering, and other sins. The bankers who were caught need to be made examples of, and mechanisms put in place to plug the leaks. A banking system without ethics is a poor basis for growth.

The other concern is system integrity. From what has been seen of the new BHIM app for e-commerce and so on, it is apparent that the National Payments Corporation of India can access individual banks’ databases over the internet (one hopes, using an encrypted channel) and make transactions happen. Now this is an open invitation to hackers. How do you maintain the integrity of the entire banking database? One solution would be to create a blockchain-based distributed database that is somewhat resistant to malicious hacking.

Similarly, a blockchain-based land registry and title management system may be appropriate to create reliable and un-forgeable evidence of ownership. This would immediately make it possible for anybody with a little land to become credit-worthy (incidentally the fact that many people will now have a credit history by virtue of their transactions having gone online will also do wonders for their apparent credit-worthiness).

That brings up the wretched question of cybersecurity in general. Once you have exposed the entire nation, including those who are unused to sophisticated phishing scams and call centre operations, there could be large losses for unsuspecting people (for instance, there is a big story in The New York Times about a call centre gang from Mumbai that has been terrorising naïve Americans by telling them that the income tax authorities are about to raid them unless a ransom is paid). The fact that the Sharadha and Rose Valley schemes, for instance, have anyway been devastating the poor shows how easy it is to defraud.

There is one more concern about the push to electronic money. Not only is it possible for any random teenage hacker to violate your privacy (not to mention professionals from, say China or Russia), there is always the concern about the panopticon: the all-seeing, omniscient and omnipotent State. With Aadhar and BHIM and other technologies, we are reaching—perhaps prematurely—a stage where the US has been ever since the Social Security number became your single ID. Identity theft is a major cottage industry there. The possibility of a Big Brother State is also worrisome. I personally am convinced that PM Modi has good intent; but who knows about his successors?

If we have traded privacy for growth, that may be a Pyrrhic victory. There is an open challenge to entrepreneurs to fix some of these gaps: in particular, can you figure out how to make robust, unbreakable systems, and provide just enough information, on a need-to-know basis, so that you can have the cake and eat it too?

Rajeev Srinivasan is a member of the National Task Force on Innovation, and a Contributing Editor of Swarajya.