Tag Archives: Demonitisation

Remedy for Monumental mismanagement of the economy by Dr.Manmohan Singh


In his article (“Making of a mammoth tragedy”, The Hindu, December 9), Dr. Manmohan Singh attacked the demonetisation of high denomination notes (HDNs) by the National Democratic Alliance (NDA) government as the “making of a mammoth tragedy”. In his prose, Dr. Singh speaks less as an economist in which capacity he is respected more than as the former Prime Minister, the role which has actually dented his image. Yet it is best to respond to him on economic issues which he has kept away from, not to his political verses. Undisputed facts, not alluring rhetoric, should decide whether demonetisation is a tragedy or a remedy. Is it a monumental mismanagement of the economy as Dr. Singh charges? Or is it a remedy for the accumulated filth as Prime Minister Narendra Modi claims? To know the answer, the story of the Indian economy from 1999 to 2004 under the NDA and from 2004 to 2014 under the United Progressive Alliance (UPA) needs to be recalled.

Real versus statistic

During the NDA rule (1999-2004), real GDP grew by 27.8 per cent, annually 5.5 percentage points. Annual money supply, that fuels inflation, by 15.3 per cent. Prices by 23 per cent, annually 4.6 per cent. Asset prices rose only moderately in those five years. Stocks rose by 32 per cent; gold by 38 per cent. Taking Chennai as an illustration, land prices by 32 per cent. Jobs rose phenomenally, by almost 60 million. The NDA also turned in a surplus of $20 billion in 2002-04 in the external sector, after decades of unending deficits, save in two years in the late 1970s.

Now come to the UPA rule under Dr. Singh, the economist Prime Minister. In the first and best six years of the UPA (2004-05 to 2009-10), before it was hit by scams, real GDP grew by 50.8 per cent, annually 8.4 percentage points — one-and-a-half times NDA’s. The world celebrated Dr. Singh. The UPA was intoxicated by the “high growth” story. But how many jobs did UPA’s high growth produce? Believe it or not, just 27 lakhs against 600 lakhs during NDA’s five years, according to NSSO data. UPA achieved one-and-a-half times NDA’s GDP growth, but just 5 per cent of its job growth. Dr. Singh now bemoans that Mr. Modi’s demonetisation will stifle jobs!

Move on. In the six years, prices rose by 6.5 per cent (4.6 per cent under NDA). The external sector deficit was $100 billion (against NDA’s $20 billion surplus). Did high petroleum prices force it? No. Zero-rated customs duty-led capital goods imports which topped petroleum imports was the culprit.

 Asset inflation

Why was the UPA’s high growth jobless? The well-kept secret is that huge asset price inflation, not production, passed off as high growth. In the first six years of the UPA, stock and gold prices jumped by three times — annually by 60 per cent. Property prices doubled every two-three years. In Gurgaon, not on the property map in 1999, land prices rose by 10-20 times. Asset inflation in six years was three times the annual nominal GDP growth. The asset inflation not the result but the cause of the UPA’s “high growth”! How? Modern economics deducts the non-asset price inflation from nominal growth to know the real growth. But it sees asset price rise as wealth and prosperity and adds it to GDP. See how this economics worked for the UPA.

 Unmonitored Rs.500/1,000 notes

Economics says money, growth, prices and jobs are inter-related. Apply this rule to the NDA and UPA periods. During 2004-10, average money supply grew annually 18 per cent (15.3 per cent under the NDA). But asset prices rose by several multiples of it. The moderate rise in money supply over the NDA’s number does not explain the huge asset inflation. The clue hides in the rising unmonitored HDN cash stock with the public which made black money deals easy. In 1999, the cash with the public was 9.4 per cent of nominal GDP. By 2007-08, instead of falling due to rising bank and digital payments, it jumped to 13 per cent of nominal GDP. Later it began hovering around 12 per cent. More critically, the HDNs with the public more than doubled from 34 per cent in 2004 to 79 per cent in 2010. On November 8, 2016, it was 87 per cent. The average annual rise in HDNs was 51 per cent between 2004 and 2010 and the annual rise was 63 per cent by 2013-14. The Reserve Bank of India noted that two-thirds of the Rs.1,000 notes and one-third of the Rs.500 notes — that is over Rs. 6 lakh crore now — never returned to banks after they were issued. The unmonitored HDNs roaming outside banks began driving up the gold and land prices by black cash and the stock prices through Participatory Notes (PNs) — which are largely hawala transfers out of India — that came back pretending as foreign investment in stocks. The PNs rose from Rs.68,000 crore in 2004 to Rs.3.81 lakh crore in 2007.

How did the asset inflation lead to the UPA’s “high growth”? Inflated asset prices to the extent realised by sale got accounted as part of income and included in GDP. Large part of the gains on stock sale got added to GDP with very little tax under Securities Transaction Tax. The spurious wealth effect also led to high-end consumption. The annual private consumption growth averaged 18 per cent till six years to 2009-10 — 80 per cent over the NDA average. The fake wealth effect, powered by HDN cash, scripted the UPA’s “high growth” story. HDNs outside banks took refuge in stocks, gold and land, produced capital gains-led growth and consumption. Had the HDNs circulated through the banking system, it would have multiplied through the fractional reserve model, reduced the inflation and interest, and funded the small-and-medium enterprises starved of organised funding.

 Catch-22 situation

The curse — asset inflation inspired jobless growth — seems irreversible till unmonitored HDNs roam and fuel fake growth. Dr. Singh had had enough wake-up calls when the share of HDN cash was escalating year after year from 2004. He could have de-escalated the hugely growing cash economy had he remonetised the HDNs by lesser denominations without demonetisation — sparing the people of discomfort and economy of short-term damage. Of course, he would have lost the “high growth” brand that made UPA rule an economic success. To unmask this deception and revive job productive growth, the unmonitored HDNs needed to be brought to account forcibly. By his inaction, undeniably, Dr. Singh had landed the economy in a Catch-22 situation. The Modi government could either opt to continue the status quo of jobless growth or force temporary decline in growth to reinstate real growth and jobs. It opted for the latter. Even an undergraduate student in economics will tell you that it will cause hardship and hit growth in the short run. A Cambridge economist is not needed to write a column on that. It is already late. If the status quo of unmonitored HDNs were to last for another five-six years, the size of HDNs would have become so huge that no government may have been able to act against it — inevitably inviting a huge crisis, both internal and external. Prime Minister Modi has rightly called the demonetisation as “kadak chai” (bitter pill). That HDNs promoted high bribery and helped terror funding through fake HDNs cannot be disputed at all. Far from doing a monumental misappropriation or making a “mammoth tragedy”, Mr. Modi is correcting the monumental mismanagement of the economy by the economist Dr. Singh.

 Courtesy – The Hindu

Terror Hawala In Kashmir Valley Rendered Trash


Intelligence sources maintained that Kashmir has emerged as a prominent focus for hawala transactions, as extremist outfits in countries grouped under the Organization of Islamic Countries (OIC) send money to terrorist groups in the state. Intelligence agencies estimate that about 90-95 per cent of extremist funding comes through this channel, with Pakistan and Saudi Arabia the primary sources of these illegal flows.

Prime Minister Narendra Modi’s decision to demonetise Rs 1,000 and Rs 500 notes may be causing inconveniences to the people, but the move has eventually halted all terror operations, especially in parts of the Kashmir Valley where nearly Rs 3,000 crore of hawala money in circulation is of ‘no use’.

The masterstroke by the government will also lead to a major shift in the terror infrastructure management and change the character as well as nature of terror funding in the country.

Besides terror, the four-month-long unrest in the valley, erupted after the killing of self-styled HuM commander Burhan Wani by security forces in July, is also expected to be wiped out in the absence of cash inflow, security agencies believe.

Major chunk of the hawala money is delivered to separatist leaders and local politicians to fuel protestors. According to Intelligence estimates, Pakistan pumps in Rs 800-1,000 crore annually for the separatist groups alone in Jammu and Kashmir.

Pakistan pumps in Rs 800-1,000 crore annually for separatist groups in Jammu and Kashmir, according to Intelligence estimates. This is apart from Rs 300-500 crore that is funded to mainstream politicians and local terror groups such as Hizbul Mujahideen.

Thirty per cent of this fund is paid to the beneficiaries in US dollars in bank accounts abroad. Half of the 70 per cent funds is paid in original currency, and the remaining in fake Indian currency.

Intelligence officials said that lack of hawala money inflow will majorly hit activities of Maoists and other insurgent groups in the northeastern states. These groups create a corpus of Rs 2,000-3000 crore annually from extortion, and buy weapons and explosives to carry out operations. They will be also be hit hard as the stocked currency has become useless and availability of new high-value notes is not in abundance.

Intelligence sources maintained that Kashmir has emerged as a prominent focus for hawala transactions, as extremist outfits in countries grouped under the Organization of Islamic Countries (OIC) send money to terrorist groups in the state. Intelligence agencies estimate that about 90-95 per cent of extremist funding comes through this channel, with Pakistan and Saudi Arabia the primary sources of these illegal flows. Some traders of Punjab, Rajasthan, Delhi and Kolkata are hand in glove with Pakistan’s ISI operatives and play a key role in transferring hawala money to terror modules.

Between 2013 and 2016, 17 cases were registered and 37 persons were arrested in terror-funding cases in J&K, mostly in hawala and FICN cases.

An Army source said that ‘cash convoy’ of terror groups—militants infiltrating the border with huge amounts of fake currency to support operations—will no longer be available. So far, this year, over 90 infiltration attempts by militants have been reportedly successful. “Every infiltrated militants generally come with Rs 3-5 lakh of cash with high denomination to sustain,” said an officer.

While mainstream politicians with Pakistan leanings and separatist groups backed by Islamabad will not be able to either fuel unrest in J&K or malign India’s image abroad, terror sleeper cells created by the neighbouring country in the hinterland will not be able to indulge in insidious agenda due to deprivation of funds owing to the scrapping of Rs 500 and  Rs 1,000 notes.

The level of terror conspiracy by Pakistan that used to be relatively simple in nature earlier is likely to become complex and multi-layered as its network of sympathisers and members of sleeper cells will be choked of funds as the number of higher denomination currency is currently limited in number. The end-user can be easily tracked down by the number series of the notes and bank branch of its origin. The agencies already maintain the list of suspects and criminals in different areas, a senior Intelligence official said.

“In this backdrop, ISI will be compelled to shift to the organised crime networks for logistic procurement and funding for terror activities. With currency of higher denomination being limited in circulation, Pakistani agencies and terror affiliates will now have to rely on gold for conversion to Indian rupees. However, rules relating to purchase and sale of gold have also been made difficult as the sellers are required give declaration that it belongs to him or her,” counter-terrorism expert Rituraj Mate said.

He added that Pakistan had created an elaborate but discreet network for logistics for terror activities and specific modules from a group of sleeper cells to execute terror such as bomb blasts. Both would disperse after playing their respective roles. This well-synchronised arrangement will now be shattered, and support from conventional criminal gangs and organised crime networks is likely to be sought by the ISI.

The demonetisation of the currency comes after a government crackdown on NGOs that were involved in terror funding, making the job of Pakistan-backed terror groups such as Lashkar-e-Taiba, Jaish-e-Mohammad and Hizbul Mujahideen and their affiliates such as Indian Mujahideen.

Courtesy: The New Indian Express