Nifty outlook for 2018 – Troubled but with some hope

When I look at what has happened in 2018 with the Nifty so far, I definitely get a sense of deja vu. A decade back in 2008, the Indian markets were flying high with the Nifty having crossed 6000 in January. At that time too, there were global rumblings on the sub-prime crisis, though the Indian context was not really an issue. We all know from history what happened. We went into a sharp and brutal correction initially, followed by years of listless performance till 2014. What many investors are worried of now is whether there is a chance of history repeating itself and , more pertinently, what is likely to happen in 2018. Let me try and share my observations in this post.

To begin with, let us understand one major difference between 2008 and 2018. In the former year, Indian markets had a very strong dependence on FII money and they could crash the market by pulling out whenever they had any inkling of bad news. Over the years, with the domestic retail money coming into the market through SIP in Mutual funds, the dependence on FII money has reduced a lot. As of now we really do not know how the domestic retail investors will behave when they see sharp cuts in the markets. In the past few years, they have not panicked when there were some cuts but what we are looking at now is going to be more serious. My own take is this – given the increased knowledge about goal setting and financial planning, it is unlikely that there will be panic on a large scale. Yes, some people will book profits and take out money fearing deeper crash, others will lower their SIP contributions but these will not be impacting the markets in a serious way.

So what are the factors that will play a greater role? As usual one will have to look at performance of earning as well as the news driven sentiment in the markets. I can think of the following issues for 2018:-

  • The society and the polity are clearly divided along serious fault lines in India. The opposition will oppose everything and even try to manipulate to have any chances, the government is in no mood to listen to any advise, even if it is good one.
  • The impact of the budget will be important for elections in 2018. If BJP wins in Karnataka along with some North Eastern states they will be tempted to call for an early election. I somehow think this will not happen though and the General elections will be held in 2019 only.
  • The elections will definitely be fought along 2 large blocks in 2019. Throughout 2018, the election results for the states will have a high impact on the markets.
  • Budget implementations, especially on the GST and welfare schemes will have a positive impact on the markets.
  • Earning growth is clearly starting to happen now. If this goes well in the next few quarters, the Nifty will shrug off the current panic and move forward. However, this will not be the year of decisive growth, it will be incremental at best.

With these factors playing out, how do I see the Nifty move through 2018? Well, to start with, I think it will go down to 10000 or even 9500 over the next 2 months. If the yearly results are good and some of the election results and GST figures show BJP in a good light, recovery will start slowly. Even then, any decisive move is only likely if the BJP wins the Karnataka elections – this looks quite difficult as of now. In the absence of such a win, this will be slow going year for the Nifty, waiting for triggers in the form of quarterly results. Assuming that the current trend of earning improvement continues and there is a good monsoon as widely predicted, Nifty will probably recover at a faster pace in the latter part of the year. Here are my predictions for the Nifty then:-

  • 9500 by March end 
  • 8500 by May end if BJP loses Karnataka to Congress
  • 9000 by July end with good monsoons, GST collections and Q1 results
  • 10000 by October end with good agriculture news, welfare scheme implementations and earning growth for H1
  • 11000 by December end if BJP wins at least 2 out of the 3 state polls in Rajasthan, MP and Chattisgarh.

In a pessimistic scenario many things can go wrong – Oil prices can continue to rise, inflation can get out of control, Monsoons may play truant, earning growth may be muted and BJP may lose most elections. In such a scenario Nifty may well end the year 2018 languishing at around 9000 range.

On the balance though, I think we will be getting back to 11000 though the route will be rather tortuous as I have described in the post.


My take on the budget 2018

All budgets in India are a product of both Economics and politics and it was expected widely that this budget would be same. The Finance minister, I would say, has largely fulfilled this expectation. He has given a budget which is addressing almost all sections of society and tried his best to address the pain areas as best as he could. Yes, there are issues which the urban salaried middle class investor can grumble about, but they have had it good for several years now and could probably do with some hardships.

Before getting into the specifics of the budget let us try to understand the social, economic and political context under which it was being delivered:-

  • This is the last full budget of the current government as the next one can only be a Vote on account. Therefore, whatever policy decisions had to be taken could only be done in this budget.
  • The agrarian distress in rural India is all too real, evidenced by farmer suicides and loan defaults. This has given rise to social tensions and BJP had already felt the backlash in electoral terms in Gujarat.
  • In urban areas too, the general consensus is that the rich have got richer and the income inequality has grown significantly. It is easy to see, both through data and anecdotally, that one section of people have a lot and the majority have very little.
  • Job creation has simply not happened because the growth in GDP had been way less than we hoped for. To a large extent demonetisation and GST, fundamentally good measures both, suffered from serious implementation lacunae and was responsible for the muted GDP growth.
  • Though the government tried to promote entrepreneurship through Mudra loans and the like, the off-take was not at the desired levels. Also with Indians getting better educated the aspiration is nowadays for jobs in most families and this was not being met.
  • Politically the BJP was in a no win situation even though they were in power at the centre and 19 states. In most of north India they had maxed out in the 2014 elections and could only go down from there. Their main rivals, the Congress, on the other hand, had done very poorly in 2014 and could only improve.
  • Now that BJP is the incumbent government, they have to protect their turf and public anger would be against them. The veterans in the party were always wary of a 2004 like situation, where they lost heavily against all odds.
  • With this backdrop, the FM had to produce a budget that would enthuse majority of the Indian populace. In case the reactions were great this will give BJP a chance to advance the elections, if not they still had some time left for course correction.

Let us now look at the main provisions of the budget. You will notice that the first part of FM’s speech almost sounds like an election manifesto, except that these are not mere promises but announcements in a budget, for which financial allocations are there.

  • Better realisation for farmers in selling their kharif crop. MSP of at least 50 % more than cost may have an upward impact on inflation but will definitely go a long way to reduce farmer distress.
  • A humongous national healthcare protection scheme for 10 crore families. The poor often lose their all in illness and this will ensure that they are shielded from it.
  • Bigger outlays for SC/ST and education scheme for ST.
  • Free gas connections for 8 crore poor women.
  • Initiatives for fisheries, animal husbandry. Job creating incentives foe apparel, leather and footwear industries.
  • A big rail project for Bengaluru courtesy poll bound Karnataka.
  • Much of these are very good but they require resources which had to come from taxation in various forms. 

The fiscal slippage this year made the target next year a more conservative 3.3 %. Though corporate companies with turnover of less than 250 crores benefited from a tax rate of 25 %, there was nothing for larger companies. Similarly, individual tax payers got very little, the Standard deduction of 40000 Rs was in reality only a benefit of 30000 Rs. The LTCG on equities were an unkind cut, especially if you see that the STT has not been discontinued either. This can easily have a dampening effect on the huge MF inflows we have been seeing month on month, for the past few years.

The senior citizens have fared a little better this time. The 50000 Rs tax exemption from FD interest income, the 8 % interest on Senior citizen FD and the increased limit on 50000 Rs for health insurance are all good measures.

Finally, though this is an election budget there is really very little for the urban salaried investor in it. However, they probably are not too important in the scheme of elections and the BJP seems to have the other bases covered. If the monsoons are good, the BJP may well be tempted to call early elections. Will they win ? Only time will tell.

India in 2018 – the fault lines run wide and deep

There are moments in the nation’s history which can be termed as watershed moments. For our country independence/partition, Chinese war, Green revolution, Bangladesh war, Emergency and aftermath, liberalisation of economy, Babri masjid demolition, BJP coming to power and losing it, UPA winning against all odds and then making a hash of it are all such moments. These have had serious impact on India, but what we see today over the past few years is more of a path breaking phenomenon.

Let me explain – since independence till 2014, the overall Indian state was run along the lines of a socialist democratic state with some capitalist overtones. Yes, in 1991 we were forced to liberalise the economy which created a number of ultra rich people and a rather well off middle class. Also the BJP government between 1998 and 2004 was of a different quality in terms of doing things better than it’s Congress counterparts. However, UPA won the 2004 elections and India went back to the norm. If we look candidly as to how things were largely defined in India they were as follows :-

  • Majority of the people were living poorly, if they were Muslims or backward castes their conditions were even worse.
  • Most people were engaged in farming and poor again, though there were some farmers who were well off and a few who were really rich.
  • Infrastructure was poor – electricity, good roads and drinking water were still off for many living in villages.
  • Corruption was a way of life from lowly government clerks to high places such as the courts. It affected poor the most as they could not pay through it to get things done. The better off kind of accepted it as a way of life.
  • The nexus between politicians, crony capitalists, media houses with committed journalists was well established. If you were part of the system you benefited from it , if not you would simply have a rather hard time.
  • Tax collection was poor as most people who could avoid it did so, with the flawed logic that even if they paid taxes nothing much would happen anyway.
  • The ruling dispensation thrived by keeping people satisfied through various means – the poor through subsidies and MNREGA type programs, the industrialists through deeply discounted land and loans, the journalists through free foreign junkets, the minorities through Haj subsidies and allowing them to continue their regressive policies, the SC/ST and OBC through reservations  and the middle class through a vastly better lifestyle as compared to their earlier generation.
  • Corruption and black money were the hallmark of the economy. Both were needed for election funding which got more expensive over time. It was a secret all knew well but no one wanted to do anything about it.
  • While the Congress and other political parties largely perpetuated this state of affairs, we as citizens were equally responsible for allowing it to happen and taking part in it actively through avoiding taxes and black money of our own at times.

However, winds of change have been blowing through the country. Factors such as relative prosperity of one part of India driving up overall aspirations, brazen scams shaking up the placid Indian populace, the left liberal hypocrite narrative having run it’s course, the majority community getting tired of being used as punching bags for living their own faith, the proliferation of electronic and social media all contributed to this change. BJP would have done well in 2014 in any case but two factors stood it in great stead – Congress was clearly seen as the fountainhead of corruption, it’s leadership spineless and devoid of authority to do anything about it. On the other hand BJP did look like the relatively cleaner party and Modi a leader who would be able to turn things around in an effective manner.

To put it mildly, the last 3 1/2 years have been interesting for the society and polity of India. On the one hand several Hindu fringe outfits and their practitioners got emboldened with their own part coming to power and started acting like loose cannons. This resulted in the unnecessary controversies about Gau rakshaks and other stuff. The media hyped it up fully in collusion with the opposition. They needed to do it desperately as it was as though they were losing all relevance in contemporary India after having controlled the narrative for several decades. So you had attacks on Churches played up as Hindu intolerance with intellectuals returning awards over it and other issues. BJP too fell for it by bringing ordinances like cow slaughter ban without explaining it properly. Lies became the order of the day, facts did not matter any more. Through 2014 BJP won elections in Maharashtra, Jharkhand, Haryana to really spook the opposition.

The opposition did get back briefly in 2015 in Delhi and Bihar, the first through BJP’s stupidity of not calling elections immediately after winning all lok sabha seats in Delhi, the second through a completely unprincipled tie up between Nitish Kumar and Lalu Yadav. These losses were good for the BJP though as they were able to focus on a lot of economic fundamentals in 2016. The framework that has been put for opening bank accounts, insurance for the poor, Aadhaar linking of bank accounts and other financial instruments are seminal changes. With the help of data analytics available with CBDT and the GST framework being in place now, it is possible to hope for a quantum jump in tax revenues in the next few years. Focus on the infrastructure and better conditions for doing business will also create a positive environment. In 2017 the stellar performance of our stock markets indicate the confidence in this direction.

At the same time there are serious fault lines that are emerging in our society and polity. These will be exploited by the opposition and hyped up by the section of the media unfriendly to the BJP. Both of them are clear that a return to power for the BJP in 2019 will give it enough time to complete the unfinished tasks of the legal cases as well as dealing with black money and tax compliance. Once that takes place, it will be almost impossible to challenge the BJP hegemony in future elections. Already they control most of India and unless the trend reverses quickly, it may well be over for the Congress.

What are the fault lines? Let me try and outline them below :-

  • Weak governance by the BJP in Rajasthan and Maharashtra in addition to the poor handling of Vyapam scam in MP has taken some sheen off the BJP.
  • No matter what explanation BJP gives, jobs are an issue with so many youth being without jobs. While good work has been done through Mudra schemes etc, much more needs to be done on both skill development and start up facilitation.
  • Agrarian distress is again a reality and the government has to be accountable. It is not enough to say that the situation was bad earlier, the onus is on BJP to make it better. Losing rural votes will mean losing the elections.
  • Social tensions are on the rise. The incidents are not many but each one will be blown up and some unfortunate comments by unthinking party men mean serious image issue for the BJP.
  • While BJP is still seen as largely clean and Modi’s popularity remains high, it is true that no real movement is seen on the UPA corruption cases. The 2G case was a fiasco for the government and it cannot afford a repeat of it.
  • The Ram temple is an issue again. If there is no substantive movement on this in 2018, the BJP runs the risk of going into a general election with large parts of the population thinking it has not been able to fulfil any major promise.
  • Traditional support base of the BJP is miffed with the short term issues of GST and unless this settles down soon they will continue to be a factor in elections.
  • It is not easy to carry out disruptive changes, people who have never paid taxes but are expected to do so now will obviously have major negative feelings about it.
  • Any serious corruption scandal surfacing will be detrimental to the BJP.
  • The opposition, media houses, some parts of industry, Muslim and Christian organisations as well as some judges of courts will try and make things difficult for the BJP every step of the way. For them it is a battle for their existence.

It is important to understand that though the BJP has good support, there are many who are opposed to it too. The battle of perception is an important one over the next 18 months and it will be to the finish. In this period both parties will not cede an inch and try their best to trade punches. The Gujarat elections were replete with verbal skirmishes that were bitter and below the belt at times – it is very likely that we will have similar or worse in the days to come.

The unfortunate part in such an acrimonious battle is that, whoever wins, the loser will feel bitter about the loss and the winner may well gloat. It will be important as a mature democracy that both parties accept the verdict and move on. For the sake of the country as well as my own inclination I hope it is the BJP.

Why was demonetisation and GST an imperative for India?

If you are thinking as to why I am writing yet another post on demonetisation and GST, you will not be wrong in your thinking. I have already written about the first here and here. Also, there has been a lot written about GST by all and sundry. However, I have been looking at some data lately and it has become crystal clear to me that not only these steps were needed but that we need a lot more to fix the tax compliance issue.

It is a well known fact that our tax compliance is really poor. In a country of 130 crore people less than 3 % pay any kind of income tax which is ridiculous. I had written earlier about our poor tax compliance and also on the need for paying taxes and filing returns. But just how bad was the situation when these steps were contemplated by the government? Let us take a look at some actual data from CBDT on the Income tax statistics from the financial year 2014-2015.

  • 4.1 crore Indians filed IT returns for this year out of which 2 crores showed Zero taxable income.
  • Only 1 crore Indians paid income tax of more than 1 lac.
  • Taxable income in that year can be seen from these numbers :
    • Between 0 to 5 lacs were 2 crore people
    • Between 5 to 10 lacs were 3.7 lac people
    • Between 10 to 25 lacs were 1.8 lac people
    • Between 25 lac to 1 crore were 62,919 people

From the above, it is very easy to see that the declared incomes of people are very different from the factual situation. If I just take the IT and ITES industry in India, it will easily have people having more than 10 lacs income at more than 1 lac. So, it is safe to say that only people who are drawing a salary and do not have any way to avoid reporting their income correctly are doing so. I am not saying this out of a wild guess – in my financial blog I get queries from several Doctors, Lawyers and other professionals all of whom earn more than 25 lacs as taxable income. Apart from this there are several businesses which do not declare income properly. In the same year only 16000 companies had a taxable income of more than 1 crore – again quite absurd !!

What is the key reason for this? Well, for one our IT authorities need to be way better than what they are. However, the main issue is that transactions are mostly done in cash and there is often no record of it at all. In such a situation, it is easy to avoid taxes almost completely. Let me give a personal example. I am doing some consultancy practice for which I invoice my Clients every month. As long as I show the invoice, pay Service tax or GST on it and my Clients pay it through my bank account, there is a record. Tax gets deducted at source and I pay the rest of the tax on my own. Fairly straightforward if you want to do things in an honest manner. On the other hand, it is also possible to arrive at an arrangement with the Client, take less money in cash and avoid taxes. Unfortunately, in our country today, this is a great problem.

How will GST help? By getting all businesses under a regime of simple tax, it will be far easier to monitor than it is today. Yes, people will still try to avoid invoices and deal in cash but now that GST is all pervasive in the supply chain this will become more and more difficult to do. Over a period of time avoidance of taxes will grow less and this will result in more revenue for the government and therefore more resources for developmental agenda in the economy.

Why was demonetisation needed? While GST deals with the future, something had to be done to get all the cash lying around into the banking system. Now that it has been done it is far easier to trace the money flows than ever before. If the economy had a lot of unaccounted cash, sectors such as the real estate would continue to deal in cash.  At the same time, the real issue will be to tax the money available through the bank deposits. If this is not done properly and taken to the logical conclusion we will gain very little.

Could we have achieved the same without demonetisation, that definitely had an adverse effect on most people and small businesses? Note that a lot of things were tried over several years. Amnesty schemes were announced repeatedly, MAT was introduced so that small businesses had to pay very less taxes, compliance related procedures were simplified greatly. Unfortunately, none of these worked in any real sense and drove us to a situation where the government just had to bite the bullet.

What about Aadhaar and why is it an important piece of the puzzle? That is a different story, though a related one. I will cover it in my next post.

The Ram Janambhoomi Babri Masjid saga – the beginnings of politics

The order by the Faizabad district court, permitting worship of the idols was seen by the Hindus as a vindication of their stand and by the Muslims as yet another betrayal of their cause in practising their religious freedom. Even before the locks to the structure could be opened as per court protocol, they were broken and people started to flock in. The resultant tension and bitterness between the communities manifested itself in severe rioting and violence throughout north India. Muslims observed 14th February as a Black day, stating that not only the government but even the judiciary had failed them.

However, in order to understand the issue completely we will need to get back to the politics of it. Over the years, Jan Sangh had tried to mobilise the Hindu populace to get some political dividends but they had only limited success at an electoral level. Though RSS had impressive membership and reach as a social and cultural organisation, Jan Sangh were unable to reap the direct benefits of it. They also did not want political alignments with other parties like the left or Janta dal variants. The Emergency proclaimed by Indira Gandhi changed all of that and kind of forced the opposition parties to get together. Jan sangh went with the Janta Party, who won the elections in a handsome manner and had their first taste of being part of government. They were also one of the reasons for the unravelling of the Janta party, courtesy the dual membership issue with the RSS. After uncertainty of about a year when the elections were held in 1980, Indira Gandhi stormed back to power.

Jan Sangh had been rendered defunct in 1977 and the leaders found it senseless to be part of Janata party any more. This led to the formation of Bharatiya Janata Party. The philosophy it adopted as a theme was Gandhian socialism and the core Jan Sangh issues of Ram mandir, cow slaughter, article 370 and Uniform civil code were very much part of it’s agenda. It was still just finding it’s feet when the assassination of Indira Gandhi in 1984 October, saw elections being called for January 1985. In the wake of a massive sympathy vote, Rajiv Gandhi and the Congress swept the elections nationally. The BJP did abysmally and was written off by most political pundits. They got only 2 seats and even their talisman Atal Bihari Vajpayee, a parliamentarian since 1957 could not get elected.

The BJP floundered for the next few years as the politics in the country went through a turmoil. Rajiv Gandhi had a great start to his prime minister’s innings but soon Bofors, Sri lankan misadventure and other issues started to undermine his popularity and authority. VP Singh was the major challenger and to counter him, Rajiv Gandhi agreed to the persistent VHP demands of Shilanyas of the Ram temple. Little was he to know that he was literally releasing a genie from the bottle, which could never again be put back.

Rajiv Gandhi did not benefit from the Hindu votes in the 1989 elections and was forced to concede power to the Janata Dal government led by VP Singh. BJP raised their tally to 85 seats, mostly from North India, and supported the government from outside. Indian politics would change forever, in the next few years and Ram mandir and Ayodhya were very much the centre point of it.

The Ram Janambhoomi , Babri Masjid saga – the genesis

Few controversies have whipped up as much as passion and frenzy as the Ram Janamboomi / Babri Masjid issue. Everyone in the country seems to have an opinion on it and there has been nothing else that can probably be claimed to be so divisive. The politics of the country, certainly the post 1986 period, has been very strongly influenced by it – so much so that the ascent of the BJP as a political force has been widely attributed to this issue. However, even with all of these, it is really surprising that very few people happen to know the facts accurately. This post is an attempt to correct that by documenting a timeline of this fascinating saga.

Well, where does one begin? If you are one of the so called liberals, singing praises of Islam and Christianity, while taking special pleasure in denigrating Hinduism then you obviously think Lord Ram was a myth. However, to millions of people, not only in this country but worldwide, Ram did exist and was born in the city of modern day Ayodhya. There was definitely a temple existing in Ayodhya, built in the place Ram was born. If your idea is to say that he was not a recorded historical figure then that is true for all founders of religion. More importantly, the sheer amount of literature, music and temples associated with Ram bears testimony to the fact that he was living at some point in time. The crux of the issue though is the temple – people who say today that there is no proof that a temple existed at the site are either ignorant or liars. The Allahabad high court had commissioned the Archaeological Survey of India ( ASI ) to find out if the temple did exist prior to the masjid being put up. Within a few months ASI submitted their report with incontrovertible proof that there was a grand temple, which was razed to the ground before the Babri Masjid came up.

With that basic premise in place, let us get back to the story. The structure called the Babri Masjid was ordered to be built by Babar and his trusted lieutenant, Mir Banki, constructed it in 1528. As this was done by razing an existing Ram temple to the ground, there was a lot of consternation among the population in Ayodhya, who were mostly Hindu by religion. However, during the centuries of Mughal rule, there was an uneasy calm though there was always simmering tension threatening to erupt. This emotive issue found strong voices and traction once the Mughals lost out to the British. Nirmohi Akhada which was a wresting club of sorts but had strong religious and spiritual overtones was at the thick of such efforts. There was an armed attempt by them to attack the Masjid, which was thwarted before much damage could be done.

This alarmed the British and they wanted to play the divide and rule strategy that they were famous for. Their administrative solution was to divide the area into two and allow the Hindus to put their idols and conduct worship in one part. This did not satisfy the Ram devotees as their contention was that the birthplace of Ram was on the spot where the Babri Masjid stood and the sanctum sanctorum of their temple should be that place. Over the years there were attempts to construct a temple in the area designated for the Hindus but the Muslims opposed it vehemently. The most strident confrontation took place in 1883 and it was somehow managed by the British and some sane voices.

Between 1883 and 1934 there was sporadic violence related to the site and the bad blood caused by this was one of the factors why the two communities substituted amity for hatred and mutual suspicion. Matters came to a head in 1934 when there was widespread violence in Ayodhya and adjoining areas of UP. The British administration tried to contain it as best they could but by then they had their hands full with the ongoing freedom struggle. The positions of the two communities got entrenched in the period 1934 till independence in 1947. The formation of Pakistan had diametrically opposite effects on the two communities. While the Hindus felt betrayed by partition and the associated violence and thought that they should now have the temple in a country where they were the majority community, Muslims wanted to feel secure in the fact that their religious rights would be protected as a minority in India.

What happened next is fairly dramatic and can be interpreted with different angles, based on which side of the divide you put yourself. On 22nd December 1949, a group of hardcore Hindu fanatics entered the Masjid and put the idols inside. From the next day there was a huge uproar in the country from both communities who indulged in blame games. Hindus saw this as a miracle and a sign that the Ram temple must be built. The Muslims played the victim card and cited how they were betrayed by the majority community and wanted status quo to be restored. The central government headed by Nehru acted swiftly in the matter by locking up the place. This was good for the Muslims – though they publicly stated that the Masjid should be open for prayers etc, the reality was that prayers were never held there for long. The Muslim game plan was not to allow the Hindus to get the satisfaction of a grand Ram temple there.

The Hindus were livid with Nehru’s decision and saw it as an example of them being second class citizen’s in their own country. The rise of Hindu nationalist parties of all kinds and the growth of cultural organisation’s like the RSS, owed in no small part to this treatment. Over the years, Jan Sangh grew in popularity, albeit not having  critical mass to win many Lok Sabha seats. Though the issue always figured in the public discourse, the communities moved on with other aspects of life and a developing nation had a lot to look forward to.

This however, did not mean that the Ram temple was forgotten. There were legal and political efforts ongoing to make the Hindus worship their idols, which were now under lock and key. Out of all these efforts, some legal success came in the year 1986. On February 1st the Faizabad district court ordered the locks to be opened and gave right of worship to the Hindus. At long last, they seemed to be getting somewhere with their aspirations of building a grand temple at the birthplace of Lord Ram.

However, this started the next part of the saga which I will write about in the next post.

A dispassionate look on demonetisation

Now that the dust and din have settled on the actual amount of cash returned to the banks on the demonetisation initiative, there are clearly two different camps that have emerged. The government and supporting voices are insistent that the drive has been a success and will have great long term benefits for the economy and country. The dissenters question the move and say that the data now proves beyond any shade of doubt that the move was completely ill advised.

Let us look at this from a fundamental perspective to understand what has really happened, why it has happened and what is the likely fallout. To begin with the objective of demonetisation was to unearth the huge amounts of cash that was being used in an unaccounted manner in our economy. It is important to understand that the proportion of cash in the black or parallel economy is a small percentage, nearly 6 %. The bulk of it is in real estate and other assets. However, this cash keeps working as the lubricant for deals in real estate, film industry and other areas where regulations are weak at best and non existent at worst. Thus, the amount of cash is ever increasing and more importantly untraceable. When the government went for demonetisation, the hope clearly was that some of this unaccounted money will not find it’s way back into the banking system as people will be worried to account for it.

What has happened in reality and why? Well, now we know for certain that the amount of money not returned into the banking system is only 16000 crores. Even though the government had not officially named a figure, it was widely expected to be much higher around 3 lac crores. I think some of the reasons are as follows:-

  • A lot of people managed to use the bank accounts of known people to deposit money. For example, I personally know a few who have done this in the accounts of people who worked for them.
  • While it was a great initiative to open the Jan Dhan accounts, I wish there was some deposit limits set to them based on the economic condition of the account holder. Many of these accounts were unfortunately used for parking black money with a promise of paying a percentage to the account holder.
  • The great Indian ingenuity to circumvent rules was in full display during November and December of 2016. An entire industry sprang up to take your old notes and give back 70-80 % of equivalent new notes. Unfortunately, instead of declaring their money and paying taxes on it, many Indians chose to go by these shady routes.
  • In the initial days there was panic and there were even stories of sackful of 1000 Re notes being abandoned etc. However, it soon dawned on people that even if they could not use others accounts or middlemen, it would simply make sense to claim it as current earning and deposit it in their own accounts.
  • The above was possible as the follow up from IT authorities were not thought to be very efficient in their follow up. Many CA’s also advised people to deposit their money and figure out how to handle tax notices etc at a later date.
  • I know of a Doctor who had 15 lacs of black money and he simply generated current year invoices to show it as current year income. As most people went about this way, the amount of money collected from the amnesty scheme was well below expectation again.

Let us now look at the impact of demonetisation on the economy as a whole. It needs to be understood that the unorganised sector got very badly hit by this move. Cash was the only mode of transaction there and sudden unavailability of it almost shut down entire industries in several parts of the country. Several workers in these industries were suddenly left without jobs and these were the section of people who could not afford to be out of work even for a short while. Yes, over the next two months most of the jobs were back but the short term misery inflicted on these people, cannot and should not be forgotten. The organised sector was more fortunate but here too there was a distinct slow down in business and demand.

Why was this not reflected in the GDP numbers of Jan 2017? Well, for one the timing of the demonetisation was chosen very well. A lot of demand and business got executed in the October period as it was festive season in India. Normally there is a lull in commercial activities post Diwali anyway. The data from the unorganised sector anyway takes a long time to find it’s way into the statistics. So the impression of the 7.9 % growth despite demonetisation was clearly a false one, as latter events were to prove. However, this should really not be seen as a problem as most well informed people did understand that the GDP will suffer by 1-2 % in the short run. I am surprised at the 5.7 % number but had been quite prepared to see something to the tune of 6.5 % for the last quarter.

The other area which has been actively promoted by the Government with the Prime minister himself being the champion is digital transactions. It is true to say that in the initial days there was a spurt in these, mainly due to the fact that cash was simply not available. The aggressive marketing of the payment companies and the Indian inclination for good deals saw a surge in these payments. However, with the cash flows having resumed, the transaction growth in these areas is becoming muted. Also, this was at best a byproduct, for the government to say that this was one of the main aims of the exercise really smacks of opportunism, if not hypocrisy.

With all this said, are there any long lasting gains from this drive then? Yes, there definitely is and only the open minded will be able to see the obvious. We now have all cash in the banking system and in a manner that can now be traced. For example, a Real estate transaction can still have some cash component BUT now the IT authorities know the money trail. This is of significant advantage and will now help IT people to follow up on any suspicious transactions. Yes, this will take time, given the paucity of resources but it is sure process though slow at times. The regulation on cash spending is a good follow up measure and this again helps in tracing the money trail. Also, the fact that cash has come back does not mean it has been accepted as accounted income. If you have a sum of 10 lacs in your bank account deposited last year, you will still need to account for it.

So while the overall impact in the short run may be poor, the long term benefits of a cleaner economy that is far more tax compliant will definitely be there. Other measures such as clamping down on benami properties and getting GST to be effective will also help in this regard. The problem is with the government trying to get mileage out of it politically and hence shifting the stands every now and then.

Demonetisation was a bitter pill to swallow for many of the citizens and for people affected adversely the taste lingers. It will however, usher in a completely new country as long as things are followed to their logical conclusion, without fear or favour.