Monday, November 14, 2016

India's anti-corruption fetish

In India - the rich find ever more innovative ways of shitting on the dirt poor. Rather than address the root causes of inequality in society, it is much easier to dismiss an attempt by the poor to seek financial reward as "corruption".  Essentially in India - you accuse anyone you don't like of being a "corrupt fellow" (or as they say in the services when it comes times to discuss promotions ... "his reputation is quite bad...")

For example, when you want to drive your car under the influence of alcohol and you are pulled over by a police officer in India, it is the police officer who is guilty of "corruption" when he accepts your bribe, but you are not guilty of anything - you are just protecting your interests and preserving your right to drive blind drunk!

In general - when you go to do something about "corruption" - you run a risk of upsetting the complex balance of wealth inside Indian society.  Most of this "black money" is actually money for a vast variety of goods and services which can't be accounted for in the "white" economy because the specific trade is illegal or undermonetized or undervalued.

The Modi government was keen to be seen doing something substantive on the "corruption" issue. It was one of the main planks of the Modi ticket. By pandering to the "anti-corruption" fetish - the Modi government hoped to satiate a fraction of the urban voters that brought it power. The whole point behind this initiative was to secure an existing vote-bank - i.e. the anti-corruption twitterati - while denying political space to opponents (such as Mr. Kejriwal) who may need subterranean cash flows to secure their own political positions.

Unfortunately whenever you do something in a chaotic place like India - you run the risk of it backfiring on you. What may seem like a brilliant idea in one instant - can turn quickly into a major political albatross.

This is true for the demonetization initiative taken by the Modi government. The idea of demonetizing something like 80% of the total currency in circulation is very risky. I describe in detail my specific concerns below.

1) It messes with the Hawala system - A very large fraction of the Hawala banking systems relies on these denominations. The Hawala system smoothly moves funds between underworld enterprises like drug, arms and terrorism and the Indian real estate sector and India's complex political system. If there are hiccups in the cash flow there - it usually turns into a major terror strike. One of the theories behind the 1993 Bombay Blasts was that the deregulation of the Indian rupee by the P. V. Narasimha Rao government had angered powerful Hawala traders and they had in turn lent support to disaffected Indian muslims who carried out the single most massive terrorist bombing in Indian history.  We are looking at significant domestic terrorism risks on account of this demonetization move.

2) Hostility with Pakistan will grow - The Pakistanis have been printing sizable numbers of fake notes in those denominations. A lot of people view the FICN (Fake Indian Currency Notes) as another devious plot by Pakistan to undermine India's security - but there is a more IMO benign explanation. As a significant portion of heroin is trafficked from Pakistan to India - occasionally there are late payments and missed orders. The FICN is basically a Pakistani way of balancing the books. It is harmful to India and totally unacceptable from the RBI perspective - but not fatal as it is effectively ballasted with bulk heroin rates. If the GoI demonetizes the Rs 500 and Rs 1000 notes - the Pakistanis will be left with a lot of worthless paper. That will make them quite hostile. This is not a good idea given how close to an escalation the situation currently is.

3)  Ordinary people will be put to grief from the economic jamming  - Hundreds of ordinary Indians use these notes for daily transactions. They need these transactions to buy and sell essential commodities. The disruption caused to these people is overwhelmingly larger than the inconvenience caused to a few million hyper corrupt people (mostly politicians - and I will be shocked if a single a BJP politicians ever comes to grief on account of these measures).  The only ones who will suffer in this is ordinary middle class people who have to accept payments in Rs 500 and Rs 1000 notes - they will not be able to receive payment or make payments. The resulting clog in the economy will take years to clear up. ( I really don't know who believes this "50 days" stuff).

4) Criminals will circumvent the system - Most people who possess the bags and bags of money will find a way around the restrictions. A large fraction of this "black money" is tied to actual farm income (which is not taxed in India), real estate and politics in India. If you are a farmer with bags of cash - you can just burn a Rs 500 note that you dodged taxes on and then correspondingly burn up a fraction of your crop. If enough people do this, the price will go up and the difference will be made up easily. If you are a builder - make a building and take only black money in Rs 500 and Rs 1000 bills from the investors. For accepting every Rs 500 note - take a Rs 50 premium. After that take out an insurance policy on it and burn the building down with all the old Rs 500 bills in it. The insurance payment will be in new bills which you can give back to the investors and you will have earned yourself a nice Rs 50 for every note.

Now before the Modivadis start humping my leg - let me assure you - I am sure your Prime Minister is super smart and he has thought all this through. I am also sure when he is crying on TV and worrying about his assassination, those are just crocodile tears and he is actually spending most of his time gloating about how he has stuck it to Yuvaraj Rahul and his "corrupt" Congis.

I am sure that the Modivadis are 500% correct to support this - but since I am not one and I can afford to be wrong - let me state for the record - from where I stand - this demonetization thing seems like a bad idea, it brings into sharp focus how little the Modi government and its administrative allies really understand about the detailed functioning of complex economy like India.


At 10:34 AM, Blogger maverick said...

More on this

Only Minister Jaitley and Sri. Urjit Patel were told of the real plan. Everyone else including the CCS was under the impression that this was simply an anti-counterfeiting measure.

AD was brought into the plan about 1.5 hours before launch. He was incommunicado during the 1.5 hours preceding the launch.

Apparently DSS and other chiefs were only told to be prepared to provide aid to civil authority if mass rioting breaks out.

So wow!!! a major decision like that and no review by the heads of the intelligence services.

Hold on to your hats ladies - this is going to be a bumpy ride.

At 8:02 PM, Blogger Nanana said...

Mav can you elaborate more on the narco aspects of all of this? How big is heroin in India?

At 5:05 AM, Blogger maverick said...

There are no reliable public statistics about drug abuse in India.

Only crude estimates are available to the public for discussion purposes. Based on NCRB data we can crudely estimate how much drug use there is in India. []. The market is quite large and growing. A crude estimate of how much heroin is consumed in India per year is around 100 mt (based on an extrapolation of . About half of this - 50 tons - comes down the Af-Pak route. At the rate of $10-$20 per gm, ( - that is close to a billion dollars.

The poor farmer in Afghanistan grows opium. He is paid in Afghanis by a Pakistani refiner.

The Pakistani refiner processes the opium into refined heroin, brands it and sells it to a Pakistani trafficker who pays in Pakistani Rupees.

The Pakistani trafficker sells the branded packs of heroin to an Indian distributor who pays in Indian rupees.

The Indian distributor then moves the product into the hands of Indian addicts who pay in Indian rupees.

The ancient banking network known as "Hawala" - converts between the currencies at an exchange rate that is determined locally based on immediate availability and global exchange rate fluctuations.

The billion dollars are actually stored in the form of Indian rupees, mostly in Rs 500 and Rs 1000 notes. Whenever there is a local shortage in the system, the Pakistanis print Rs 500 and Rs 1000 denominations and give it to the Hawala system so that there is no direct impact on the exchange rate or local violence levels.

Prime Minister Modi's demonetization has introduced severe welts in the flow in these channels. That has sever implications for both the value of India's currency and for national security as a whole. It seems that Sri Modi did not put this policy through the usual internal review channels. I do not know why he did such a thing. Perhaps the Modivadis can explain to me how this kind of thing is not dictatorship.

I think it may be best to have a separate post on this issue.

At 5:39 PM, Blogger Nanana said...

Thanks Mav. Off topic so i will ask here. Does the payoff for PakMil establishment work same as that of Scicilian mafia or mexican cartels? Or more like Mumbai RTO? In addition to official benefits and pensions and land grants that they get, do some of the PakMil get to further build a large bounty in offshore accounts while they are in positions of power *ex-officio*? Then is the only reason this gravy train is not halted because there is honour amongst thieves?

At 2:40 AM, Blogger Nanana said...

Another link: Ashok Malik, on how CPEC frees India from long term plans of reintegrating with the Pakistani economy:

At 5:44 AM, Blogger maverick said...

Dear Nanana,

I am not exactly sure how the PakMil gets it cut. I suspect it is a mixture of the cartel system (with direct payment to the top and top down distribution) and the RTO system (i.e. each layer pays the layer above it).

In the days of old - there was talk of a council in the Lahore area which had all the big players. Rumor had it that apart from Ayub Afridi, the Sharif brothers, key Army people were all part of it and they decided who got what part of the cut. I think this was being moved around via international (Mossack Fonseca, BCCI etc... ) channels. The big players we alleged to be Gen. Fazle Haq, Gen. Aslam Beg and his brother, Zia ul Haq.

Per the Aslam Beg testimony the ISI itself got some percentage of the trade, and so the NLC and its allies in the trucking mafia (i.e. Hamid Gul's private company). I don't know who moved all this around - there was a rumor that a major bank in Pakistan (a household name) was the conduit but it was never confirmed.

Regarding Malik's views - yes CPEC is a major regional event - this is just the tip of the iceberg.


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