Swachh Bharat, Delhi Air Pollution, Why Govt fails big time?

It is again that time of the year in Delhi. Monsoon is over, Winter (thanks to changing climate) is yet to come, but the air is slightly cold and foggy. Noise related to pollution has again started to appear on social media timelines – Posts on Paddy stub burning, trucks coming, open construction etc. But the fact of the matter is that the winter of 2017 is going to be as much polluted if not less than the winter of 2016 which was as bad as that of 2015. Before the hidden politician amongst us jumps and starts looking at the performance of rhetoric driven AAP Govt, let us look at the performance of another regime which is also trying to another big problem plaguing India and that is cleanliness in India.

PM Modi launched a drive to make India clean on 15th Aug 2014. Work started on a war footing with words backed by large budgets & media campaigns.  Govt has spent/allocated more than 26000 Cr ($3.5 bn) on Swachha Bharat since 2014 but there is hardly any impact seen on the ground. Despite ‘in your face’ campaigns, large money spending, the situation has not improved at all. Take a stroll in any of our marquee cities like Bangalore, Mumbai, Varanasi, Agra etc and landscape remains as dirty as ever. Earlier there was just garbage all over now there is garbage with hoardings of Clean India! There are campaigns and big talk of toilets being built everywhere but in reality, everything is as it was prior to 2014 except an addition of storage room aka a dysfunctional toilet in every rural household and this futile exercise has consumed close to $ 3.5 bn in hard cash. Now again before we start looking at the failure of BJP and its inability to move things, we need to ponder and need to look beyond parties. It’s not AAP / BJP / Congress failure but a failure of Govt or rather a failure of the way the Govt thinks.

If one looks carefully and analyze the way govt acts it will come out that Indian government rarely thinks in terms of performance, the end result, or NPS score of target consumers/customers but always think in terms of money being spend/allocated and scheme names. This thought process has led to a scenario where whole government thought process is limited to budget/cess/allocations & vanity matrices like 100% literacy, 100% village electrification (If 10% of houses get electricity, its considered electrified for the purpose of govt record) and naming all such schemes after Nehru Ji, Gandhi Ji and now on Atal ji and DeenDayal ji.

If there is any doubt on this line of Govt thinking, kindly look at advertisements released by various Govt under various regimes. It does not matter if the advertisement was released by Jayalalitha or Karunanidhi, Mayawati or Akhilesh, Manmohan Singh or Modi, the template remains same.  Some scheme name, a big photograph of the leader along with data on the quantum of huge crores being spent,  so many families benefitting, blah blah. Suddenly you wonder if there was really a regime change or the same set of people are still running the government under a different set of masks!

Hence If one looks at Swach Bharat campaign from a government perspective, the whole campaign looks super success full with  26,000 Cr allocated, more than 52 million toilets built, India is on way to becoming super clean. But the reality on the ground is totally different. Was there any issue on the Govt intent? NO, Govt was as determined as it can be but core issue has been thought process where Govt can only think from budget outlays. Nobody focussed on fundamental problems related to toilets/sanitation and challenges related to it.

The fact of the matter is that India is neither ready nor can afford western model of toilets. First, there is no sewage system in any of the villages or towns and on top of it, there is hardly any water. In India, the difference between have-nots and haves is just one simple thing – access to clean running water. Only rich and middle class have access to it while resting of the India battles for few liters of potable water every day. With a focus on having toilets,  a person who was using 300 ml water in open defecation earlier,  now needs 3-liter water at his house and this house has no running water no access to sewer lines and no place to build sewage pits. The house in villages is either interconnected or clustered together having no scope to build open pit system. Even if one builds an open system, what to do during monsoon flooding or filling of tanks in 2 years as there is no manpower working in these areas? So if one looks at the constraint on the ground – no water, no waste disposal system, the idea of “Swachh Bharat” by building toilets was DOA ( dead on arrival) however the whole Govt machinery just went ahead with the plan –  as it knows one thing best which is to create a budget and collect money for it. So whole Govt went ahead with 26,000 Cr in hand even without understanding the basic problem of sanitation and challenges related to water, disposal, treatment etc.

So again before passionate hidden politicians jump and start blaming Modi govt. pause and see what happened in Delhi.

Delhi Govt in all earnestness appointed IIT Kanpur to do a study and find out the cause of pollution in Delhi. The report which has its own serious flaws in methodologies / simplistic observations/conclusions,  was still adopted by Delhi Govt but none of the simplistic solutions was implemented by it. Why? The simple reason is that solutions were like 1000 cuts war on pollution rather than any big bang budget approach and to make matter worse the improvement would have shown by 2022 (the election is in 2020). Since there is no big budget allocation, no ribbon cutting, and no big hoardings, the report and solutions have been conveniently parked in a cold storage.

So what is the solution? The only solution to all such problems is one that is delinking budgets from any action. Govt needs to think in form of solutions/ results rather than in terms of budgets and big bang approach.  For example in the quoted IIT Kanpur report, roadside dirt in summer had very high weight. A small team could have taken a cluster of Delhi and implemented changes to see if vacuuming the road and covering construction is creating any localized impact and what could solve this. A lot of A/B testing in startup parlance but with focus on finding a solution rather than big bang talk with focus on election!. Likewise, for Swachh Bharat, It would have been better if Govt had done trials on some select cities like Agra, Varanasi, Bangalore etc and figured out what is working and what is not working. Or in villages, the focus could have been on building community toilets rather than at individual homes.

Executing small projects is not complicated and there is enough talented manpower with the Govt in addition to the large budgets, but then small projects don’t get allocation or gravitas from the top. Further, these projects can’t be run by politicians as they are tied to the 5-year horizon and neither by bureaucrats with transferable jobs. This project needs people with long-term engagement as well as skin in the game with suitable rewards as well as accountability and punishments. Until the existing system thinks in terms of a long-term model with proper accountability and lifetime postings, India will remain refugee to musical chair policy making and will slowly decline to a hell hole in terms of quality of life in no times as policies designed for slavery don’t work in democracy on a long-term basis!
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Job less Growth & Booming Share markets

Are businessmen turning investors?

No longer mid-size /SME entrepreneurs investing in their own growth/plant expansion etc.

However same capital is finding its way to investments in – Mutual Fund, Share markets, Real estate and a tiny bit in startups!! as the rate of turn and paperwork in own business is lower than returns from investments.

This sums up all mystery of jobless growth in a booming share market.

धर्म ऐवम कर्म

धर्म

“जो धारण किया जय, वो धर्म होता है। एक कर्म प्रधान व्यक्ति के लिए, कर्म ही उसका धर्म होता है अंतह कर्म ही धर्म है |”

Tale of GST and why it has to be complex

IF GST becomes simple i.e. no multiple rates, no rates within the industry, it will lead to simplification of business. Ease of business will jump, business will boom as the cost of doing business will drop drastically, which will lead to lower costs and higher consumption.

Given India’s massive population and interlinked economy, this will put India on another path of growth as the economy will boom, profits will soar, jobs will get created. But this has a huge downside.

Simplified tax/GST laws will almost eliminate corruption. No longer there will disputes as all will be taxed at uniform rates. Hence no ambiguity, no money laundering and hence no scope for corruption.

If there is no corruption/ bribe to be made, there will no longer be demand for prized postings ( good postings cost massive money) as an industrial town will be same as a rural town from income-generating perspective.

When there will be no demand for prized postings, the favorite business of postings/transfers will grind to halt. Nobody will pay crazy sums to superior powers for a favorite posting.

This, in turn, will choke the earning capability of the chair which used to take these decisions. This lack of money will further choke the money supply to the elections.

Hence to keep wheels of democracy running, one need complicated GST/ tax laws.

Jai ho democracy.

Why USA (Trump) Leaving Paris Climate accord is good news for Environment

There is a sense of betrayal and shock among the Global community. President Trump true to expectations has pushed earth to the brink of doom by pulling out from the Paris climate accord.

Frustration and disappointment are understandable. Last time when we faced last big challenge to the environment i.e Ozone layer depletion in the late 80s and early 90s, it was collective action by Governments in banning CFCs, which stopped further damage to the Ozone layer. And good news it did stop damage to the Ozone layer.

So yes Ozone layer was saved, but was that really last big crisis related to the environment? Did we face that just one big black swan event on environment or we are in the state of continuous decline? Has global collective action made any impact on worsening climatic condition?

Whatever one thinks about climate change, the fact is that it is for real and we don’t need complex data/papers in scientific journals to feel the challenge of climate change. All we need to do is look around and see the damage as it happens for real. There is no need to sail and sense silent oceans, just look around the nearest water body and you can see it. Pause for a moment and think about birds, animals, insects that you used to see 15/20 years back and think about now! Birds have disappeared so does many plants and overall healthy ecosystem. The temperature in cities is on the upswing while rainfall has become very sporadic.

Hence the belief that Paris Climate accord will fix all the problems and by 2030 earth will be super fine again is flawed. This hypothesis is wrong at two levels.

One is on an individual basis. Question is “are we more sensitive to our environment as an individual? Are we driving less, consuming less electricity, using fewer electronics, not using plastics or creating less garbage? Forget about using less, the consumption of all these has jumped by 100% to 800% in the last few years. Even a company like Google, which claims to be champion of green actions, has pushed all its users in a habit of saving all junk data in never-ending Gmail storage boxes? Sensible consumption anyone?

For a moment, we assume that consumption as part of progress cant is stopped then what about affirmative actions? How many trees anyone has planted or know anyone in our social list who has planted a tree? Ok, not in the first degree of connecting than a second degree or third degree?

Hence to believe that Govt will save us from impending doom when all of us are busy pushing it to limit is nothing but the stupidity of first order or blindness or probably trait of our species as captured in this Matrix video.

The other problem with Paris climate fallacy is our sudden faith in Govt despite all empirical evidence of the exact opposite.  One need not to be a big historian to see that majority of big disruption / innovation which helped humans to move beyond a serious crisis, did not come from a some paper pusher bureaucrat but from private citizens who innovated and build next level of solutions be it medicine, electricity, transportation. Todays cutting edge innovation be it AI, driver less car, electric vehicles, drones etc – all are coming from private companies who are trying to solve multiple needs. Once everyone is clear that there is no magic bullet in form of Paris accord, which will miraculously save the earth in the year 2030, innovation will start and with adequate effort (capital + intelligence) we shall be able to solve it much better. Probably faster, better and cheaper!

Trump by his actions, has just pushed us closer to that solution!

Of Politicians, Bureaucrats and 52 ministerial knots in Ease of doing Business in India

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“Ease of doing business In India” seems to be stuck despite being the focus of present NDA Govt. PM Modi, determined to bring India in top 50 places to do business, has directed ministers/bureaucrats to reduce procedures/paperwork so as to improve “Ease of Doing Business” ranking of India.  However, despite all the push for last 2/3 years, India has merely limped to the rank of 130 from earlier 131( just 1 point) as per Ease of Business report released by World Bank. One wonders why has Govt not been able to solve this not so complex puzzle, despite present dynamic leadership and noble intentions and what could be the reason for such a dismal performance on this count?

Interestingly the answer doesn’t lie in the political leadership of present times but rather curiously designed governance structure of India which has been designed to rule than govern. The complex web of the system which on the face of it, appears to be a solution of all problems but in fact is the root cause of all problems plaguing India today.

Indian Govt as per its official website has 52 ministries, 16 APEX offices, 53 departments, and some 85 commissions, not to count State / Junior ministries, an army of bureaucrats and millions of govt servants servicing this large country (2nd most populous / 7th largest economy). However how many ministries (departments) the USA, an economy which is 10 times bigger in terms of GDP has? Just 15 departments and China, a country much bigger than India in terms of population, area, and size of the economy? Just 20 ministries and 5 APEX offices!!! Probably there lies the secret of governance or rather lack of !! One can fairly conclude given the state of affairs in India vs China / USA that quality of governance seems to be inversely proportional to the size of Govt.

A ministry or department once formed behaves like a living organism. It acquires its own identity, shape, and size where it needs energy (budget/power) to survive, grow and stay relevant. Unfortunately, more budgets are granted only if the ministry is more relevant/visible and there lies all the pain. To stay relevant, ministries draft more rules, notifications and circular so that more work is created and more budgets are allocated which in turn create more hindrance for normal businesses. For example, consider the case of the ministry of labor.

Ministry of labor in an ideal world, shall look after the welfare of labor and draft rules related to minimum wages (Ironically a state subject), monitor issues related to labor wages and work conditions. However if one just make policies and issue advisory, it reduces the scope of work and in turn, causes a reduction in budget and power. So ministry of labor does not only stop at labor issues but also worry about “Healthcare” and operates hospitals as well. No not ministry of health but it is the ministry of labor which focusses on providing world-class health care to the workers of India. It has a department called ESIC ( Employee State Insurance Corporation) which collects close to 6.5% of wages earned by an employee and use this money to provide healthcare. Are ESIC hospitals best in the country? NO. Are these hospitals really sought after by all workers? well NO. Is there a perfect alignment of interest among hospitals and workers? NO. Needless to say, the condition of ESIC remains pathetic like any Govt hospital with the poor quality of care, zero accountability, and dismal service standards.

So if there is no operational excellence, no benefit or advantage then why Govt needs to run hospitals and force more and more people to the path of ESIC rather than giving them freedom of buying health insurance and choose hospitals? Interestingly Govt rather than reforming ESIC, keep on bringing more and more people under its ambit ( new limit is 21,000 monthly wage) because core issue is not about the welfare of workers but about the power of labor ministry and ESIC. Without this massive operating outlay, the ministries will be faced with budget cuts / reduced power, a scenario abhorred by bureaucrats and ministers alike. This scenario is not limited to the ministry of labor alone. Every day, every ministry/department is busy thinking of the laws/rules which can increase intervention of the state to next level. Recently parliament passed a bill mandating employers to provide 26 weeks of paid leave to pregnant women in order to come at par with Norwegian countries, however little did the well-meaning minister realized that it will make married woman highly unemployable to small businesses and will again create a rush for Govt jobs with all these perks. There is another minister thinking of ways to control portion sizes served by hotels and list goes on!

PM Modi in his address to NASSCOM ( industry body of IT companies) pointed out that the success of the famed Indian software industry is not because of government but rather in spite of it. He said that IT industry grew as Govt had little understanding of the sector and by the time Govt took notice of it, it had become quite big. Unfortunately, despite such astute understanding, Govt continues to meddle in any industry be it hotels, small businesses or any other flourishing industry. One good example of Govt intervention is the launch of StartupIndia in the otherwise flourishing segment.

Startup India program was launched last year with big fanfare and in a year, we have Startup India events, Startup sessions and even a Startup India policy whose main highlight is that now a nodal body can certify startups!! With dept. at work with all ideas on nodal bodies/ministries/agencies, have startups in India taken off?? Well if one looks at data, 2016 was probably the worst year in terms of VC investments ( lowest in last many years) and policy confusion. So much Govt attention has only muddled startup scene as earlier startups like any other company were taxed on profits and now thanks to overactive Govt, they are getting taxed even on investments!! so much so for ease of business and proactive Govt!

This is not the case with the just ministry of labor or Startup India. We still have a ministry of Steel and we also have a ministry of heavy industries. We have a ministry of surface transport and also a ministry of railways. Tomorrow there will be a ministry of LCVs and then ministry of 22 fire trucks. Overall whole governance structure looks like a design lifted straight from famed British comedy “Yes Minister” which in Indian context looks more like Indian tragedy as the number of departments/ministries keep expanding and expanding.

So for a startup or any company, what will be the best ministry to deal with? MSME or DIPP ? or specific functional ministry depending upon core area ( Fin-tech, travel, Steel, Textile and so on so forth). Needless to say, with dozen of ministers / departments working at same matter in their parallel universe and none willing to lose an inch of control, things remain in perpetual gridlock as every ministry in order to remain relevant / powerful keep on adding its own notifications, rules, processes and thus kicking ease of business out of window.

French writer and aviator Antoine de Saint-Exupery once wrote that “Perfection is Achieved Not When There Is Nothing More to Add, But When There Is Nothing Left to Take Away”. Likewise, the ease of business can only happen if there are fewer ministries to deal with and not more and India can only improve its ranking if it reduces 52 ministries to 20 and eliminates the massive rusted bureaucracy ruling the masses in disguise of servicing them. Hence the Govt need to do the massive thinking and withdraw from the majority of areas rather than getting into every area. This needs a paradigm shift where the aim of government shall be to enable rather than to provide. An area which was well understood by PM Modi till 2014.

So the issue is why it is not happening and PM Modi, a firm believer in maximum governance and minimum government, has not able to solve this issue. And with every passing day, the present Govt looks more “House Trained” than ever ( As Sir Humphrey would have pointed out in Yes Minister).

The answer to this puzzle does not lie at the door of political leadership but at the door of Indian governance system design. India ruled for almost 800 years had an administrative system whose main task was to rule / or help rulers rather than providing governance. In 1935, Britishers relented and started giving natives a say in governance issue but the underlying system remained loyal to the masters in London. This system created an anomaly where the front face i.e political class became accountable for everything while back-end ie the bureaucracy controlled delivery as well execution of state powers.

Indian bureaucracy aka the iron frame of India became a behind the scene administrative machinery which on account of being “faceless, formless”  became a formidable supreme power where its members enjoyed all fruits of the power with full permanency and without any accountability (count the no of bureaucrats convicted/ arrested for failure in delivering their duties). The whole situation aptly summed by Sir Humphrey in Yes Minister  “Dear Bernard,  Ministers comes and ministers go. but we remain forever”. So while political class gets judged every moment and face change of order every five years, bureaucrats remain forever to provide continuity in governance. Moreover, the majority of Ministers/politicians remain servile to bureaucracy as politicians being new to administrative set up have minimal understanding of intricacies of governance due to lack of experience as well as due to lack of time (given very high public engagements).

Hence to assume that a politician will come and reform this rusted Indian service delivery system and usher a new era of policy thinking from this same tired, an entitlement seeking, generalist army of experts, is at best a mirage and worst a daydreaming on part of the Indian public. No politician or media or judiciary can do the required change and only hope is that India will get a strong header PMO secretariat/cabinet secretary who decides that enough is enough and he or she needs to reform this massive government rather than just demanding (and getting) more and more privileges for their clan.

History tells us that last time India saw some serious reform, it didn’t come from political class but from bureaucrats. T N Seshan as an election commissioner changed forever the way elections used to happen in this country, a former bureaucrat cut all the rules/regulations in 1991 economic reform and a strong CAG head turned all crony capitalism upside down with same system, same machinery, and same people.

Hence any talk or thought of bringing India among top 50 places to do business is going to remain pipe dream till present political leadership figures out a way to minimize this vast maze of ministries, departments, APEX offices, commissions and what not, and till then God save the king!

Startup wish list for Budget 2017: Leave us Alone!

Another Budget by NDA govt is in the offing and air is again thick with expectations. Like all years, every industry group is busy preparing wish list which generally boils down to a single point agenda of reducing tax rates and talk of level playing field and how this single reform i.e. tax rate cut will catapult their industry to leading position in the world, generate so many jobs, add so many basis points to the GDP etc etc. At the same time, mandarins at North and south block, silently whisper in the ear of finance ministry about worsening position of fiscal deficit, poor tax GDP ratio and need to collect more taxes in order to provide for poor and why Govt needs to be now ready for 8th Pay commission as it has come out that Indian bureaucrats are very lowly paid in comparison to bureaucrats at Singapore and USA in dollar terms. Indeed a very tough scenario for the finance minister to keep both sides happy.

However for a change, Startups / Investment sector rather than joining the usual annual chorus would like to strut solo guitar and like to chant “We need no tax breaks, we need no exemptions, hey FM, please leave us alone.

India seems to be on the cusp of startup revolution or rather was on the cusp of revolution. The present state of startup euphoria started in 2006 and saw the building of iconic companies like Flipkart, Paytm, Redbus, Citrus Pay and 1000s more with billions of USD getting pumped in this startups till the Govt took notice. Last year, we saw the launch of big “Startup India conclave” and single-minded focus of Govt in improving ease of business and create a conducive environment for startups. What is the end result? No of startups/funding in a startup is down by some 67% in last year alone. The number of tax notices issued to startups/funds issued in the last ½ years exceeds all the notices issued in the last 10 odd years. Earlier there was a tax only if a company used to post a profit, now startups are even taxed on investment raised (the only country in the world to do that). So much so for the benevolent attention of the Govt.

Overall it seems that Startups have got in the same league as farmers have been or to put in management jargon are the new “farmers” for the great Indian super Govt. In India, for the last 60 odd years, every Govt and its budget have one singular focus that is to work for farmers and improve their conditions. Billions have been spending on doing that with schemes, loans, policies and what not. What is the end result? Everyone connected with farmers be it experts, professors at agriculture universities, ministers, agencies, bankers have flourished except farmers! Farmers have continued to suffer and battle perpetual poverty and commit suicide while Govt focuses on farmers in terms of money and time just keep on increasing. Likewise, Govt focus on startups has brought a windfall on all stakeholders be it consultants, bureaucrats, bankers, event managers and all tertiary people except startups/funds. The consultants have been impaneled, lobby groups have been formed, nodal agencies have been constituted, huge budget allocations have been done with crores being spent in ad campaigns, while startup founders and fund managers are busy justifying valuation to tax authorities and being made to feel as hawala operators!

The reason for such state of affair is simple that Govt is looking at startups and doing that quite efficiently. The result is that there are now rules, then representations, then modifications and addendum and then more notifications with every organ of Govt at central and state level trying their best to add value and contribute their set of rules to already muddled water of startups. Probably only thing pending from Govt is a levy of startup cess on all investors and startups.

All this high involvement has only created a high level of uncertainty and confusion with rules changing every quarter and more and more coming every year. In decision theory, there is an interesting term “The Ellsberg Paradox “ which demonstrates that its the uncertainty, not the risk which makes people activity-averse and any investor or entrepreneur can provide for risk but not for uncertainty. Unfortunately, last many years of hyperactivity by govt in terms of ever-changing regulations / new and innovative form of taxes has created immense uncertainty in mind of entrepreneurs/investors alike and one is getting scared rather than encouraged to be investor/entrepreneur.

PM Modi in his address to NASSCOM in 2015 famously remarked that success of IT sector in India is not because of Govt but in spite of Govt as the government had no clue of IT sector and by the time it figured out the sector, it has grown in size multifold and became too big to be disturbed. Likewise, Startups were on a growth path till Govt took notice of it.

Hence it is high time that powers in finance ministry take notice of sentiments expressed by PM and rather than preparing to levy startup cess, listen to Pink Floyd and leave us – entrepreneurs/investors alone!

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The article was published in The Economic Times.

The Indian Sahibs

1/ IndianSahibs: A senior bureaucrat is checking at the airport but hold, it’s not him but his protocol officer and a CISF guard, who is checking for him.

2/ IndianSahibs: Custom official has stopped so sahib consort is threatening and name dropping on protocol. There people are busy on full tax payer salary. Incidentally, that means Airlines issued boarding pass without seeing the person – a big security hazard. Now why custom official – It is Indian airlines departure from the international side so the customs guy needs to stamp.

3/ An official abusing powers/ utilizing free man powerfully paid by taxpayers is more corrupt than any black money hoarder and on top of it, he is compromising security big time.

4/ and this tells what is wrong with India. We remain servile to officials while going gaga on small busmen eking out a living

5/ same officials who want salaries at par with world best also guaranteed jobs, ten thousand perks,  gleefully tank every Govt scheme by shoddy execution and blatant corruption.

5/ anyone who thinks there is hope for India is living in fool’s paradise. Our real rulers are not politicians but Sahibs who demand and get more power

6/ Sahibs with more powers, zero accountability, and fixed tenures thanks to sustained demand by the middle class. We got our own Frankenstein

So critical question: why great Indian middle class remains extra servile to Babus/Sahibs & full of contempt to politicians? Racism or what?

Demonetization: recession at gate or GDP at 9%

Update 1: 12 Dec 2015 :

1. 34 days have passed since the announcement by PM Modi and as expected almost all of 14 lakh cr is going to be deposited in line with my prediction. India is a jugged country and people always figure out a way to beat system due to our long history of surviving in a hostile system.

2. I still stand by positive contribution to GDP but all assumptions were based on the idea that the situation will normalize in 10-15 days. As of now, it is not looking to normalize even in the next ½ months and hence impact is going to be negative now.

3. Big lesson – Indian middle class – bureaucracy, bank officials etc will boomerang any big reform and hence its high time output focus on reforming them.

++++++

Demonetisation has happened. 500 and 1000 rupee notes are banned. There are serpentine queues outside banks / ATMs and experts are busy. There are high pitched videos, columns, tweets and Facebook posts by every expert about how poor are hurt and how this will kill the trade. Roll back demands are being made from every armchair economist, citizens dining in five-star hotels but extremely concerned about poor, many chief ministers. Overall air of the nation is thick with not only smog but also with pro-poor and small business friendly experts and politicians.

There is a view propelled by a gang of astrologers masquerading as economists that demonetization is going to hit the hard economy as cash will be sucked out of system and trade will stop. This hypothesis does ring true if one notices the plugging sales at e-com ventures, lack of crowd in markets and drop in footfalls at malls. No wonder all Captain Obvious is at top of lungs on the incoming slowdown hitting Indian economy due to this demonetization.

History tells us that events rarely follow an obvious path and are shaped by unforeseen and unpredicted. Demonetization is such an event. It is not going to slow down the economy but going to put this economy in the high pedestal of growth. A jump by 2% to 3% in GDP if not more by demonetization is very much possible and for the first time in the world, we will see trickle up effect in the economy than usual trickle down.

The first foremost and obvious effect of demonetization is the elimination of the cash economy and shift towards banking system. Lot of people even without illegal money were not using banks and were saving in cash at home for a variety of reasons. Now all this money will go informal banking channels and will find its way to formal earning mediums like mutual funds, fixed deposits, savings accounts etc. This will create a push and boom as the cash lying idle at home will be at work and will create a contagion effect. Those dormant Jan dhan accounts will now be kicking with life and in a big way. Even if  10% cash lying idle at the household level, translates into 1.4 lakh crore ( $ 21 billion). Now this $21 billion will be available in the banking system and hence available to Govt/ Industry to kick-start new projects / build infrastructure. To get a relative perspective, FDI inflow in India in FY2015-16 was $40 bn while in FY 2014-15  it was $30 bn so the amount coming from dormant accounts to banking system alone is 53% of this year FDI and almost 70% of FY14-15 FDI.

The second kicker to the economy will come from fall in real estate prices. As per experts and general perception, real estate prices are going to fall by 20% to 30% in general (a black component of a deal). In India, in FY 2015-16, if one just takes top 8 cities, $14 bn worth (90,000 Cr) was invested in the real housing ( 3 lakh houses in 8 cities at a 30 lakh average price though in real numbers are much higher). As per experts, real estate prices are expected to crash by 20% to 25%. This drop in prices even if we take 50% drop in a number of transactions will leave more than 9000 Cr ($1.3 bn) money at the hand of these end users in just 8 cities and this amount will be 10x higher if one account for the whole country. This extra cash available with the consumer will go in other discretionary consumption and will either build the saving rates or drive consumption of services as well as consumable goods.

The third and not so obvious kicker will come from the attempt of all back money hoarders trying to convert it in white. As per data released by RBI, India has 14 lakh Cr ($ 210 bn) in circulation in 500/1000 bank note denominator. For a moment if we assume on a very aggressive basis that 50% of it is white and declared income ( fully tax paid), still there is INR 7 lakh Cr ($105 bn) in black money. Now, these cash hoarders will try to use people with low income to transfer 2.5 lakh into account. Now as per financial ministry data, India has opened 25 Cr (250 million) Jan dhan account for poor people as on today. Now if black money hoarder were able to use 50% of these accounts (12.5 Cr) to deposit cash in Jan dhan bank accounts, one just needs to deposit INR 70,000 in each account. So apparently all this cash will flow back in the system in next 50 days without any collateral damage to these money bags. However, the cost of organizing this deposit program will range anywhere from 20% to 40% ( as per the figures being circulated in media/social media). Even if we take a nominal cost of this transaction at 10% being paid to these Jan dhan accounts(against 30%), it will be a commission of INR 70,000 Cr ($11 bn) ( 10% of 8 lan crore) or 8,000 per Jan dhan account (12.5 Cr). This 8,000 will immediately find its way to consumption as this is massive cash for these account holders and even if just 50% is spent, Indian economy will see pumping of $6 bn (40,000 Cr) being spent in next 3/5 months. This class will binge on clothes, consumer goods and will create a massive multiplier effect. However for the first time multiplier will not trickle down but will trickle up as rural or low-cost goods will drive the industry. So in a way, PM Modi has imposed huge wealth tax on the rich people and accomplished direct cash transfer to poor people.

Foreign investors pumped $10 bn in 20 months in Indian startup which put India on the world map as a top 3rd country for startups and changed the whole mood of the nation while creating many multi-billion enterprises. Payout of $6 bn in arrears to Govt employees in 2008 as per sixth pay commission, triggered a consumption boom in India and insulated it from the economic crisis which impacted every country. Hence this total amount of $40 bn hitting the banking sector/consumption in next 3/6 months is not just going to finish the black economy but going to put India on an autobahn of economic growth.

PM Modi in his usual total out of box thinking, has just put India on growth orbit of a different level where a minimum jump in GDP by 2% to 4% is not ruled out.

Gear up, the age of India has arrived.

Namo Namo

This article appeared at Times of India here.