Sweet little lies

Despite the frenzy of distractions since, by now you have likely heard the news that demonetisation failed. As NDTV’s Sreenivasan Jain put it in Truth vs Hype, the news sent the government into “a spiral of deflection, of moving goalposts and of swamping us with cherry-picked data”. He’s being very polite, avoiding the accurate and efficient word: “lies”.

Take this blatant example from the 31 Aug 2017 Ministry of Finance release titled “Demonetisation immensely beneficial to Indian Economy and People”:

The Government had expected all the SBNs to come back to the Banking system to become effectively usable currency.

Oh yeah? Here are four examples that show otherwise:

  • In his 8 Nov speech, Prime Minister Narendra Modi stated: “The 500 and 1,000 rupee notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper.”
  • Two days later, Finance Minister Arun Jaitley told News18 that, of the 14 lakh crore notes outstanding, “some would certainly get extinguished” because “people who have used cash for crime purposes are not foolhardy enough to try and risk and bring the cash back into the system”.
  • On 10 Dec, Attorney General Mukul Rohtagi informed the Supreme Court that “the government had expected ₹10 or 11 lakh crore to be returned out of a total of ₹15 lakh crore of ₹500 and ₹1,000 notes that were demonetised”.
  • One month later, on 10 Jan, NITI Aayog member Bibek Debroy predicted that some 10% of the notes in circulation would not return.

Some other big holes in the government’s defence of demonetisation are now widely acknowledged. That the proportion of fake notes in the system is small and remains so, and that the cash crunch failed to impede the activities of militants in Kashmir and in Naxalite areas (here, here and here). That demonetisation has brought in fewer taxpayers than the government claims.

So what’s left to be said?

Quite a bit, it turns out. The big fibs are defended by a ring of smaller lies and half-truths, to the point that honesty seems absent in the entire defence of demonetisation. It’s one thing for politicians to spin or massage the truth, quite another for an official government statement to do so.

Let’s look at the claims in that document, one by one.

A significant portion of SBNs deposited could possibly be representing unexplained/black money… Since November 2016 and until the end of May 2017, a total of Rs 17,526 crore has been found as undisclosed income and Rs 1003 Crore has been seized.

Duh, that’s obviously what happened. It is possible that the income tax department’s Operation Clean Money exposes a good proportion of that money in the coming months, and thereby contributes to the original goals of demonetisation. But the evidence so far is unimpressive.

₹17,256 crore sounds like a lot, but is actually well within historical averages, even if we exclude the unusually large 2013-14 haul – which we really shouldn’t since demonetisation was supposed to be this bold, never-seen-before move (see chart below). The best-case scenario is that future revelations await, the worst-case scenario is that wily citizens successfully convert black money to white.

Screen Shot 2017-09-03 at 10.41.18 PM.png

Takeaway: Wake us up when you have something solid.

The total assets under management (AUM) of Mutual funds (MFs) rose by 54% by the end of June 2017 from March 2016.

This is simply ridiculous as a defence of demonetisation. The bulk of this asset growth happened prior to demonetisation, between Apr and Oct 2016, when it rose 32% (according Association of Mutual Funds in India data). Following demonetisation, mutual funds assets grew a more subdued 16% between Nov 2016 and Jun 2017. But 54% sounds so much cooler than 16%, doesn’t it?

Screen Shot 2017-09-03 at 11.10.11 PM.png

Takeaway: They do take us for fools.

Thanks to demonetization led efforts, zero balance accounts under PMJDY declined from 76.81 % in September 2014 to 21.41% in August 2017.

More bunkum, I’m afraid. The proportion of zero balance Jan Dhan Yojana accounts had already fallen to 24.1% by 26 Sep 2016, several weeks prior to the demonetisation announcement. In fact, the reduction from 24.1% to 21.4% that occurred after demonetisation is the slowest since 2014 (see chart below), quite the opposite of what the Finance Ministry is implying.

Screen Shot 2017-09-03 at 2.06.41 PM.png

Takeaway: Still taking us for fools.

As part of fillip to digitalization, about 52.4 crore unique Aadhaar numbers have been linked to 73.62 crore accounts in India. As a result, every month now, about 7 crore successful payments are made by the poor using their Aadhaar identification. The government now makes direct transfer of Rs. 74,000 crore to the financial accounts of 35 crore beneficiaries annually, at more than Rs. 6,000 crore per month.

Congratulations, but this has nothing to do with demonetisation. It’s to do with Aadhaar and PMJDY, which were ticking along nicely long before demonetisation, and would have continued to do that in its absence.

Takeaway: Irrelevant.

Digital payments have increased by 56% from 71.27 crore transactions in October 2016 to 111.45 crore transaction till the end of May, 2017.

This implies steady growth in digital transactions, when in fact the Ministry of Electronics and Information Technology – clearly more honest than the Finance Ministry – admitted in the Lok Sabha on 2 Aug that “digital transactions increased during November-December 2016 and have plateaued thereafter”. In other words, people shifted to digital payments when they had no cash, got accustomed to it to some extent, and then reverted to their old habits. This is clear in the chart below — and recent National Payments Corporation of India data show no increase in later months either.

Screen Shot 2017-09-03 at 11.07.24 PM.png

So we sacrificed millions of jobs and two percentage points of economic growth for a temporary bump in the growth rate of digital payments.

Takeaway: If only the spin would also plateau.

Some people had expected a very large shock to economic growth on account of demonetisation.  Their expectations have been belied.

I don’t know what the Finance Ministry is smoking, but it’s obviously potent stuff (see below). To be fair, the 5.7% GDP number came out the day after the demonetisation defence, but the 6.1% growth in Q4/2016-17 was already down 1.8 percentage points from 7.9% in Q4/2015-16. The only expectations belied here are the Finance Ministry’s.

Takeaway: The Finance Ministry can’t read statistics. Worrying.

It’s not easy to defend a failing flagship policy, especially when the central premise is shaky.  When the foundation is built on wishful thinking, the supporting ‘evidence’ is bound to stray into fictional realms too. Let’s hope the Finance Ministry doesn’t have to rely on such storytelling skills in the future.

 

 

Spinning an electricity turnaround in Uttar Pradesh

An Economic Times (ET) report on 26 Apr credited the newly elected Bharatiya Janata Party government in Uttar Pradesh (UP) for a dramatic turnaround in the state’s electricity situation. The news report claimed that UP had “shed blackouts within a month of the BJP taking over the reins, moving from perennially running short of electricity to ‘zero-shortage’ in April”.

Soon enough, Power Minister Piyush Goyal shared the article with an approving tweet:

https://twitter.com/PiyushGoyal/status/858150103776931840

That’s a whopper.

It is certainly true that UP’s energy deficit (measured in million units) hit a record low in Mar 2017 of 0.2%, compared to a much bigger gap of 10.5% a year ago in Mar 2016. However, it would be ridiculous to give the new government credit for this improvement: the UP election results were declared on 11 Mar, and a new government sworn in on 19 Mar.

The ET article cited unpublished data from the National Load Despatch Centre, which oversees the national electricity grid, to show that this improvement continued into April, but we’ll have to wait for numbers from the Central Electricity Authority to get a clearer idea.

But regardless of how April turns out, the ET claim completely elides the fact that power shortages in UP, and indeed all over India, have strongly diminished over the past year, as this chart vividly shows:

Screen Shot 2017-04-29 at 12.53.50 PM

India’s energy deficit fell sharply in the first half of 2016, and particularly so in UP. UP’s deficit (shown here as a 3-month moving average) converged with north India’s around Sep 2016, and by Dec 2016 had fallen below that level. This was unanticipated: the Central Electricity Authority’s 2016-17 Load Generation Balance Report had anticipated that UP would have an energy deficit of 6.5%, but it turned out to be only 1.7%. Since the BJP ran the state only 13 of those 365 days, the decline in UP’s power shortage had little to do with it, Goyal’s celebration notwithstanding.

Even so, fewer blackouts and less load shedding can only be good news, right?

Yes and no. As much as India’s power capacity has risen in recent years, it is more weak growth in demand that accounts for the disappearance of India’s once-chronic electricity shortages (see chart below):

Screen Shot 2017-04-29 at 4.10.34 PM.png

The chart above shows a steady decline in the growth of energy demand since 2014-15, both in UP and in India. This doesn’t have to be a bad thing; many economies display lower energy intensity as they grow, and technological advances could also play a role. Consider the UJALA scheme to promote energy-efficient LED bulbs: government claims likely overstate the energy savings by a factor of two (see Why you shouldn’t be bedazzled by Modi’s LED claims), but their adoption probably shaved a percentage point off 2016-17 energy demand. However, if the decline in demand reflects industrial weakness, and the lingering effects of demonetization, that would be an unhealthy sign. And the rapid decline in the growth rate of energy demand in the past two years is worrying.

Either way, one thing is clear: the ending of UP’s power shortage is part of a broader structural story that has little to do with the new UP state government. And no amount of PR claims dressed up as news reports can change this reality.

(This article was originally published in The Quint.)

 

 

Long way to go for Make in India

A look at “Make in India”, published as an oped in the Hindustan Times:

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How does one judge Make in India? Recent news that foreign direct investment (FDI) flowing to defence in 2016-17 was an absurd trickle of 61,000 (or perhaps $61,000, the Ministry of Defence didn’t specify) seems to have not caused much of a ripple. Nor has the fact that FDI in defence in the past three years has been – this isn’t a typo either – $174,000, notwithstanding several liberalisation announcements.

Defence is just one, albeit telling, sector, with its own peculiarities such as the much-delayed “strategic partners” policy and a single buyer – the Ministry of Defence. But it is an exaggerated version of the story playing out across the high-profile Make in India campaign, which promises to generate millions of jobs in India by increasing the share of manufacturing to 25% of gross domestic product (GDP).

India has seen strong FDI flows in the last couple of years, but most of this is going to ride-sharing services like Uber and Ola and e-commerce providers like Amazon and Flipkart. FDI in manufacturing hit a high of US$9.6 billion in 2014-15 (slightly better than the previous 2011-12 record), but actually fell the next year to US$8.4 billion. A major pickup in 2016-17 seems unlikely.

Despite rising costs in China, India has made little headway into becoming a global manufacturing alternative, particularly at the low end that generates the most jobs. Textiles and clothing jobs from China are moving to Myanmar, Cambodia and, yes, Bangladesh, while Vietnam, Thailand and Indonesia are gaining in electronics production. India has become a global small-car hub over the last couple of decades, but this relatively high-end segment is not a massive job-creator.

Things are slowly changing. India has a large domestic market to leverage, and the two dedicated freight rail corridors it is now building (connecting Delhi with Mumbai and Kolkata) should contribute to a major reduction in logistics costs in a few years. But, for now, southeast Asia is eating India’s lunch.

There are limits to what a government can do. India’s can’t, and arguably shouldn’t, try to emulate China’s labour suppression that kept manufacturing costs down, which Myanmar, for instance, could. This government isn’t even pushing the smaller measures forcefully enough. The focus on “ease of doing business” reforms is commendable, but only four of 31 states have implemented meaningful labour reform in the last three years. Even if the opposition doesn’t want to cooperate, the BJP could certainly prod its 12 other states to follow suit.

And let’s not forget the self-goals. Demonetisation might have contributed to the BJP’s political victory in Uttar Pradesh, but it has shredded the informal sector. Large companies in sectors from automobiles to consumer goods have laid off thousands of workers, as have their suppliers. Demonetisation may have delayed the goals of Make in India by months, if not years.

It’s not a bad thing for India’s aspirations to exceed its political grasp, but a trending social media hashtag won’t generate jobs. India has always done its bit of manufacturing, and the true test of Make in India lies in whether its GDP share meaningfully rises, not in photo-ops.

Jumla is the new black

It’s hard to tell whether demonetisation will turn out to be a bold hit or a costly miss, but it appears to many that the government has taken the black money bull by the horns. Announcing the withdrawal of ₹500 and ₹1,000 notes, Prime Minister Narendra Modi listed several steps that his government had taken so far in its war on black money:

Looks impressive, what’s not to like? Just that, once you discount the hype, it’s not very different from what’s been done by past governments, whether the United Progressive Alliance (UPA) or the United Front (UF).

Show me the money

Consider the figure of ₹1,25,000 crore collected over two-and-a-half years. The government hasn’t provided a break-up, but based on Finance Ministry replies to parliamentary questions, it includes the following:

  1. ₹65,250 ₹67,382 crore declared under the 2016 Income Disclosure Scheme (of which 45% will flow in as actual taxes)
  2. ₹21,354 crore of undisclosed income seized from individuals and businesses (under Section 132(4) of the Income Tax Act)
  3. ₹22,475 of additional income assessed from taxpayers by surveys (carried out under Section 133A of the Income Tax Act)
  4. ₹8,186 crore of undisclosed income held by Indians in accounts with HSBC Geneva, revealed by the French government in 2011
  5. Around ₹5,000 crore of offshore holdings by Indians that an International Consortium of Investigative Journalists investigation exposed in April 2013

All of which adds up to ₹1,22,265  ₹1,24,397 crore, close enough to our headline figure. But how remarkable is this effort?

The income disclosure scheme is a one-off (more about that later), but what about the black money brought into the open via searches, seizures and surveys? The chart below shows the record in previous years (source here):

Screen Shot 2016-12-09 at 11.59.37 PM.pngIsn’t that interesting. Using the same definitions used by the Modi government, it turns out that the quantum of black money exposed in the last two years of the UPA was more than ₹1,30,800 crore. That’s right – the UPA tracked down more black money than the Modi government did, and in a shorter time frame.

As always, there are caveats. Not all the money assessed under Section 133A should be strictly considered “black”; some of it consisted of income that taxpayers felt was not taxable for whatever reason, but the authorities disagreed. Still, if the Modi government wants to count all those funds under its “black money” haul, it cannot deny the UPA credit for a bigger haul.

Bring back the money

That’s fine, you might say, but hasn’t the Modi government adoped a much more comprehensive approach to black money than the scam-tainted UPA? It’s passed bills to bring back black money, succeeded with its income disclosure scheme and, as Modi himself stated, reached agreements with many foreign countries to provide tax information.

Let’s take these one-by-one.

The Modi government has indeed passed bills that raise the penalties for the concealment of foreign income and beef up the handling of benami properties, and we have to see what effect they have. But it’s not clear that income disclosure schemes even work, leaving aside the obvious unfairness of giving tax criminals a break while the rest of us cough up our cash. A similar scheme in 1997 resulted in close to half a million persons declaring ₹33,695 crores of previously undisclosed income, equal to ₹85,153 crore in current rupees and a third quarter higher than the Modi government’s bounty. I think we can all agree that it didn’t make much of a dent in India’s black money problem.

What about black money transferred outside of India, which the Washington DC-based Global Financial Integrity estimates averaged US$51 billion per year between 2004 and 2013 (some of which likely returned as foreign investment via “round tripping”)? In his demonetisation announcement, Modi referred to “agreements with many countries, including the USA…  to add provisions for sharing banking information” that could help make international tax evasion more difficult.

A process has been underway since the 2009 G20 summits in London and Pittsburgh to improve transparency in international financial transactions. This has translated into an effort to include banking information in both existing and proposed Double Taxation Avoidance Agreements (DTAA) that India has (currently with 95 countries), and to reach Tax Information Exchange Agreements with countries that India doesn’t have a DTAA with, mostly tax havens such as the Bahamas, British Virgin Islands etc.

The table below shows that the UPA accounts for much of the progress so far, although this could change over time; the Modi government is currently negotiating another 53 DTAAs.

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That doesn’t mean that the Modi government has been lagging: in May 2016 it finalised an important DTAA renegotiation with Mauritius, the island nation that has been the source of a third of all FDI inflows since April 2000, and is believed to be the main gateway for round-tripping. India will impose a capital gains tax of half the Indian rate on investments from Mauritius starting from April 2017, and the full rate from April 2019. A similar agreement with Singapore, the second largest source of FDI into India (16% of the total), is in the pipeline. The idea is to remove one incentive for round-tripping: saving on capital gains tax.

There is also a broader multilateral effort under the OECD umbrella to facilitate the automatic sharing of taxation-related information. It began with the Convention on Mutual Administrative Assistance in Tax Matters, that India joined in 2012 and now covers 106 countries and jurisdictions. India (under the UPA) became one of 47 countries to sign the Declaration on Automatic Exchange of Information in Tax Matters in May 2014, which led to the establishment of the OECD-led Global Forum on Transparency and Exchange of Information for Tax Purposes that is now at the core of international data sharing. In June 2015, the Modi government took another step forward by signing the Multilateral Competent Authority Agreement on Automatic Exchange of Information, under which 54 countries including India will start automatically sharing financial data from September 2017.

In summary, there has been a robust G20-supported process underway for several years to bring transparency to international financial information, which Modi certainly didn’t start, and had little choice but to go along with.

The bottomline: Modi’s demonetisation drive marks an ambitious break from past practice. But his claim that previous BJP policies have brought in an unprecedented amount of money is just a jumla.