How the Modi government ‘solves’ problems

It is curious how the Narendra Modi government has gone about “solving” India’s problems one by one. Consider demonetisation, for instance. The ostensible reasons given then and subsequently were that the government wanted to end the problem of black money in one shot; it wanted to bust counterfeit notes in the economy, and thus apparently end terror funding; it wanted to reduce cash in the economy and move towards digital payments; it wanted to increase tax compliance, and so on.

For a fig leaf of propriety, the RBI was asked to give its nod to the hare-brained scheme that Raghuram Rajan had warned against. The government sent the note to the RBI on the morning of November 8, 2016, and it expected the nod by the evening. The RBI Board met at 5.30 PM that evening. The minutes of the meeting show that the Board said that none of the government’s stated objectives would be served: Only 6% of the estimated black money is in cash, so it won’t be the end of at least 94% of unaccounted wealth which is in real estate, gold and diamonds; by the government’s own estimate, the amount of fake notes in the economy was only worth Rs 400 crore and it was not worth demonetising 86% of currency by value to kill this piddly amount; and so on. But the Board knew what was expected of it. So, demonetisation was declared to be “in the national interest.” By 8 pm that day, Modi was on TV. How much black money has been ferreted out and added to the national coffers since?

On the “fourth anniversary” of DeMo, the government claimed that it had “drastically improved” tax/GDP ratio; had “made India a lesser cash-based economy” (sic, but true, India is a lesser economy today than it was before DeMo); “helped reduce black money, increase tax compliance”, and that it gave a “boost to transparency,” concluding that DeMo had been “greatly beneficial towards national progress.”

What’s the truth? The economy is in the doldrums (and it was even before the pandemic). While the number of people filing I-T returns has risen, tax/GDP ratio has fallen from 11.22% in 2017-18 to 9.88% in 2019-20. There is more cash in the economy than ever before (outpacing the rate of economic growth by a large margin). The construction sector (which supports another 150 allied industries) collapsed, and the government has since been trying to resuscitate it; millions of daily wage workers lost wages for months on end. And that’s just a snapshot of what the government’s ‘solution’ to the problem of black money did.

Or, take the problem of transparency in political funding. India had a problem of political donations being made in cash out of the black money reserves of unscrupulous businessmen. The Modi government declared that Congress had corrupted the system and that it would solve this problem. How did it do it? It made anonymous, unlimited donations to political parties legal through the Electoral Bonds scheme. Now, any corporate or rich individual can donate any amount of money to a political party by purchasing a bearer bond (which is as good as cash) and neither the donor nor the recipient political party has to reveal it. Under the Congress, unaccounted, untraceable donations were still illegal. Now, it’s legal by law.

And now, hold your breath for one more such solution: an RBI internal working group (IWG) has recommended that large corporates be allowed to own banks. That is, the very ones that borrow large loans from banks to run their businesses and who often do not repay, are now to be allowed to own the banks themselves!

The problem statement is like this: Banks are in the doldrums because of bad loans, and bad loans happened because of the phenomenon of “phone-banking” during the Congress regime. If a big businessman wanted a loan but the banks were not ready to lend, he would call up somebody in Delhi, and that somebody would call up the bank and the loan would be made.

And given the record so far, the solution goes like this: Ha, the Congress was corrupt and so there was ‘phone-banking’ and crony capitalism. That will not happen in my regime. In my regime, the businessman will himself own the bank, and can help himself to a loan whenever he wants -- with the public’s money!

After much hue and cry from the likes of Raghuram Rajan, Viral Acharya, Vijay Kelkar, etc., the RBI Governor has sought to distance the regulator from its own IWG by saying that the latter’s recommendation is not the RBI’s view. But we know how this works. The RBI did not want to give its nod to DeMo, but it had to. Will it be different this time? The IWG itself noted all the reasons why it is a dangerous thing to do, and then went on to say, well, if we improve supervision, it should be fine.

What’s more, if the corporates – and we know which ones want to be banks urgently – cannot be ushered in through the front doors, there are back doors, too. For the IWG has also said that corporates that own NBFCs should be allowed to turn them into banks, and payments banks should be allowed to become full-fledged banks after three years of operations.

Such are the ways in which the Modi government solves our problems.

(DH's Opinion Editor lives the life of an owl, and can turn his head 270 degree)