by Roopa Pai
▶‘Launder their money’, turning it from ‘black’ to ‘white’, i.e., figure out a way to make it seem that they got this illegal money in a legal way, and then spend it on whatever they want to; or
▶Put their illegal money into Swiss banks. (Swiss bank accounts only have numbers to them, and no names, to protect the identity of their clients. It is a criminal offence in Switzerland for a bank to reveal the name of the account holder.)
According to reports, Indians have more money in Swiss banks than citizens of any other country in the world. One estimate puts it at 130 billion rupees! By taking this money out of the country, these Indians have made 130 billion rupees (or whatever the exact amount is) worth of funds unavailable to the Indian government or to Indian industry. If it was available, India could arguably pay off most of its national debt and become one of the world’s richest and most developed countries. And we haven’t even begun to talk about all the black money that is inside Indian mattresses, and in Indian money-laundering ‘washing machines’!
You see? You think a grown-up slipping a policeman a hundred bucks to ensure that he doesn’t give a ticket (for talking on the phone while driving, say) is a small thing which doesn’t matter to anyone, but what he is actually doing is donating to the country’s illegal economy by helping the policeman earn black money. Like so many other things in life, the illegal economy also begins with us, and the choices we make. Think about it.
A short note on Demonetisation
On the evening of 8 November 2016, in a shock announcement that sent ripples of fear and excitement through the country, Prime Minister Narendra Modi let Indians know that, from that very midnight onwards, currency notes of the value ₹500 and ₹1000 would be ‘demonetised’—they could not be used anymore as a medium of exchange for goods and services. If you had any of those notes with you, you could, however, exchange them for new currency notes of the same value in banks and post offices, or deposit them into your bank account, where they would be counted according to their printed value. This, he said, was part of the country’s war against black money.
Economists, bankers, politicians and common people had differing views on the timing of the demonetisation, and the way in which it was carried out. But these views needn’t concern us now.
Instead, let’s think about how demonetisation helps to bring out the black money in the system and how that helps the country.
▶When black money is stored as cash, it is stored as high-value notes; i.e., as ₹500 notes or as ₹1000 notes. That way, money takes up far less space. (If it was stored as ₹10 notes, the mattress inside which they were hidden would become very thick indeed.)
▶When such high-value notes are demonetised, all of them instantly become worthless pieces of paper. The only way they will regain their value is when they are deposited in banks (or exchanged at banks for new currency of equivalent value).
▶If you deposited the devalued notes into your account, the government would know that that money was part of your income, and you would then have to pay tax on it. If you did not deposit them into your account, they would remain completely worthless. Generally, more people would prefer to deposit their black money and pay a part of it as tax, thus getting some value for it, rather than not deposit it and get no value for it at all.
▶If plenty of previously undeclared money made its way into the banks and swelled the bank’s coffers, banks would have more money to lend to people who wanted to start new businesses or schools or hospitals, or build houses, or buy farmland. (If you’re not quite sure what banks do and how they work, check out page 137.) All that activity in education, healthcare, manufacturing, building, and farming would help the country produce more goods and services both for the use of people in the country and for export to other countries. That would help the economy grow.
▶Banks would also have to pay more tax to the government (how much tax a bank pays depends on how much money it has). Therefore, the government also would have more money to spend on projects that the country needs.
▶A lot of the undeclared money may not come back to the banks, either, because people who have it will not want the government to know that they had it in the first place. Let’s say this money which does not come back amounts to ₹X crores. That means the banks (or at least the Reserve Bank of India) is making a saving, or a ‘profit’, of ₹X crores, since it doesn’t have to pay out that amount of money to the people who had it.
There are also other possible side benefits of demonetisation.
▶Any counterfeit ₹500 and ₹1000 notes in circulation would become completely valueless overnight. Counterfeiters would have to wait for the government to release new notes and figure out how to duplicate them before they started printing counterfeits again, and this would take time. Within that time, the government could bring in stricter rules to crack down on counterfeiting.
▶Millions of people in India do not have bank accounts. Since the only way of getting value for devalued ₹500 and ₹1000 notes is to deposit it in a bank account, demonetisation could encourage people to open accounts and deposit their money in them. This would help banks to earn money, which they can then lend out to people who need them. It would also help the government to monitor the amount of money in the system.
▶Keeping money in banks and withdrawing only the amount you need when you need it—or paying for something by simply transferring money from your account to the payee’s account—is safer and more secure than carrying actual cash around.
▶Having a bank account and showing that you are serious about putting away a little money in it regularly will help you get a loan from a bank when you need it. A bank loan is far safer, and less expensive than a loan from a random moneylender.
▶More people would begin to spend digital money instead of cash, through debit cards, credit cards, or online wallets. This would again help the government monitor how much money is being earned and spent, and by whom, which it would not have been able to do if cash had been exchanged. Knowing how much each person earns will also help the government catch tax avoiders and make them pay. Digital money will also thwart counterfeiters—there is no place for fake currency in a ‘cashless society’.
On the flip side, there are many problems, too, with demonetisation, especially in the weeks immediately following such a drastic move. This is what was happening when this book went into print.
▶Since ₹500 and ₹1000 notes made up, in value, more than 80 per cent of the total cash circulating in India, removing them overnight created a severe shock to the economy. People had no cash to buy things, and didn’t know when they would be able to get more, so they reduced spending.
▶There were long lines in banks of those who wanted to either deposit old notes into their accounts, exchange old notes for new ones, or withdraw money from their accounts. Banks did not have big reserves of new currency, so there was a limit on how much each person could withdraw. ATMs ran out of money very quickly. Many of them were not refilled for days.
▶The new ₹2000 note, which was introduced soon after the demonetisation announcement, helped matters along, but the new ₹500 note, which was meant to replace the old ₹500 note, took a long time coming. For many weeks, therefore, finding change (for ₹2000) was a real issue.
▶Since a huge percentage of India still trades only in cash, the scarcity of cash was a problem, and caused the economy to slow down in the first few weeks. Everyone’s business was affected—from the small trader to the big builder, from the farmer to the factory owner. It prompted a lot of people to switch to digital buying and selling and to go cashless, but many more millions need to get there. They will not find it easy to do that for the following reason.
♦For a country to go ‘cashless’, a majority of its households should have at least one bank account each; a majority of its people should have smartphones through which they can send and receive ‘digital’ money instead of cash (or there should be a platform that will wor
k on regular phones); and there should be strong Internet connectivity everywhere, because all these transactions are done over the Internet. India does quite well on the first two counts, but Internet connectivity is still poor in large areas of the country, which means it will still be a while before it is able to go truly cashless. Even if we had had great Internet connectivity (or a platform that used just the cellphone network) already up and running, it would still take a ton of time to ensure that all banks were hooked up to it and that all users knew how exactly to work it.
All these short-term problems were expected, however. Economists say that we cannot truly analyse how good or bad demonetisation was for the country—did it bring hidden reserves of black money into the open (and how much)? Did it go some way in curbing corruption? Did it succeed in curbing the production of counterfeit currency? How did it affect the economy?—until at least six months after the fact, i.e., in May or June 2017.
So was demonetisation a good move? You tell us in July 2017!
Bet you didn’t know that!
MRP: It happens only in India
Have you noticed that any packaged good that you buy—soft drinks, biscuits, shampoo, medicines—has a price printed or stuck on it, which is preceded by the initials MRP? Ever wondered what it meant? Well, even if you never wondered, here’s the answer: MRP stands for Maximum Retail Price, and it means what it says. To ‘retail’ means to ‘sell’, so the MRP is the maximum price at which a good can be sold.
Who decides what that price is? If it was the government that decided the price, that would make India a ‘government-controlled command economy’ (see ‘Economic Systems’ on page 70), which we aren’t. If it was the retailer, or the seller of the product, who decided the price, that would make it a ‘market economy’, which India is heading towards strongly but hasn’t entirely become yet. In India, (which, by the way, is the only country in the world that has an MRP system) the MRP is actually decided by the manufacturer of the product. Here’s how they do it.
If ₹X = What the manufacturer wants to charge for the product, and
₹Y = An extra amount that the retailer gets to keep for himself every time he sells the product, as a fee for all the work he does to buy, transport, store and sell the product to you, then
MRP = ₹X + ₹Y
The Indian government introduced the MRP system in 1990, for very good reasons (explained below). But a lot of people think that the MRP should be done away with, for several other good reasons (explained below too). Let’s check out both sides of the argument, shall we?
All those in favour say ‘Aye’!
The MRP was introduced, essentially, to protect the customer. Let’s say you lived in a remote village where there were only one or two shops selling essentials. Without access to good roads and technology, you would not know what those essentials cost in the nearest town. Without a printed MRP to keep him honest, the shopkeeper in your village would sell you those items at whatever price he wanted! The Indian government introduced the MRP system in 1990 to prevent stuff like that from happening. There’s another reason. A fixed MRP prevents one powerful retailer from bulldozing every other retailer out of existence, thus keeping things fair for retailers as well. How does that work?
Let’s say there are two shopkeepers in your remote village, but one (let’s call him Ameer) is far wealthier than the other (let’s call him Less Ameer). Now, any shopkeeper (or retailer) would calculate the price of his products using this equation.
CP + RC + P = RP
where:
♦CP is Cost Price (or what it cost him to buy the product from the manufacturer)
♦RC is Retailer Cost (or what it cost him to buy, transport, store and sell the product at your village)
♦P is Profit, and
♦RP is the final Retail Price
This is the equation that Less Ameer (LA) would use too. However, our wealthy Ameer may tweak the equation a little. Since Ameer has ‘deep pockets’, i.e., more money than LA, he may decide not to add his Profit to the equation. He does not want to lose money (which is why he keeps CP and RC), but he may not mind about not making money for a while. Naturally, things will be cheaper (RP will be less) in Ameer’s shop, and all customers will flock there. After a few months of swatting flies, LA will be forced to shut down his shop and go become an assistant to a halwai (since he has so much experience swatting flies). Or something. At this point, our greedy bully Ameer will add the P to his equation, and sell his products at the same price as LA had sold them.
So far so good. All this can—and does—happen whether or not there is an MRP. Here’s where it begins to get interesting, though, and the MRP really begins to show its strength. Now, because he is the only shop around, Ameer can push the P up to whatever level he likes, and villagers like you will have no choice but to buy from him! This cannot happen when there is an MRP.
A fixed MRP, therefore, keeps the playing field fair and prevents this kind of bullying and profiteering by powerful retailers. And that’s why the MRP should stay!
All those not in favour say ‘Nay’!
And this is how the naysayers argue their point.
♦The MRP works only on packaged items. In India, many other essentials—vegetables and fruits, for instance—are sold loose, and retailers charge what they like anyway, depending on how much they paid for it and how much the customer is willing to pay. Also, even in cities, except in the big supermarkets, things like dals, pulses, rice, oil and spices are sold loose, not in packets with an MRP marked. This sort of defeats the purpose of the MRP.
♦These days, with mobile phones and television and radio reaching even small villages, most people know what prices of things ought to be. It is far more unlikely that retailers can cheat their customers now.
♦It is really difficult for the government to ensure that everyone is sticking to the MRP, especially in smaller towns and villages. Instead of spending money, time, and effort to enforce the MRP, the government can invest in technology to ensure that information on the right price of a good reaches customers in far-flung villages.
♦India is moving towards becoming a free market, where the ‘market’ (people who buy and sell goods) decides what the price of something should be. In other words, if people are willing to pay more for something, its price should go up, and if people will not (or cannot) buy something because its price is too high, its price should go down.
♦Who knows how much people are willing to pay for something? Is it the manufacturer, who is not in touch with the customer directly, or the retailer, who meets customers every day? Obviously, it is the latter. Doesn’t it make sense, then, for the retailer to have the freedom to decide the price, not the manufacturer? A fixed MRP—or a pre-decided price—is an ‘artificial’ price, say the naysayers. It simply won’t work as well, they argue, as the ‘natural’ price set by the retailer, which is a flexible price that can go up or down depending on the mood of the customer. And that’s why the MRP should go!
Now that you have heard both sides of the MRP argument, what are your thoughts? Should the MRP stay, or go?
BIG QUESTION 2
How come my parents never ate a Maharaja Mac in India when they were my age?
Because they were vegetarian, haha.
No, but seriously, it was because foreign companies were simply not allowed to trade in India until quite recently!
It might be a little difficult for you to imagine, but many of your parents spent their entire childhoods (in India) never having eaten a burger (not even a veggie one) from McDonalds, or dug into a bucket of fried chicken from KFC, or even, hold your breath, guzzled a bottle of Pepsi or Coca Cola. How come, and what did Economics have to do with it? To understand it somewhat, we need to go back a bit in time.
Rewind to the mid-sixteenth century. Although Europeans were trading actively with India by that time, it was not until the end of the eighteenth century, 250 years later, that the British emerged as the most powerful Euro
pean power in the subcontinent. By this time, they had also morphed from being mere trading partners into absolute rulers. Slowly but surely, they began to make some pretty big changes to the Indian economy. And these were changes that would benefit them, not us.
No wonder then, that from being one of the world’s largest economies in 1700, India had become one of the poorest, and relatively a much smaller economy, by the time the British left in 1947. Clearly, things needed to be improved, and fast.
Our first Prime Minister, Jawaharlal Nehru, dearly wanted India to become industrialised quickly, so that we could stop importing finished goods from other countries and start manufacturing them ourselves. Another important point on his agenda was that India should also produce all the food her people needed, by herself. He felt that at least in the beginning, the government should decide how most of India’s money should be spent.
If the government didn’t take control, felt Nehru, there was a big chance that the rich would grab everything, and India would go back to being a collection of small kingdoms, with the rich behaving like kings and stomping upon the poor. There was another, equally undesirable, possibility. Even those who had the money to produce goods like iron and steel, big machinery, or aeroplanes, and provide services like education, banking and railways that would help the country’s growth, may not want to produce those particular goods because doing so would not immediately bring them a big profit. If the government took charge, however, it could put its money where the country needed it most—set up colleges and steel plants in smaller towns, helping those towns to grow, build airports in remote areas so that they were connected to the rest of the country, and in short, do the kinds of things that someone looking for a quick profit would never do in a million years. Yup, Adam Smith may not have approved of Nehru’s Economics, but government help and support was exactly what the destroyed Indian economy needed at that time.