The problem with the media (and not just the Indian media) is that it is always looking for the next big sensation, in order to move on quickly from the last one.
Take the case of the Nirav Modi fraud. It has been totally upstaged by the death of the actress Sridevi in Dubai, where she had gone to attend a wedding. The coverage has been appalling to say the least. One news channel even ran the headline Maut Ka Bathtub (with the actress having drowned in a bathtub). Another had a reporter getting into a bathtub and reporting how it felt. The programming has been high on speculation and low on news.
Channels asked, if Boney Kapoor (Sridevi’s husband) had a role to play in death of the actress. This was just pure speculation. The explanation that news channels had for the shabby programming was that what they did was in public interest. But as my friend Amit Varma put it on Twitter, there is a difference between the public interest and what the public is interested in.
This is not to even remotely suggest that the media should have continued to focus only on the Nirav Modi fraud and not reported Sridevi’s death at all. But the way the media (in particular TV channels) dumped Nirav Modi’s fraud and moved on to talking only about Sridevi’s death, was totally uncalled for.
Given that the media is not interested in talking about something which happened just two weeks back, it goes unsaid that its interest in something which happened around 16 months back, is largely non-existent. We are talking about demonetisation here. (We can almost hear many readers say, oh no, not again!)
On November 8, 2016, the prime minister Narendra Modi, demonetised Rs 500 and Rs 1,000 notes. The pretext was that “the magnitude of cash in circulation is directly linked to the level of corruption.”
This argument, as we have shown multiple times before, clearly does not hold. A country like Japan, which has far lower levels of corruption than India, has a much higher currency to GDP ratio. A country like Nigeria, which is one of the most corrupt countries in the world, has one of the lowest currency to GDP ratios in the world. (For a more detailed analysis click here).
Also, corruption at the top level has become a lot more sophisticated. The era of paying cash to the corrupt in gunny bags is long gone. (That happens only when political parties move around cash to fight elections or in the movies). Bureaucrats are now smarter. They are looking for quid pro quos, which include the funding of foreign education of their children and followed by a good job in the corporate sector.
Further, even people who take bribes in the form of cash do not continue to hold on to it. They convert it into other forms of wealth like gold and land. In fact, as we have written in the past, data from income tax search and seizure operations shows that only around 4.9% of the undisclosed wealth is held in the form of currency notes or cash.
The entire idea of drawing a link between currency in circulation and level of corruption, was at best a specious one.
The question is why are we talking about demonetisation and currency in circulation, now. On November 4, 2016, four days before demonetisation was announced, the total currency in circulation had stood at Rs 17.98 lakh crore. Between November and December 2016, as people deposited Rs 500 and Rs 1,000 notes in bank accounts, the currency in circulation fell dramatically. It has been rising regularly since then.
On February 16, 2018, the total currency in circulation stood at Rs 17.78 lakh crore. Take a look at Figure 1, which plots currency in circulation, from November 4, 2016, onwards.
Figure 1 basically shows us that the currency in circulation is now back more or less where it was in early November 2016.
What also needs to be taken into account is the fact that the size of the Indian economy (as measured by the gross domestic product) has also increased between November 2016 and February 2018.
Take a look at Figure 2. It plots the currency in circulation to the GDP ratio, as of the end of each financial year.
As can be seen from Figure 2, before demonetisation, the currency in circulation as a proportion of the GDP varied between 11.6% and 12.3%. As of the end of 2016-2017, it fell to 8.8%.
For the end of 2017-2018, we have projected the currency in circulation as of March 30, 2018, and divided it by the GDP forecast for 2017-2018. In order to make the projection we took into account the rate at which currency in circulation increased on a weekly basis between January 13, 2017 and February 16, 2018. Between November and December 2016, the currency in circulation was contracting. We have not taken into account, the currency in circulation as on January 6, 2017, simply because the jump in currency in circulation between January 6 and January 13, 2017, was extreme, in comparison to other weekly increases.
This exercise essentially tells us that the currency in circulation to the GDP ratio at the end of the year is likely to come in at 10.8% of the GDP. Even if the currency in circulation increases at a slower pace, we will end up at somewhere between 10.6% and 10.8% of the GDP (assuming that the real GDP turns out to be somewhere around the GDP projected).
As of the end of 2016-2017, the currency in circulation to GDP ratio was at 8.8% of GDP. At 10.6-10.8% we have seen a huge improvement over the previous year. From the looks of it, this increase is a good sign. It tells us that the economy which had suffered a huge blow in the aftermath of demonetisation is starting to recover.
The increasing currency in circulation as a proportion of the GDP, is a sign of people carrying out more economic transactions with each other than they were in the past. Of course, many of these transactions are carried out in cash. Informal economy forms a huge part of India’s total economy. It also employs a major part of the workforce.
Depending on which estimate you want to believe the informal economy forms around 40-45% of India’s economy and employs anywhere between two-thirds to 92% of its workforce.
The currency in circulation going up is clearly good news for the informal sector. It shows that life seems to be gradually getting back for this sector which was badly hit in the aftermath of demonetisation. This should gradually translate into good news for the formal sector as well. If the informal sector does well and people working in it earn money and spend it, the firms operating in the formal sector are bound to benefit, as well.
Of course, the propaganda these days is that everybody who operates in the informal sector is bad, because they don’t pay tax. But that is incorrect. As we have written in the past, a bulk of the individuals working in the sector do not come under the tax bracket and hence, they don’t pay tax. Hence, painting everyone with the same brush is neither fair nor required.
Having said that, there are people and firms operating in the informal sector not paying their fair share of taxes. This means the income tax department needs more efficient targeting, instead of painting everyone with the same brush, as the government has been doing since November 2016.
Also, the Narendra Modi government is yet to clearly establish the benefits of demonetisation. A piece of news that has been highlighted in the media is of the government sending out many income tax notices. But how much has that helped in terms of the extra tax collected by the government? No clear answers have been provided for that.
In an answer to a question raised in the Rajya Sabha, the ministry of finance said in December 2017: “During the period from November 2016 to March 2017, the Income-tax Department (ITD) conducted searches on around 900 groups, wherein, assets worth over Rs 900 crores were seized and undisclosed income of Rs 7,961 crores was admitted. During the same period, 8,239 surveys were conducted leading to detection of undisclosed income of Rs 6,745 crores. Further, during the period from April 2017 to October 2017, around 275 groups were searched by the ITD, where assets worth over Rs 573 crores were seized and a disclosure of over Rs 7,800 crores was made by the assesses concerned. During the same period, 3,188 surveys were conducted by ITD in which undisclosed income of Rs 2,485 crores was detected.”
What this statement tells us is that in the aftermath of demonetisation barely any money has been recovered by the Income Tax Department. The undisclosed income admitted to has been fairly low. Also, even this is going to be contested in courts and tribunals. This shouldn’t come as a surprise to anyone who has looked at the past performance of the department. Their capacity is limited and they can’t suddenly start doing much more than what they have been in the past. It is as simple as that.
If the government wants more people to come under the tax bracket, it needs to simplify the income tax system. One way of doing it is to implement the Direct Taxes Code, which has been lying in the dumps for nearly a decade. The Code in its original form actually simplified the income tax laws in the country.
Of course, simple income tax laws, wouldn’t have worked well for the chartered accountants, lawyers and politicians (or what we can possibly call the Deep State, taking inspiration from Bill Bonner), and hence, was put on the back burner, where it has been lying ever since (Dear Reader, here is another solution to tackle a serious problem, which is not going to be implemented).
Steps which make the overall system simpler and the cost of compliance cheaper, are going to improve the ease of doing business quite a lot, than all the statements that politicians make in the support of the ease of doing business.
But the question is does the Deep State want genuine ease of doing business? The answer is no and which is why they are long on talk and short on action.
Vivek Kaul Editor, Vivek Kaul’s Diary
PS: It is entirely possible to make solid double or triple digit gains in the Indian stock markets – and to do it safely. We have just released a premium report recommending the top 5 safe stocks. Get it here…
Vivek has worked in senior positions with the Daily News and Analysis (DNA) and The Economic Times. He recently finished writing a bestselling trilogy on the history of money titled, Easy Money. He has taught in several universities on the topic of Economics. He currently contributes to many of the top financial publications in India on top of writing his own publications, Vivek Kaul's Diary and The Vivek Kaul Letter.
SECRET ADVICE FROM A "BRAIN TRUST" OF GLOBAL EXPERTS
Take your insider’s seat at a table of global financial strategists it's taken 40 years to network together...
With their advice, you’ll be immediately plugged into a stream of expert insights you won’t find anywhere else in the world.
You’ll be right in the middle of the world’s most successful group of independent investment minds.
Experts based here in the US, and in the UK, China, Germany, France, Australia, India, Brazil, Spain, Portugal, and Argentina.
Rest assured you will “crisis-proof” your financial life... and make money while the rest of the world sits on the sidelines.
Click below for access to this network’s very best strategic thinking, analysis, and investment research, all in one easy-to-read weekly memo. Learn more
Agora Economics provides a long-term forecast of real total returns over the coming 10 years. The model forecasts annualized real returns and includes 8 factors, including valuation, demographics, interest rates, consumer economics and investment cycles.
Yahoo finance API is not available right now, please try again soon...
Agora Economics is a worldwide network of economists, researchers, and analysts.
We provide clear, consistent, and actionable investment advice often counter to popular economic perspectives.
Our organization is called “agora” for the ancient Greek marketplace of the same name… where society gathered to trade goods, exchange news, and share opinions.
Today, the global marketplace of competitive investment ideas from Agora Economics keeps you far ahead of mainstream thinking in the world of money.