Dadabhai Naoroji: The ‘black man’ in Westminster

Dadabhai Naoroji: The ‘black man’ in Westminster
Dadabhai Naoroji, the first Indian elected to the House of Commons, lent his energies to causes as diverse as the women’s suffrage movement and Indian self-rule
Some days ago, members of parliament at Westminster in London organized a special meeting to honour the memory of the first Indian to have been elected to the House of Commons. It was not an open event, yet the queue outside wound around the building long enough for a café owner to step out and enquire what it was that had attracted so much enthusiasm. When I explained, he looked terribly interested himself in the proceedings and asked, “Oh, is the MP upstairs?” Alas, I had to tell him, the man we were celebrating had died 100 years before, which meant he fell in a very different category of “upstairs”. And he had died not in London, where he once represented his voters, but far away in Mumbai, in one of the seven houses that lend the suburb of Saat Bangla in Versova its picturesque name. The café manager looked vaguely sheepish while the rest of us made our way into the building, walking past V.R. Rao’s portrait of the man we were there to commemorate: Dadabhai Naoroji.

Naoroji was one of the founders of the Indian National Congress but he was also convinced that it was “in Parliament (in Britain) that our chief battle has to be fought”. And so, in 1886, he presented himself as a candidate in the general election. Despite endorsements from the likes of Florence Nightingale, he was demolished. Lord Salisbury, the Conservative prime minister, declared that the English were not prepared to have a “black man” as their representative, only to regret those words. For the consequence was that his statement was published in newspapers around the country and Naoroji became an object of massive interest overnight—including in discussions around precisely how “black” this pale-skinned man exactly was. By 1892, he had a real shot at winning, and the people of Finsbury Central did not disappoint—he carried the day with a dazzling majority of three. When his un-black rival demanded a recount, the tally went up; Naoroji had actually won not by three but by a margin of five votes. Delighted either way, he served not only as the voice of Finsbury Central in parliament but also as president of the local football club. And both in the House of Commons and outside, he lent his energies to causes as diverse as the women’s suffrage movement and, of course, Indian self-rule.

A number of people frowned. Some called him Dadabhai Narrow-Majority, which was only marginally better than “Mr Nowraggie”. But the old man didn’t mind. On the contrary, his shattering of the glass ceiling was conclusive enough for two more Indians to also enter the House of Commons in the coming years. He himself lost the next election in 1895, but made up for it by conveying his message in his seminal Poverty And UnBritish Rule In India, lambasting the Raj for its unashamed leeching of Indian wealth for British aggrandizement. The book was a milestone, and remains his most memorable intellectual contribution to the freedom struggle. And it did not surprise too many people that he had earned himself this distinction: When still in his teens at Elphinstone College (then, Institution) in Mumbai, Naoroji was labelled by a professor, a little sentimentally, “The Promise of India”. Personally, though, he didn’t let such things go to his head. “Prosperity has not elated me and I hope adversity will not (depress) me,” he wrote to a friend, “so long as I can feel I am living a life of duty.”

Naoroji was born in British Bombay in 1825 in modest circumstances. He was a bright student, and an 1845 effort to go to university in England was only thwarted because one of his sponsors feared this prodigy might be tempted to become a Christian. So Naoroji began to teach mathematics and natural philosophy at Elphinstone College, till in 1855 he became the first Indian to be appointed a professor at that institution. It was a short-lived career, for by now he had decided to go into commerce—he moved to England and eventually set up a cotton import business. Just to cement one foot firmly in the intellectual space in any case, he also accepted a professorship at University College London. His subject: Gujarati. In the course of time he would set up the still-thriving Zoroastrian Trust Funds of Europe, as well as the East India Association (which later merged with the Congress party), and emerge as one of the most distinguished ambassadors for India in the seat of empire.

Naoroji was also a most sympathetic interlocutor for Indians lost in this alien country. Many were the students who wrote to him for advice, and many too were the parents who frantically sought his assistance in preventing their beloved male offspring from getting ensnared by the fearsome, emancipated women of the West. In 1888, one young man wrote to him asking for guidance on life in England, “which shall be received as from a father to his child”. His name was Mohandas Gandhi, and many years later he would remember Naoroji as “the G.O.M.” (Grand Old Man) who made life easier for so many Indians with his sheer warmth and friendship. Indeed, Naoroji deserves much credit for going out of his way for others: Among the 30,000 documents that comprise his private papers, between notes sent by his plumber and an 1894 eye-glass prescription, are numerous letters in Gujarati, Marathi, even Persian and French, to strangers seeking his esteemed attention. That is, assuming everyone understood what he was saying, for, as a friend wrote with a hint of annoyance, “your handwriting is rather hard to read”.

By the time Naoroji died, aged 93, he had enjoyed a most fascinating career. This included a stint as chief minister to a maharaja of Baroda who was accused of trying to murder the British resident at court with arsenic and crushed diamonds; luckily, Naoroji had already resigned by the time of the scandal. He had run newspapers, participated in great public debates on India’s future, and, significantly, set on its eventful course the Congress party that would serve as the vehicle of Indian nationalism in the years to come. And so it was that when he died, among the richly deserved tributes paid was one reminding everybody that while the man himself had departed, the idea he stood for would be enshrined forever in the destiny of the country he loved.

The year of Kidambi Srikanth

The year of Kidambi Srikanth
With four Super Series titles in the bag, 2017 truly looks like the year of Kidambi Srikanth

Kidambi Srikanth has had a fantastic run of form this year.

Since his loss in August to then World No.1 Son Wan Ho of South Korea, in the quarter-finals of the World Championships in Glasgow, the Indian badminton player has lost just one of the 13 matches he has played. His wins include the back-to-back Super Series titles in Denmark (22 October) and France (29 October), taking the number of his Super Series titles this year to four, and career tally to six. His victories this year have come against players such as Olympic champion Chen Long (Australian Open), world champion Viktor Axelsen (Denmark Open), and Son Wan Ho (Indonesia Open).

Along the way, Srikanth became the only Indian, and the fourth player ever, to win four Super Series titles in a calendar year. The other three are Lin Dan (China), Lee Chong Wei (Malaysia) and Chen Long (China).

He is slowly becoming the man to beat in world badminton.

Srikanth is naturally agile. It helps him move to the net faster and finish with a tap kill. And his speed has been the key to his success and dominance on fast courts such as those in Denmark and France, says coach Pullela Gopi Chand. “In the kind of fast conditions that he’s won in, Srikanth is clearly the world’s best player,” says Gopi Chand.

Srikanth also has a lethal smash.

But, and perhaps more importantly, he has also become stronger mentally, which has helped his game on court. “He has developed the ability to stay cool under pressure,” says former India player Arvind Bhat, who is one of the Indian team’s travelling coaches. “In the quarter-final versus Shi Yuqi (in France), for instance, Srikanth lost the opening game 21-8. An earlier Srikanth, and most players in fact, would have panicked. But he managed to turn things around.”

In fact, in the last two weeks, he has scored three comeback wins—against Axelsen in Denmark, Shi Yuqi in France, and compatriot H.S. Prannoy, again in France.

The other big change has been in Srikanth’s physical fitness. Just hours after his Denmark win, Srikanth landed in Paris and had to get down to business. Sure, both finals (in Denmark and France) may have been horribly one-sided affairs that took a little over 30 minutes to finish, but that alone isn’t reflective of the toll this exertion takes on an athlete’s body. Unlike, say, tennis players during Grand Slams, badminton players have to play six days at a stretch during a Super Series.

“I’m actually a little bit surprised myself,” says Srikanth. “The way we have been training for the last eight-nine months, I guess it’s working for me. I just need to continue this way and keep working hard.” Under Indonesian coach Mulyo Handoyo, who joined the Indian team in March, training sessions at the academy in Hyderabad have changed dramatically. Two-hour training sessions interspersed with long gaps have turned into 4 gruelling hours on court and plenty of running exercises with water breaks. The idea is to develop endurance.

Gopi Chand, however, thinks he needs to develop more patience. “Specially on slower courts. Hanging in there during sticky situations—that’s going to be a real test of his fitness and maturity,” says the national coach.

Comparisons with Gopi Chand and Prakash Padukone may be unfair, but in his career as a professional badminton player so far, Srikanth’s achievements have been tremendous. Padukone’s All England title (1980) came at a time when badminton as a career was unheard of. Gopi Chand’s title came 21 years later. And for both players, the crown in Birmingham remains their biggest claim to fame, when they were aged 25 and 28, respectively. At 24, Srikanth seems to be on a roll.

Further reforms are needed for the GST to succeed

Further reforms are needed for the GST to succeed
The systematic bias against small-scale dealers embedded in its present design is harming supply chain structures and must be remedied
The Rs9 trillion booster shot announced at the end of October will not achieve its purpose unless the tangles in the goods and services tax (GST) structure are sorted out, and the systemic bias against small-scale dealers embedded in its present design eliminated. Big business in India relies critically on inputs from small business. Organized sector manufacturers will hesitate to expand if these traditional input channels dry up. If they respond by producing their inputs in-house, we will be going right back to what we were trying to get away from with value-added taxation.

The GST carries design features that have harmed supply chain structures, as I wrote in my Mint column on 6 October. Some of them were partially reversed at the meeting of the GST Council held that day, but further changes need to be considered at the next meeting on 9 November in Guwahati.

The alterations made on 6 October included enhancing the turnover limit to Rs1 crore for the voucher-free composition scheme which has quarterly reporting, and making quarterly reporting permissible beyond that up to a limit of Rs1.5 crore. These were certainly moves in the right direction, but both changes benefited only retailers selling business to consumer (B2C).

They did not benefit small business to business (B2B) suppliers to large turnover buyers doing monthly reporting. These cases are very common—some of the biggest manufacturers rely on small suppliers of intermediate inputs like nuts and bolts. The large buyer will have to wait for his input credits to be honoured through voucher matching until the small seller does his quarterly uploading. He will clearly prefer to buy from a supplier who does monthly reporting, which then introduces a clear bias in favour of large suppliers, and an inefficient transfer of production away from low-cost small-scale producers. The small seller can of course opt to stay with monthly reporting, which means the quarterly relaxation is in effect not useful to him. As for B2B composition scheme suppliers who do not issue vouchers, they start with the basic disadvantage of the buyer not being able to claim input tax credits under the voucher matching scheme.

A ministerial panel appointed in October made several proposals to make the composition scheme more attractive, such as reducing the rate of levy on turnover and further raising the turnover qualifying limit. These will again benefit only B2C retailers. No small B2B supplier will opt for the composition scheme as long as there is universal voucher matching.

The whole purpose of value-added taxation was to improve the spatial spread of economic activity both regionally and across the scale dimension. The bias against small industry in the present GST design can only be eliminated by getting rid of voucher matching for all but integrated GST (IGST) transactions. On quarterly reporting, the ministerial panel does seem to have proposed that it be extended to all, but with summary documentation and payments every month. A monthly payment system will release business from the present reporting straitjacket only if it is treated as a monthly advance tax, with documentation needed only once every quarter (like advance payments of income tax).

I still maintain that the principal reason why GST reduced economic activity had to do with the reporting modalities, not the brambly rate structure. But the rate structure was and continues to be a problem. It has undermined the very principles on which the tax reform process was built seamlessly across successive governments at the Centre, the most fundamental of which was simplification.

The fact of a multiple rate structure is quite distinct from the pattern of assignment of products to those rates. Instead of a coherent block-wise mapping of products by type on to rates, products of the same type were assigned to different rates, with no visible rationale. This was then followed by several changes in rate assignment, clearly displaying the lack of any principle underlying the first round of rates assigned.

For example, at the 21st meeting of the GST Council held on 9 September, rate reductions were announced for 40 products. Walnuts, whether whole or shelled, were reduced from 12% to 5%. Were other edible nuts already at 5%? If so, why were walnuts at a higher rate earlier? Or were all nuts earlier at 12%, with walnuts now singled out for a lower rate? Dried tamarind and roasted gram were reduced from 12% to 5%, but idli/dosa batter (a similar traditional processed foodstuff) remained at 12% even after reduction.

It gets worse. Cotton quilts came down from 18% to 5% for pieces costing under Rs1,000, but 12% for pieces costing more than that. But, to be fair, there were also some offsetting instances of rate rationalization. Oil cakes, which previously carried different rates by end use, got unified. Brooms got unified too, but could they have not been further unified into a single product category of household goods? With the simplification announced in late October, whereby retailers can issue vouchers to consumers consolidated by rate, it becomes particularly important to group products by type into a single rate.

Rates are technocratic issues. What can be put up to the GST Council is rate policy with respect to a product group, not issues of principle such as rate differentiation by end use or price boundaries. These run contrary to the core attributes of GST as a tax, and should never have been among the options presented to the council in the first place.

Why has it taken so long for the design flaws of the GST to be recognized? I suspect it was because when the GST Council was formed with all state finance ministers as members, it seemed a faultless structure with all interests adequately represented. The incentive error made there was that the compensation formula gave all states a guaranteed 14% growth rate in revenue, instead of a guarantee calibrated in terms of revenue buoyancy to underlying (nominal) GDP growth. That dulled the gaze of all state governments at the growth impact of the structuring of the GST. A pity, because some states have excellent commercial tax departments, with more than 10 years’ experience in operating the state-level value-added tax.

Was Parliament watching? Indeed, a number of questions on the GST were tabled in the Lok Sabha’s monsoon session which began on 17 July, a few weeks after the 1 July launch of GST.

They were bunched and responded to on three dates during the monsoon session. On 21 July, question number 1,069 on GST, was taken up. The first of its four parts was: “Whether due to implementation of GST the micro, small- and medium-scale traders will suffer huge losses as feared by some economists”. The minister responded in a single word: “No”. The last part was: “Whether the GST might adversely affect economic growth in the initial part of 2017-18 and if so, the details thereof?” The minister responded with: “The implementation of GST is expected to have a positive impact on the economy.” And that was that. As an unstarred question, no further follow-up question was permissible, on whether reality was departing from expectations.

Another question, number 1,101, asked whether the government was tracking the response of the general public to the roll-out of GST. The response was: “The implementation of GST has been smooth with no instances of any major inconveniences faced by the public in general... Further, the government is taking all possible steps to ensure correct information is disseminated to the general public by way of topic-wise, GST-focused advertisements in the electronic media. All this is coupled with regular meetings of the secretaries of all the departments of the government to sort out any issues that may arise.”

I don’t know where those who drafted this response were living if they saw no major inconveniences. I was alerted to the design defects in the GST not in professional circles, but from conversations between shopkeepers whenever I ventured out to buy anything. The full-page advertisements in the major newspapers alluded to by the minister did not reveal why traders were shrinking the scale of their activities (the issue addressed in my piece in Mint on 6 October).

Question number 3,273, answered on 11 August, the last day of the monsoon session, was on whether there was confusion among traders over GST. To which the good minister responded: “No Sir. There is no major confusion with reference to registrations and exemptions under GST.” In response to question 2,206 answered on 28 July, on whether the GST carried features that were possibly problematic, the minister said: “No sir. It is intended to bring transparency and accountability in business transactions along with the ease of doing business and rationalization in tax rates.” Because it was an unstarred question, the member of parliament could not respond to say that doing business had actually become more difficult.

Moving to the Rajya Sabha, question number 1,065 asked whether rolling out GST in a state of unpreparedness had spawned a large workforce of tax consultants and chartered accountants whose heavy bills would burden small traders, the response once again was a short “No sir”. Question number 2,498 asked whether the common man faced problems after demonetization and GST. The response on 8 August was that the roll-out had been smooth with no blockages or interruptions.

Good questions, but not enough to have shaken the apparent conviction of the government that the GST design was perfect. Any tax reform has to facilitate business in order to secure revenue and willing compliance. Such a configuration for the GST is still possible if the reporting frequency is shifted to quarterly for all, and voucher matching is restricted to IGST transactions.

What bank recapitalisation means

What bank recapitalisation means
Recapitalisation matches the capital requirements of public sector banks for both NPA provisioning and some growth
The past couple of days have brought cheer to public sector banks. The promised recapitalisation of Rs2.1 trillion takes care of not only the provisioning requirements of public sector banks, but also provides them with growth capital. All requirements of public sector banks have been addressed at one stroke.

Bank recapitalisation via special recapitalisation bonds is an approach the government used in the 1980-1990s. Between financial years (FY) 1985-1999, the government infused Rs204 billion into public sector banks via recapitalisation bonds. The operational details of the bonds will likely be similar to the bonds of the 1990s.

Assuming that the Rs1.35 trillion infusion is equity capital, it could be highly dilutive but positive for the FY19 adjusted books. The Rs1.5–1.6 trillion infusion will lead to 0-200% dilution of public sector banks. At first glance, the quantum of this dilution will look high for minority investors, but in most public sector banks the current stock price is higher than the adjusted book value of FY17, so raising at current prices or higher will have a positive impact on the FY19 adjusted book value.

The Common Equity Tier 1 (CET 1) requirement determines if a bank can stand the test of crisis. Our estimates suggest that the CET1 requirement of all public sector banks is Rs1.5-1.6 trillion. The balance recapitalisation fund can be directed towards growing their business-growth capital. Recapitalisation, therefore, takes care of dry powder requirements for stressed assets and future capital for growth, assuming CET 1 of 9.5%, 60% provisioning on all stress and 7% compound annual growth rate (CAGR) in risk weighted assets (RWAs) over FY18–19.

We expect bank recapitalisation to benefit the economy through five main channels. First, assuming Rs700-750 billion is available to banks as growth capital and a leverage ratio (loan-to-equity) for banks of eight-nine times, the available growth capital should enable banks to extend additional loans worth Rs5.8-6.5 trillion (7.3-8.3% of outstanding credit).

Second, the capex cycle recovery has been stuck because of the excess leverage sitting in many companies. While banks have recognized the bulk of these assets as non-performing assets (NPAs), resolution of these assets has been long-pending. Resolution in most of these cases requires a right-sizing of the debt of these leveraged companies, which was only possible with capital in the public sector banks. Now, with adequate capital, this resolution process will move forward more quickly, which should set the stage for a capex cycle recovery in the medium term.

Third, capital shortage in the face of rising NPAs had resulted in a wider gap between the public sector banks’ weighted average lending and deposit rates; so recapitalisation should enable more effective transmission. Fourth, recapitalisation should improve risk appetite, easing credit conditions at the margin for needy borrowers; and finally, higher share prices should enable public sector banks to directly raise more capital from markets.

Overall, the bank recap is a growth positive. Given that capex weakness is due to excess leverage (which the recapitalisation addresses), private investment should pick up over time as capacity utilization improves. In any case, a cyclical recovery is already under way and we expect gross domestic product (GDP) growth to rise from an average of 5.9% in H1 2017 to 6.7% in H2 and to 7.5% in 2018.

The recapitalisation commitment to banks does have fiscal implications. For now, the fiscal impact of the recapitalisation bonds is likely to be limited to the additional interest payments, which are estimated at Rs80-90 billion per year (0.05% of GDP). At the same time, the government should also benefit from a rise in PSB market caps due to increased dividends and a sell-down of equity.

However, the recapitalisation bonds will increase the government’s debt liability by 0.8% of GDP (47.5% in FY17) either directly (if the bonds are issued by the government) or indirectly via higher contingent liabilities (if the bonds are issued by a government agency). Despite the adverse impact on debt, this should not have any adverse impact on India’s sovereign credit rating because recapitalisation will also improve India’s medium-term growth prospects.

With no extra government borrowing, the likelihood of inflationary impact from recapitalisation is less. Recapitalisation should also be neutral for monetary policy as it improves growth prospects and monetary transmission, which is often cited by the Reserve Bank of India (RBI) as one reason why the positive growth effects from monetary policy have been limited.

The quantum of recapitalisation is a positive surprise and matches estimates of capital requirements for public sector banks for both NPA provisioning and some growth. With a very clear solution in place for the NPA problem, growth recovery will be less susceptible to periodic slowdowns and will be more structural than cyclical. While the current measures will take time to show effect, the medium and long term will be a showcase of the positive impact of these announcements. The government now needs to follow through with reforms aimed at public sector banks. Since 2014, the policy choices made by both the government and the RBI have resulted in a stability not afforded to many emerging markets. The big bank recap is another step in that direction.

Communism, 100 years after the Russian Revolution

Communism, 100 years after the Russian Revolution
The common totalitarian experience of Communist regimes is ample proof that the core project was at fault
A hundred years ago, a group of Communist revolutionaries stormed the Winter Palace in St Petersburg to overthrow the first democratic government in Russian history. The new dawn they promised eventually became a nightmare for the millions of people who lived under Communist regimes. A group of European historians, in a book titled The Black Book Of Communism, estimated that 94 million people have been killed by Communist regimes around the world over the years.

This body count needs to get salience when the 100th anniversary of the Russian Revolution is celebrated next week. The Communist ideology is derived, on the one hand, from the penetrating insights of Karl Marx on the contradictions of Victorian capitalism and, on the other, from the violent determination of Leninist regimes to impose their version of utopia on feudal societies.

The common totalitarian experience of Communist regimes is ample proof that the failings cannot be ascribed to specific situations such as the military threat to the erstwhile Soviet Union. The core project was at fault. The few experiments with a more moderate version of Communism—in Yugoslavia under Josip Broz Tito or during the Prague Spring led by Alexander Dubček—were too insignificant to make a lasting impact. The liberal Menshevik regime in Georgia was crushed by an invading Bolshevik army in 1921. The spectacular collapse of Communism across Europe as well as the embrace of capitalism by the Chinese Communists destroyed the last remnants of credibility.

There are many reasons why Communism failed.

First, capitalism in the advanced countries softened its hard edges in response to the Communist challenge.

Second, the industrial proletariat that Marx hoped would be the driving force of historical transformation lost its political clout in economies where services became more important.

Third, the innate failure of planning agencies to replace the price system as the primary institution of economic coordination amid rapid technological change ensured that Communist countries lost the race for global dominance.

Fourth, hope of the emergence of a new socialist man driven by political commitment rather than economic incentives such as higher wages or property rights proved to be vacuous.

Fifth, the totalitarianism of the international Communist movement snuffed out all fresh thinking, and intellectual movements such as the New Left, Eurocommunism and analytical Marxism were treated as heretical.

This newspaper is firmly committed to liberal principles. Yet, we recognize the fact that any modern society needs a left to articulate the needs of the poorest. The liberal consensus that has dominated the world since 1990, and which deserves at least some of the credit for the most spectacular decline in poverty in human history, in what the economist Branko Milanović describes as the biggest reshuffle of global incomes since the Industrial Revolution, is now being challenged by a resurgent nationalism in the developed countries. The working class in these countries has seen its incomes stagnate as industrial jobs were shipped abroad or lost to automation. This working class has veered towards nationalist parties rather than the traditional left to articulate its grievances.

In India, the left has become a spent force. Its Pavlovian opposition to economic reforms, its failure to grapple with the complexities of caste, its restricted base in pockets of labour aristocracy such as bank unions, its readiness to compromise with Muslim communalism in an attempt to oppose Hindu communalism, its loyalty to Stalinist methods—these are just some of the factors that have sent it hurtling towards irrelevance. It is no surprise that the vacuum created by the collapse of the Congress has been filled by the Bharatiya Janata Party rather than the Communist parties.

The political philosopher G.A. Cohen—one of the most interesting Marxist thinkers of our time—used the parable of a picnic to argue why socialism is desirable. He argued that most people would prefer to go on picnics where everyone shares in a spirit of community rather than one where there is competition.

The problem is that what is true of an intimate group of people need not be true of large populations. The libertarian thinker F.A. Hayek once argued: “... If we were always to apply the norms of the extended order to our more intimate groupings, we would crush them.” The same logic can be used the other way round—the rules of intimate groupings cannot be imposed on the extended order unless you are prepared to use extreme violence. That is the big lesson of 100 years of Communism.

What are the lessons the left should learn from the last 100 years

Nasa says Earth’s ozone hole shrivels to smallest since 1988

Nasa says Earth’s ozone hole shrivels to smallest since 1988
Nasa says in 2017 the ozone hole is more than twice as big as the US, but it’s 1.3 million square miles less than last year and 3.3 million square miles smaller than 2015

The ozone hole over Antarctica shrank to its smallest peak since 1988, Nasa said on Thursday.

The huge hole in earth’s protective ozone layer reached its maximum this year in September, and this year Nasa said it was 7.6 million square miles wide (19.6 million square kilometers). The hole size shrinks after mid-September.

This year’s maximum hole is more than twice as big as the United States, but it’s 1.3 million square miles less than last year and 3.3 million square miles smaller than 2015.

Paul Newman, chief earth scientist at Nasa’s Goddard Space Flight Center, said stormy conditions in the upper atmosphere warmed the air and kept chemicals chlorine and bromine from eating ozone. He said scientists haven’t quite figured out why some years are stormier — and have smaller ozone holes — than others.

“It’s really small this year. That’s a good thing,” Newman said.

Newman said this year’s drop is mostly natural but is on top of a trend of smaller steady improvements likely from the banning of ozone-eating chemicals in a 1987 international treaty. The ozone hole hit its highest in 2000 at 11.5 million square miles (29.86 million square kilometers).

Ozone is a colourless combination of three oxygen atoms. High in the atmosphere, about 7 to 25 miles (11 to 40 kilometers) above the earth, ozone shields earth from ultraviolet rays that cause skin cancer, crop damage and other problems.

Scientists at the United Nations a few years ago determined that without the 1987 treaty by 2030 there would have been an extra 2 million skin cancer cases. They said overall the ozone layer is beginning to recover because of the phase-out of chemicals used in refrigerants and aerosol cans.

Demonetisation: A resounding success

Demonetisation: A resounding success
Demonetisation has provided Indian citizens an opportunity to reimagine not only their currency, but also their social mores, honesty, and compliance with law
India was transfixed and transformed a year ago on 8 November, when Prime Minister Narendra Modi, in his resolute war against corruption and black money, demonetized Rs500 and Rs1,000 currency notes. The political verdict came swiftly with stunning wins for the Bharatiya Janata Party (BJP) in Uttar Pradesh and Uttarakhand, and rapid government formation in Manipur and Goa. The prime minister’s popularity reached new heights and his approval ratings soared to levels rarely seen in democracies. The people of India recognized that a surgical strike was required to curtail illicit activities and blessed demonetisation. Thus, in political terms, demonetisation has already proven to be a resounding success.

On the other hand, in economic terms, a heated debate is under way whether demonetisation has been a success or not. Several reputed economists have pronounced their judgements on demonetisation.

For instance, Dr Raghuram Rajan has mentioned that he believed that while there might be long-term benefits, the short-term economic costs of demonetisation would outweigh them and that there were alternatives available to achieve the main goals. He has chosen not to elaborate what he thought the long-term benefits might be nor has he quantified the short-term costs.

Dr Manmohan Singh has estimated the cost of demonetisation to be 2% of gross domestic product. These quick assessments appear specious. Zhou Enlai, when asked in 1972 about what he thought the impact of the French Revolution of 1789 was, is said to have commented that it was too early to tell. When revolutionary changes take place, it takes years, decades, or even centuries before the impact of such transformations can be studied and commented upon.

Note that we lack scientific data and thorough analytical studies on the economic impact of demonetisation. For any massively complex system, judging the impact of a large disruption requires careful understanding of influence channels, distilling its impact on multifarious variables and finally, measuring its bearing, if any, on a variety of outputs. An economy as varied as India’s is highly complex with multiple inputs, not-completely-understood dynamics, many agents and actors with different motivations, and finally, outputs which are not measurable with accuracy or certainty. It will take many years to filter out the economic impact attributable to demonetisation and, indeed, this bold move and its implications will, quite probably, be the subject of hundreds of dissertations. Consequently, any snap judgements will be coloured largely by ideology and opinion.

Some data is beginning to emerge on how the economic trajectory actually played out as opposed to estimates of how the various models predicted that they would play out.

Since demonetisation, the government has embarked on another ambitious bipartisan reform of consolidating various levies and taxes in different states into one comprehensive goods and services tax (GST): such a large reform intervention also creates its own changes in the economy.

To appreciate the changes that demonetisation brought about, we need to carefully choose and measure the relevant short-term high-frequency indicators and a few emerging long-term indicators which point to the direction that the economy has since taken.

High-frequency and quantitative indicators like (1) cash-to-GDP ratio, (2) volume of digital payments, (3) number of new registered taxpayers, and (4) estimate of “unaccounted for” money and the number of tax notices sent indicate that demonetisation has generated material changes. The cash-to-GDP ratio is now down to 9.7%, from 11.3% pre-8 November last year. This cash is now in the banking system which has helped swell the current accounts and savings accounts balances of banks: this will allow them to lend and invest more, and at lower rates. Digital payments, at Rs50,000 crore in the month of October 2017, are up 41% year-on-year. The finance minister has stated that 9.1 million taxpayers have been added to the tax net as a result of actions taken by the income tax department during fiscal year 2017. Further, the ministry of finance has indicated that between Rs3 trillion and Rs4.2 trillion is “unexplained” during the cash deposit rush post-demonetisation and hence has sent out 1.8 million notices to assesses: apart from the one-time benefit to revenue of such “declarations”, these moves could bring significant stock and flow of incomes into the tax net. This data shows that demonetisation has had a positive impact on the formalization of the economy, improving the tax base and hastening the use of digital payments. Consequently, it is quite plausible to argue that these effects, which will clearly have an ongoing GDP impact, could easily swamp the impact of a one-time 2% decline in GDP.

Apart from these purely economic factors, there is another more profound behavioural change that has been accomplished. A new normal has been established—Indians are paying their taxes and moving towards a less-cash society. There is a pronounced trend towards tax compliance driven by the belief that the system is working to reward honest taxpayers even as it makes life difficult for those who have been used to evading or underpaying taxes. GST and the implementation of the benami transactions Act make it even more difficult for anyone in the economic chain to opt out of the taxation system.

Massive reforms like demonetisation cannot be measured solely by using economic parameters but need to take into account the structural shift that such reforms induce in society. Societal and long-term economic changes are difficult to measure and require more reasoned, detailed, and patient analyses: this should increase our resolve to do deeper research rather than jumping to hasty, ill-informed conclusions. demonetisation has provided Indian citizens a unique opportunity to re-imagine not only their currency, but also their own social mores, honesty, compliance with law, and their willingness to change and adapt to a more transparent and New India. We should celebrate this New India.