Modi's plan unfolds

Regardless of whether Prime Minister Narendra Modi’s shock therapy on the Indian economy garners electoral support for him or not, he is assured of immortality in Indian history. Opinion polls and surveys, from the one conducted by Mr Modi’s personal app to those conducted by the media, provide skewed indication of the people’s mood. The decision to scrap Rs 1,000 and Rs 500 currency notes has been presented by the government as an essential step to snuff out black money. Mr Modi’s drive against India’s shadow economy has been exhibited as a moral crusade because besides being unfair to law-abiding citizen, clandestine wealth prevents the State from undertaking “anti-poverty and development programmes”. As a result, even those believed to be hoarders of undisclosed income and tax evaders have lavishly praised Mr Modi’s move, at least in public. Consequently, barring Mamata Banerjee, Mayawati and Arvind Kejriwal, no one has the gumption to demand a rollback and be labelled an advocate of the corrupt. Mr Modi has indisputably polarised India between the corrupt and honest.

This is not the first time that a leader has attempted to ride on morally (policy-wise) correct issues for political benefit. Indira Gandhi aggressively adopted population control but the coercive nature of the sterilisation programme backfired and was instrumental in her eviction from office. Last winter, Arvind Kejriwal acted egotistically and enforced the odd-even scheme, again on an issue that had assumed alarming proportions. Economists of repute have contended that Mr Modi’s unplanned action will not siphon out great amounts of black money, but will heap great misery on people and deal a body blow to the economy. Demonetisation is thereby not intended for its stated objectives but is part of a bigger package that is just beginning to reveal itself. The jolt to the economy from the step has preceded an equal blow — Goods and Service Tax. If the government succeeds in securing passage of the three supporting bills for GST, it will be in a position to roll out the biggest indirect tax reform yet by its April 1, 2017, deadline. This would be a double whammy for the economy because even before it stages a recovery from the setbacks triggered by demonetisation, the new tax regime will trigger greater slowdown.

The introduction of GST will result in huge job losses as the informal sector, which has so far not paid most taxes, will be particularly hit as promoters question the raison d’être of remaining in business after paying full taxes that would cut their profits significantly. Not just small operations in the informal sector but even the bigger ones, like SMEs, will be badly affected as business may become unviable for them because of the rise in cost of business. The predicament for the government stems from the informal sector employing almost five times more people than the formal sector. The first policy thrust became evident within days of demonetisation when the government launched the campaign for going cashless. The objective of the massive push towards cashless transactions is not just to overcome the immediate crisis of inadequate currency. But the drive has to be seen as a way to move towards ensuring transparency in businesses with the aim of reducing tax evasion.

Prominence being given to the Unified Payment Interface (UPI) makes it appear that it is an initiative of this government. The National Payments Corporation of India, which powers the interface, was founded and promoted by the RBI in 2008. Though UPI was launched in April this year, work on it was under way. NPCI, it may be recalled, launched RuPay, the indigenous card payment network competing with international card companies, in May 2014, more than a week before the 2014 Lok Sabha results were announced and the Narendra Modi government came to power. Giving boost to cashless transactions may be a precursor to making it mandatory for all wages — above a certain limit — to be paid by cheque or bank transfer. It is foreseeable that in future cash salaries will be disallowed as expenses in income-tax returns. However, Mr Modi cannot prioritise targeting black money, as the bigger political challenge is to ensure jobs for those rendered unemployed in major production centres and, most importantly, in the real estate sector.

The launch of Pradhan Mantri Garib Kalyan Yojana along with a cess and fund for taxing amounts of undisclosed income being deposited somewhat addresses this crisis. In the bill amending the income-tax law, the government declared that money collected under the PM Garib Kalyan Deposit Scheme will be “utilised for the schemes of irrigation, housing, toilets, infrastructure, primary education, primary health, livelihood, etc., so that there is justice and equality”. Providing jobs to lakhs of workers — skilled and unskilled — in welfare programmes over the next couple of years will be a tall order. Because Mr Modi famously quipped that he did not believe that the “government had any business to be in business”, it can be safely assumed that state-funded welfare programmes for the poor will be executed by private players in the organised sector.  The government has also hinted that it is considering a universal basic income scheme. We can expect either a formal launch or a statement of intention within the next few months. 

The decision is clearly motivated by electoral considerations and aimed at winning working class votes. Mr Modi’s steps undoubtedly tighten screws on the informal sector, including the politically-significant trading community. Amendments to employees insurance and provident fund regulations to extend coverage of these schemes would enable Mr Modi to further expand his core constituency and reach out to the “last man in the line”. Efficient execution of planned welfare programmes will be central to Mr Modi’s drive to evolve his party from being a trader-based organisation with the middle class as its core constituency. Mr Modi considers the telecom sector as a key driver of his programmes. Like telcos, he is aiming to target the ABCDs (ayah, bai, carpenter, driver), because unless his section votes for him, his electoral hold on India will surely weaken. But before that he must find immediate ways to ease the currency crisis, or else his political plan will remain stillborn.