#
Before you listen to this episode of The Scene and the Unseen, I have a recommendation for
#
Do check out Pulya Baazi, hosted by Saurabh Chandra and Pranay Kutasane, two really good
#
friends of mine, kick-ass podcast in Hindi, it's amazing.
#
Let me begin this episode of The Scene and the Unseen with a scenario for you.
#
Let's say an important politician, let's call him dear leader, takes his car out for a joy
#
ride and callously runs over a family of beggars, all of whom die.
#
Crowds gather around the car, oddly most people in the crowd are not angry at all, instead
#
they are congratulating dear leader on his bold policy move.
#
A journalist attempts to ask a critical question but is shot down for his impertinence and
#
A team of economists now emerges and says that dear leader's visionary action will be
#
a net positive for the economy.
#
One of them says that now that these poor beggars with no recorded income are dead,
#
India's per capita GDP will go up.
#
Another economist says that as all of the victims were unemployed, India's unemployment
#
rate just went down, all thanks to dear leader.
#
Another economist calculates the productivity gains for all those who would have spent a
#
couple of minutes interacting with these beggars and now don't have to because they're dead.
#
These economists give themselves high fives and tell dear leader that he should kill more
#
Meanwhile, the journalist manages to whimper, but how can you do cost-benefit analysis in
#
What economic benefit could justify the moral cost?
#
They immediately arrest the journalist for being an urban naxal and one of them bends
#
down to massage dear leader's foot, which is aching from pressing the accelerator so
#
This is all for the good of the nation.
#
Welcome to The Scene and The Unseen, our weekly podcast on economics, politics and behavioral
#
Please welcome your host, Amit Barma.
#
Welcome to The Scene and The Unseen.
#
Today's episode is about demonetization, a subject on which I've done a couple of episodes
#
You can look for them in our archives at seenunseen.in.
#
This episode is sparked by the RBI finally releasing the data on how much of the demonetized
#
currency came back into the banking system, 15.3 trillion rupees or 99.3%.
#
That basically is one final metric of the policy failure of demon, as we call it now,
#
as if we needed any more metrics.
#
And my guest to talk about this today will be Shruti Rajgopalan.
#
But before I get to my conversation with her, allow me a small rant because this is a subject
#
I feel very, very strongly about.
#
Right after demonetization was announced, I wrote a bunch of pieces about how it was
#
They'll all be linked on the page for this episode at thinkraguti.com or seenunseen.in.
#
It was evident to me at the start that demon was wrong from both a moral and an economic
#
In a piece I wrote for the Times of India shortly after demon was announced, I pointed
#
out the economic problems with it.
#
One, Modi claimed it was an attack on black money, but this was nonsense.
#
The government's own estimates showed that only 6% of black money was kept in the form
#
The rest was gold or real estate or foreign accounts and so on.
#
Two, Modi said that demon would help fight counterfeit currency.
#
But the government's own estimates showed that only one in 4,000 notes was fake, which
#
is normal by standards across the world and which governments usually fight successfully
#
by phasing out old notes.
#
Three, Modi said that terrorist activities would be heard by this.
#
But cross-border terrorism has actually gone up in this time.
#
Leave alone domestic terrorism by Gaurakshaks.
#
Four, Modi later said that this would help digitalization.
#
But data since is shown that digitalization has followed the same upward trend it was
#
And people are now back to using cash in the same way that they were before.
#
Also it's unclear why digitization is such a good thing anyway.
#
So none of the economic benefits were going to pan out anyway.
#
Now what about the costs?
#
There are two kinds of costs here, economic costs and moral costs.
#
The economic costs were quite obvious.
#
If you remove 86% of the currency in use, where cash transactions are 97% of all transactions,
#
the economy will be crushed.
#
There are numerous estimates and descriptions of the damage that Narendra Modi did.
#
And I will point out one specifically striking figure to you.
#
My friend Nitin Pai first mentioned this that every 1% rise in the GDP brings 2 million
#
The opportunity cost of demonetization is much more than this.
#
And naturally the rich were hurt the least.
#
They used their connections to launder their money, one indication of that being automobile
#
sales in the months following demon.
#
They fell for 2 wheelers and 3 wheelers but remained steady for high end SUVs.
#
But forget the economic cost, let's talk about the moral cost.
#
When millions of people find out that much of their money is worthless and they have
#
to queue up outside banks for hours and days for their own money, what else is that if
#
What else is that if not violence?
#
More than a hundred people died directly because of demonetization and I consider them people
#
murdered by Narendra Modi.
#
These include Jagdish Panwar, the tea seller from Sikar in Rajasthan who had a heart attack
#
brought on by the fact that he suddenly did not have money for his daughter's wedding.
#
These include Halkhe Lothi, the farmer from Chattarpur in Madhya Pradesh who killed himself
#
because he didn't have money to buy fertilizer and seeds in time for the sowing season.
#
These include the unnamed 55 year old woman from Telangana who killed herself because
#
the 54 lakh she had saved over a lifetime was now worthless.
#
These include the newborn child who died in Mumbai because a hospital refused to accept
#
the newly demonetized notes and so on and on and on.
#
These are human beings, not statistics.
#
Beyond these debts, businesses shut down in the informal economy because it runs mainly
#
on cash, livelihoods were destroyed, years of hard work were wiped out in one evening.
#
I call it the largest assault on private property in human history.
#
It was a crime on humanity and there were people who tried to do a cost-benefit analysis
#
They claimed that the economic benefits justified the moral cost.
#
Leave aside the fact that there were no economic benefits and this was an economic disaster
#
as well, but even if there were benefits, can you play with the lives of people like
#
Would it be right to use even one person in this manner as a means to an end?
#
Narendra Modi did this to every citizen of this country.
#
Modi is a delusional megalomaniac, there's nothing new to say on him.
#
But what really makes me angry is the supposedly respectable economists and public intellectuals
#
who supported demonetization.
#
Many of them were rewarded for this with positions in the Prime Minister's Economic Advisory
#
Council, in Niti Ayog and so on.
#
I personally know different economists who worked in government and were ordered to defend
#
demonetization even though they personally thought it was a disaster.
#
They should have refused, but they defended it.
#
And all these people who defended this crime on humanity with its massive moral and economic
#
costs, how do we describe them?
#
Are they bad economists?
#
Well, duh, and are they also bad human beings?
#
Which is a more charitable explanation?
#
I view demonetization as a litmus test for both sound economic thinking and basic human
#
Demon was indefensible, but I won't rant about that anymore because I might burst a
#
vein or something, something dear leader would not mind at all.
#
I have a bunch of links on the page for this episode which lists out all my writing on
#
the subject, do check them out.
#
In the meantime, it's time for me to bring on my guest for today's episode, my friend
#
the brilliant Shruti Rajgopalan.
#
But before that, let's take a quick commercial break.
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Shruti, welcome to the Seen and the Unseen.
#
Now you've also been writing about demonetization for a while.
#
In fact, you wrote a very trenchant piece with our friend, Larry White, where you sort
#
of rebutted some of the arguments which Jagdish Bhagwati and a co-writer had made for demonetization.
#
What were your instincts when you first heard about it?
#
So my immediate instinct on demonetization was that it was simply a terrible idea.
#
So I remember writing about it immediately after the event, maybe like five or seven
#
My first op-ed on the piece was published in Real Clear Market somewhere end of November,
#
maybe about three weeks after the event.
#
It just took a while to place the piece because there was a lot of confusion over what was
#
We have remembered at the same time, on the same night was the Trump election.
#
So I live in the United States and any column that you sent to any American newspaper was
#
just like there was too much other stuff going on.
#
Everyone was writing about Trump.
#
So even though I wrote it about maybe seven, eight days after, got published about three
#
weeks after, and it was pretty consistent to what I feel right now, I made a few arguments
#
then which was that it assumes the demonetization policy assumes that the black money is essentially
#
held in cash, which my hunch then was that this is simply not true.
#
And the second part of the argument was India is fundamentally a cash economy, right?
#
Many people have made the analogy of cash in India, just like blood in the body.
#
And if you drain the cash in India, it would basically kill the economy and the poor people
#
as would happen if you drain the blood from the human system.
#
So those were sort of the arguments that I made.
#
And at that time, what I was really concerned about were the economic costs of demonetization.
#
And I do want to add here that only bad economists make this distinction between human costs
#
and economic costs and say that the economic benefits justify the human costs.
#
All economic benefits and costs are human costs and benefits.
#
People dying is not, as you rightly pointed out, only foolish economists point out that
#
when a poor person with no income dies, the GDP per capita goes up and, you know, when
#
a human child is born, then the GDP per capita goes down.
#
So only terrible economists make arguments like this.
#
So demonetization was no different.
#
There were a lot of economists who made terrible arguments.
#
Some of those arguments were based on misinformation, right?
#
They just made the wrong assumptions in terms of how much black money there was in the economy
#
and how much money or, you know, one time revenue would be recovered from the demonetization
#
So one kind of bad economics was grounding it on poor assumptions.
#
The second kind of bad economics was just grounding it in poor reasoning, which is the
#
idea that, you know, all these costs that you're talking about, which is people dying,
#
people not able to pay their hospital bills or get their children married, poor people
#
losing their entire life savings, right?
#
Even rich people who are running from pillar to post, trying to avoid the tax, trying to
#
spend a lot of resources to avoid the tax of demonetization.
#
All of these are huge economic costs.
#
So these were basically the two different kinds of responses from the bad economists.
#
But there were a lot of economists, you, Larry White, Ajay Shah, myself, who basically, you
#
know, called a spade a spade and said demonetization is a bad idea because it's just simply too
#
Shruti, you know, both of us look at the world sort of through an economic lens where we
#
speak about incentives and so on.
#
And we talk about the incentives on people in general.
#
When we talk about public choice theory, we talk about how politicians and bureaucrats
#
also respond to incentives.
#
Do economists also respond to incentives?
#
I mean, I know this is not really part of the subject of the show, but it's something
#
that's interested me that, you know, even economists who should have known better and
#
who perhaps did know better, like Jagdish Bhagwati, Arvind Panagariya came out in defense
#
What were the incentives that play there?
#
You know, I'm really not sure.
#
There were many economists who got it wrong.
#
And like I said, you know, the two categories, there are people who relied on bad information
#
and there are people who relied on bad arguments and some people relied on a combination of
#
Jagdish Bhagwati, Arvind Panagariya, all of them have written extensively on trade policy,
#
And when you read their work on trade policy, it is all grounded in the costs and benefits
#
of trade and protectionism.
#
Exactly the kind of analysis one would do for demonetization.
#
So the way protectionism imposes a tax on people, they would talk about what are the
#
costs of these tax and what are the benefits of protectionism and who the benefits go to.
#
They have very clear, excellent economic analysis.
#
So I'm not sure if it simply didn't translate from one field of economics to another.
#
You know, those arguments were in trade and they simply didn't understand what was going
#
on with demonetization to apply the same principles.
#
Or I don't know if something else was going on.
#
In all fairness, Arvind Panagariya never said anything really about demonetization into
#
I mean, Bhagwati wrote a couple of pieces and you in fact rebutted one of them with
#
So the piece that we rebutted, actually this is a good time to talk about it.
#
There are two issues with respect to the failure of demonetization, right?
#
The first is that demonetization was simply too costly.
#
So these are the arguments you and I have been making for a year and a half, which is,
#
you know, the loss of human life, the loss of human livelihood.
#
Former Prime Minister Manmohan Singh talked about it's going to lead to a drop of 2% of
#
the GDP and it's definitely lost more than 1%.
#
Like there has been more, a dip of more than 1% of the GDP already.
#
So there have been people who've been talking about the costs.
#
There's a second aspect to it.
#
Now let's assume that demonetization was completely costless.
#
In the sense that the RBI was perfectly prepared, all the notes were ready to transition from
#
old notes to new notes, all the APMs and the banks worked, there was no confusion.
#
Any person could have gone and traded or switched their currency from old to new bank notes
#
without any significant hassle.
#
So let's assume that is actually what happened, which basically means that the cost of the
#
transition in that 60 day period really go down.
#
Now is demonetization a good idea, right?
#
If we had gotten it right, if it wasn't the Indian state that made the transition, but
#
some other super state which had high capacity and transition perfectly.
#
What the new RBI data reveals is even then demonetization is a complete failure.
#
So the purpose of demonetization was that the moment the original thousand and five
#
hundred rupee notes, their legal status was revoked, what would happen is that people
#
would deposit the money in banks to switch to the new notes and those people who had
#
black money or illicit wealth, people who are drug trafficking, human trafficking, those
#
kinds of things would simply not put the money back in the banks.
#
The reason being that they get caught and if they get caught, they face severe penalty.
#
You have to pay past taxes.
#
There's a penalty for non-payment of taxes, which at some point was pegged at over a hundred
#
So you're basically better off eating your losses and just not putting the money in the
#
Now the success of demonetization obviously depends on how much money do you think is
#
not going to come back to the banks.
#
So for RBI, currency in circulation is a liability.
#
So every rupee that doesn't come back to the RBI balance sheet is a reduction in liability.
#
And therefore a one time revenue gain for the government.
#
So this is what they were hoping would happen.
#
Now there were different estimates on what is the black.
#
Just to make it clear, just to kind of clarify what that means, what basically means is that
#
if an X amount, which they assumed would be a very, very large amount, did not come back,
#
the RBI could essentially just write it off and the government would essentially have,
#
if they wanted the RBI gave it to them, have that much of funds to actually play with.
#
That's exactly what it means.
#
So now let's think of numbers.
#
Now the assumption was that 15 trillion in currency value in circulation in the economy.
#
So there were these estimates going around on how much of it is black money.
#
And remember, it's not just about how much of it is black money, how much of it is black
#
Because if you've already laundered your black money and converted it out of cash, then you're
#
not really affected by demonetization.
#
So there were these wild estimates.
#
There are people who have estimated there was an old government report floating around,
#
which was supposed to be a confidential report that said 60% plus of the Indian economy is
#
running on black money.
#
That basically means money on which tax has not been paid, right?
#
Black money is not like some bad thing in the sense that the money itself is rotten.
#
So it's just money on which tax has not been paid or the full tax has not been paid.
#
Now most people, like there were members of the government, like Vivek Debroy, who was
#
at NETI Aayog, estimated at between 10 and 30%.
#
In their article, Professor Bhagwati and his two co-authors, Vivek Deheji and Praveen Krishna
#
also estimated the black money at fairly large number, over 10%.
#
And they had basically no basis for this estimate, right?
#
Because the government's own estimate was that 6% of black money is kept in cash, which
#
was an estimate which came out which the income tax department, I think, if I remember correctly,
#
came out with this based on several years of data from raids.
#
So, you know, this is the thing with black money, right?
#
We can't say anyone's estimates are right or wrong, because that's all they are.
#
They are just estimates.
#
There is no clear way by which anyone can precisely account for the amount of black
#
money in a system, right?
#
So at some point we are making wild guesses and it's unclear how one can get it right.
#
So if you base this on, you know, the wealth of the nation or the GDP of the nation, then
#
you're making two kinds of estimates.
#
One is how much of it is black money, two, how much of it is in cash, right?
#
So one of the things that, you know, Professor Bhagwati and his co-authors in their article,
#
what they talked about was how much of it would be in cash and therefore how much of
#
it would be taxed like instantly at 100%, right?
#
So now all the economists who are talking about the costs and benefits of demonetization,
#
the benefits estimate is coming from what one thinks is not good, is going to be unreturned
#
currency to the banks, right?
#
And there's a second part, how much they think is returned to the banks.
#
But, you know, the government will later prosecute and tax them at 50% instead of 30% and impose
#
a penalty and all of those things that I'm not going to go into because, you know, that
#
you could have done even without demonetization, put a penalty.
#
If India had the state capacity to really prosecute people for non-payment of tax, then
#
we'd be living in a very different world right now.
#
So I'm going to leave that part of it aside.
#
So now the question is, how much did different people think was going to come back or not
#
So one of the estimates made by Professor Bhagwati and co-authors was that, let's say
#
somewhere between one to two trillion doesn't come back.
#
So they estimated that one third of the currency in circulation is black money.
#
So out of 15 trillion, five trillion is black money.
#
Let's say one trillion of that is just unreturned notes.
#
So you simply don't get that money back in the banks.
#
That's a 100% tax on that money, 100% deem to RBI and could be transferred to the government.
#
So that is one trillion, right?
#
On the other, the rest of the four trillion, let's say half of it comes back and is actually
#
detected as black money and that would have a 50% tax on it, which basically means that's
#
another trillion, which the government would gain, but that is after all the audits and
#
everything is complete.
#
So they roughly estimated two trillion came back.
#
By the way, there's nothing wrong with this estimate, right?
#
Because at this point, everyone was basically, you know, I don't want to say guesswork, but
#
that is really what is true.
#
All economists, including myself, were guessing at some level, really what is the extent of
#
the black money in the economy.
#
But you know, Shruti, you, you guess based on something or the other.
#
From what I remember, when Bhagwati and Dahijaya's piece came out, they seem to be making the
#
figures up because there was no data on which it was based at, you know, on from which they
#
could conclude that one trillion would come back.
#
As we now know, a 10th of that came back.
#
But that is not the problem with their argument.
#
The problem with their argument was they didn't account for the costs of demonetization, right?
#
Now let me say the benefits is one, two trillion or four trillion or half a trillion.
#
Unless I account for the costs, how do I know whether this is a good idea or a bad idea?
#
So the real problem with the piece that you're talking about was that they didn't account
#
for the costs of, and you know, any tax or any policy tool, we need to account for benefits
#
So the real problem was not that they got the benefits wildly incorrect.
#
It was that the costs were not mentioned at all.
#
That was the problem with the argument for me.
#
That is also a problem.
#
And that's because like Modi, they didn't give a damn, but you know, anyway, I don't
#
want to go into my rant, but tell me about your, your response to that, which you and
#
so now yeah, so Larry White and I basically responded to that saying, look, we are economists.
#
We don't play benefit benefit.
#
We play cost benefit, right?
#
That's what we do fundamentally.
#
So now how do we figure out what are the costs of demonetization?
#
Once again, Larry and I were writing this December, late December, early January, you
#
We didn't have any data on the amount that came back to the RBI.
#
They hadn't even started counting yet, but we had a decent sense of the cost just during
#
We weren't even talking about the costs of auditing those who sent the money back to
#
the bank accounts later or, you know, other costs drop in GDP.
#
We were simply at that point relying on CMI data and we were talking about how much of
#
it was spent right by people waiting in lines and things like that.
#
And one of the things we discovered was that this particular tax has a 64, I mean, based
#
on that one trillion estimate, 64% excess, but excess burden, which is basically what
#
The cost of a tax is how much was lost in economic activity plus the actual administering
#
To convert that to the demonetization situation, it is what was the loss in economic activity
#
They were waiting in line for hours, right?
#
The vegetable vendors can't sell their vegetables because no one can make change, those sorts
#
Plus the actual cost of printing new currency, transporting it, right, reaching it to the
#
farthest corners of India so that people can actually do their daily business.
#
This was the nature of the demonetization tax and benefit calculation that we made.
#
The point, once again, was not about one trillion or 64% excess burden.
#
It was simply difference in point of view that we can't just account for the benefits
#
or the windfall gain to the government, whatever that may be.
#
We must also account for costs and all cost is human cost, opportunity cost, right?
#
Now there's some new information that has appeared, finally, the RBI has showed us what
#
it says in its books after counting all the notes and this new information tells us something
#
completely different from what I've been talking about so far.
#
So far we've been talking about how demonetization has certain costs and benefits and I thought
#
the cost far outweighed the benefits, whatever they may be, right?
#
Now the demonetization data tells us something new, 99.3% of the notes have come back, okay?
#
This in a 15 trillion value currency, 1% is 150 billion, this is 107 billion, right, 0.7%.
#
That's the amount that remains unreturned.
#
Now what this means is even if the government had done everything perfectly, right, all
#
the transition had been perfect, all the notes had reached the people at the right time,
#
there was really no significant cost to demonetization, this policy would have still been a failure.
#
And the reason it would have still been a failure is the original assumption that there
#
is 30% black money in the economy and it is mostly held in cash is probably not correct,
#
Either people don't have their black money in cash or they manage to launder it beautifully
#
because Indians are so good at laundering money and very little money has come back
#
to the RBI, so only 107 billion has not come back.
#
That is a really, like in terms of a tax revenue gain, it's insignificant.
#
So now think about the numbers again, a conservative estimate of the cost of demonetization, okay?
#
And we still don't know the long-term impact.
#
I'm just talking about the conservative estimate of what has happened so far.
#
People say it's about 1% of the GDP, okay?
#
India is a roughly 150 to 160 trillion rupee economy, okay?
#
So 1.5 trillion is 1% of the Indian GDP.
#
We have spent at least, as we know so far, 1.5 trillion rupees to gain 107 billion back
#
So if this isn't damning evidence of a completely failed policy, not in execution, but just
#
simply in assumption and foundation, I don't know what is.
#
So, you know, you've just written a piece on this for Mint, which has a very interesting
#
insight and we're going to come back to it after a commercial break.
#
But before we go in for the break, I'd also again like to rant a little bit and reiterate
#
the point and this is, you know, Suyash Rai, who did an episode on demonetization with
#
me, said very wisely that even that there's no point doing a cost-benefit analysis because
#
even if the benefits are much, much more than the costs, what sense does it make when the
#
cost is on a particular group of people and the benefits go somewhere else?
#
You know, then you can't just treat them as replaceable units.
#
Every human being who suffers, a person whose newborn died because a Mumbai hospital would
#
not take money, you can't tell that person that the benefits outweigh the costs.
#
Can you put a, can you even put a value or a number on that cost?
#
I think this was a humanitarian disaster and it's a different matter that there are no
#
And that people like Bhagwati basically debase themselves, but, you know, being lab dogs
#
for a demagogue, but leaving that aside, it's, it's, you cannot do a cost-benefit analysis
#
for something like that.
#
I, I, I, you know, I both agree and disagree with Sivesh.
#
His point is very well taken, you know, he's absolutely right.
#
The costs fall on a different group of people.
#
The benefits fall on a different group of people.
#
But having said that, any kind of political or policy tool always doesn't spread costs
#
and benefits equally, right?
#
There is always going to be winners and losers from any given policy.
#
So demonetization is not unique in the fact that there's a different group of people who
#
benefit and there's a different group of people who suffer.
#
But where it's different is that in this particular instance, it was really, I mean, a humanitarian
#
disaster is a great way to sum it up because we have to remember India is a cash economy,
#
And only the very wealthy, the, you know, the top 1%, 5%, 10% people really use bank
#
Debit card usage is miniscule in India.
#
At the time when demonetization happened, most people use their debit card for ATM withdrawal.
#
In fact, only 53, contrary to what the government claimed, only 53% of our population even had
#
Exactly, so only 50% has bank accounts of the 1.25 billion people in the country.
#
About 125 million didn't even have identification papers to quickly open a bank account, right?
#
So the humanitarian cost in this particular instance really disproportionately fell on
#
And that makes this policy much worse because it was peddled as a tax on the rich where,
#
you know, the government would gain this huge revenue windfall and we distributed among
#
the poor through Jan Dhan accounts and all that.
#
And what actually ended up happening was rich people were doing all their transactions by
#
If they couldn't buy vegetables, you order on Zomato, right?
#
That's what was happening.
#
It's a very sort of, you know, if you don't have bread, eat cake kind of situation for
#
It was really the poor people who struggled, especially women who are particularly known
#
for keeping all their savings in cash, right?
#
Because, you know, the rural area suffered much more than urban areas.
#
So in terms of just, if you, if you look at it, if I take off my economist hat and just
#
think about it from the point of view of fairness and justice, this was just a disaster on such
#
It is unforgivable what it did and, you know, economists, I mean, I blame economists for
#
not counting all the costs, but I don't particularly blame economists for not counting like specific
#
human costs because, I mean, in terms of this happened to poor people or this happened to
#
the rural economy, because that's simply not what we usually do.
#
Shruti, let me, let me come at a rebuttal and tell you how this is different from other
#
policies which also have winners and losers.
#
And that is not in the magnitude of the human cost.
#
I think that is actually the wrong focus if you're looking at it from that point of view.
#
The issue here is that let's say that you have a policy where you reduce tariffs.
#
There'll be a different set of people.
#
And you can say the cost is on someone and the benefit is on someone.
#
And most public policy is like that.
#
I'm not talking about those.
#
The question to ask is, is your policy directly infringing on the rights of your citizens?
#
And this was a policy which was an assault on people's property, which was an assault
#
on their livelihoods, which was an assault on their lives itself.
#
And therefore it's an entirely different category.
#
And therefore you don't need to think about the magnitude of the cost.
#
The very fact that such a cost is happening.
#
I mean, how do you do the math of that?
#
You know, a hundred people died.
#
What number do you put to that which you can possibly justify with any kind of benefits?
#
And which is really what makes me so angry at all these lab dog economists who for whatever
#
they wanted out of the, you know, so yes, she said another interesting thing.
#
He said that for him and I completely agree with him and he put it beautifully.
#
He said demonetization was a litmus test.
#
It was a litmus test of character.
#
This is not like another policy disagreement where two people can have a reasonable disagreement.
#
This is a line in the sand that if you are on that side of it, if you supported demonetization,
#
then you will be judged for it and it will be remembered.
#
But anyway, we'll quickly cut to a commercial break and that part is fine.
#
You know, I think any kind of, I think, you know, academics of every kind, not just economists,
#
all experts, policy experts, people who are technocrats working for government, everyone,
#
all of us need to be held to a higher standard when we put our weight behind any policy.
#
We should be judged when it comes, when the time comes and we know people were right or
#
So that part I agree with.
#
You know, the difference between this is a, we, I hope to chat with you one day in detail
#
about trade tariffs and things like that.
#
Trade tariffs seem more benign, but they are also a huge infringement on liberty.
#
No, no, I agree with you.
#
I mean, I was a loss of livelihood.
#
I think there's a problem with the kind of tools that the state uses.
#
The Indian government for the last 70 years, as you and I have discussed so many times,
#
every policy move is a coercive move, which is a direct assault on human liberty, human
#
property, human livelihood and economic freedom.
#
Like this has just gone on really long.
#
Now demonetization is the most draconian form of that since probably the emergency, right?
#
This has been the worst thing on the largest, like just given the scale that has happened
#
in India in a very long time.
#
So in that sense, I shared your anger and just like, at some level, I think I'm still
#
an utter disbelief that this happened, that anyone thought this was a good idea to execute,
#
It's just such a bad idea in terms of the horror of it, but we've been doing this a
#
And for each one of these policies that have always been economists and experts who have
#
So, you know, when we're talking about Indira Gandhi's emergency policies, the very same
#
economist, Professor Bhagwati is one of the first people who wrote a critique against
#
state planning and command and control.
#
And at that time there were other joker economists, right?
#
They were like other idiots who were supporting everything Indira Gandhi did.
#
And they said the trains ran on time and how the economy is becoming efficient during emergency.
#
So there have always been economists and experts who support just the terrible policies executed
#
I buy your point and I've written about trade tariffs before also, in fact, which is why
#
I mentioned my example was a reduction of tariffs because that is something I can agree
#
Increasing a tariff is actually also an assault on property because all such restrictions
#
on the free market essentially redistribute money from poor people to rich people.
#
So I completely buy that even if they sound benign, there are so many policies which are
#
But anyway, so we'll on that, on that note of agreement, we will take a quick commercial
#
You know what it's been?
#
It's been another awesome week on IVM.
#
If you aren't following us on social media, make sure you are.
#
We're IVM podcasts on Twitter, Facebook and Instagram.
#
On Siders says this week we have comedian Aadhar Malik.
#
Aadhar also hosts a show for called Synology, Synology.
#
You should check that out as well.
#
But on Siders, he talks about everything from theater, family, heritage and sings a comedy
#
On IVM Like, Sharanay and May are back to join the gang to talk about their favorite
#
On the Prakriti podcast, Pawan and Hamsingh discuss how and why the fall in the Indian
#
repeat is connected with developments in Turkey with co-founder and fellow at the Takshashila
#
Institution Narayan Ramchandran.
#
Last week we released the final episode of the Kolaba Cartel where we spoke to other
#
members from the Misty team along with the five cartel members about how things have
#
turned out after the launch of the restaurant.
#
From Pesa Vesa, Anupam talks to Deepak Shanoi on the business of life in a one hour episode.
#
Whatever may be your profession, you definitely don't want to miss this episode.
#
On the Kinetic Living podcast, Coach Urmi talks to Kani Surka.
#
Kani shares her thoughts about her fitness motivation and more.
#
And with that, let's continue on with your show.
#
Shruti, welcome back to the Scene in the Young Scene.
#
While we were at our commercial break, you told me off mic that you are also angry now.
#
Well, I'm angry for a few reasons, right?
#
Because, you know, we keep talking about 1% loss in GDP and this, that and the other,
#
You're absolutely right.
#
Like these are the tools we have as technocrats or academics or economists to talk about an
#
issue on a large scale.
#
But this 1% loss in GDP, 2% loss in GDP, we really can't account.
#
Now how do you go back and tell someone who lost their livelihood because supply chains
#
were disrupted in November, December and has been unemployed for two years and their family
#
had to sell land or their kids had to go out of school or their children were trafficked
#
because that was the only way to feed them?
#
Like you just can't account for these things, right?
#
So that's what makes me so angry about demonetization, that there is this cost which is rendered
#
invisible because the people who were just truly affected by it, we don't see them.
#
I mean, not just we as academics, the government doesn't see them, technocrats don't see them,
#
academics don't see them, right?
#
These stories are just like some stories every 10 years on the 10th anniversary of demonetization,
#
there'll be a story about, you know, someone's kid who died, who would have been 10 years
#
But other than that, these people just became invisible.
#
And now the only way we really discuss demonetization is numbers.
#
And it frustrates me because that's the only thing I know how to do, right?
#
So that's the part that is making me really angry after speaking with you.
#
Let's come to the subject in discussion and I apologize if our listeners are frustrated
#
and saying get to the point, all this is old.
#
Yeah, he's a demagogue.
#
So the point really is this recent report of the RBI which came out which said that
#
blah, blah, blah, most of the money is back in the system and this practically, you know,
#
the money that isn't back is like really an accounting error, 0.7 percent.
#
And you wrote a very perceptive article in Live Mint about this.
#
And therefore, even though in Mint rather, it's live mint dot com and which is linked
#
And even though I had decided after doing two prior episodes on demonetization and having
#
written about it so much that I'm not going to do any more episodes on this because I
#
might my blood pressure will surely be affected by it.
#
But I thought your insight from this was worth talking about.
#
So in the first part of your article, you really talk about the sort of the three possibilities
#
of why so much of the currency came back.
#
So would you like to take us through them?
#
So we've taken a long detour to this.
#
So now let's forget all this cost benefit stuff.
#
Let's just talk about, OK, they said there's going to be this huge windfall with gained
#
What is this windfall gain or lack thereof and what does it mean?
#
So when we say that 99.7 percent of the currency came back, there are a few possibilities,
#
some possibilities I didn't discuss in the piece.
#
So the first possibility is there was never any black money in the economy.
#
They were completely mistaken.
#
Every single person is mistaken that there is black money in the economy.
#
Citizens are really good, law abiding, tax paying citizens, and there is no black money.
#
Now we know this is ludicrous, right?
#
So we can set it aside.
#
Now if we can all agree that there is black money in the economy, there are two other
#
possibilities that explain this 99.3 percent figure.
#
So 99.3 percent figure, what does it really mean?
#
One is that there was a lot of black money in the economy and it was never really held
#
So what does that mean?
#
It means Indians are masters at laundering money.
#
So how do you launder money?
#
Shell companies, tax havens, Swiss bank accounts, political parties, there are many, many ways
#
of laundering money and we have laundered our money, right?
#
Now I believe schools and colleges are a great way of laundering money because the admissions
#
racket is like, you know, full of cash.
#
Exemption is a great way to launder money because they get all kinds of exemptions.
#
So now, you know, Indians were always pros at this, which means that when demonetization
#
happened, hardly anyone had their black money in cash balances, which means, you know, most
#
of the money came back.
#
Which is actually the government estimate also because the government IT department
#
themselves made this estimate that a very small percentage of the money is actually
#
Yeah, so, you know, they estimated it at about 6%, about, you know, a little over a trillion.
#
So one trillion, that was one trillion, I would say, you know, we are all genuinely
#
surprised at how little came back.
#
Even the worst skeptics of demonetization are kind of taken aback that, wow, this is
#
So one trillion because, you know, of the IT department and other economists who use
#
this figure was a number that was floating around.
#
One trillion is roughly 6% of the currency in circulation.
#
It sounded like, okay, 6% of black money, but through the quick clarification, the estimate
#
by the IT department was that 6% of black money is kept in the form of cash.
#
Not that 6% of currency is black money or completely different.
#
And that is a much, much smaller figure than the one trillion, which that's a much smaller
#
Yeah, so if the black money estimates are 30% of the wealth of the country, then, you
#
know, 6% is a fairly large number.
#
I'm talking about 6% of the currency in circulation.
#
One trillion not coming back was a number that was floating around for a long time.
#
Lot of people estimated that roughly something close to a trillion to 1.5 trillion won't
#
And we talked about how this is all estimates previously.
#
So now when only 107 billion come back, one possibility is Indians are just pros at this.
#
They never kept their black money in cash because they knew how coerced the government
#
70 years of socialism has taught us how to get around these problems.
#
Possibility two is, and I think this is more likely, a significant portion of black money
#
was in cash balances, but Indians are just so good at circumventing the law.
#
Once again, you know, 70 years of socialism and draconian regulation has taught us a lot
#
on how to circumvent the law.
#
That in a mere 60 days, we managed to convert a significant portion of the cash holdings,
#
which was in black, into white, launder it, and put it back in bank accounts.
#
This was done by, you know, paying people salaries for a year, like the staff, right,
#
which is relatively people poorer than you who won't get caught in the IT net, right.
#
Another possibility was, you know, shell companies, tax havens, Swiss bank accounts, all that
#
The third was you take a haircut on anything and pay the premium to private parties instead
#
So you go to someone who is a jeweler and or like a dealing with gold and say that,
#
you know, you take 20% off, right, I'll give you a hundred rupees worth of old rupees.
#
You give me 80 rupees worth of new rupees, right.
#
And you know, we take a 20% premium off of it for the government.
#
I'd have to pay 30 to 50% if I get caught.
#
So all this was going on.
#
And because of this, now we realize that people have used these very clever ways to get out
#
And remember that political parties were exempt, right, much longer.
#
Obviously, people just went and donated money into political parties and took a premium
#
I believe there was a lot of scams going on in temple trusts, right?
#
What you do is you basically go and drop all your illicit cash in the temple, you know,
#
the cash collection box, the hundi that you have in each and every temple.
#
So things like that were happening.
#
So combination and you know, about 50 things that I don't even have the cleverness to imagine
#
And now all these ways we circumvented the law and we are just so adept at it that most
#
of the money has come back, right?
#
There could be a small possibility of some accounting error.
#
I must say, RBI may have gotten the transition of notes wrong because they were also surprised,
#
but they are pretty good bookkeepers.
#
I won't place too much value on the conspiracy theory of, you know, RBI has misestimated
#
by 5% or 10% or something.
#
If there is any error in counting, it's really very small.
#
So I wouldn't pay too much attention to that.
#
So what this 99.3% figure tells us is Indians are just really good at jugat, right?
#
Either before the monetization or after and all the money has essentially come back means
#
they have figured out some solution to their problem.
#
They've probably paid a premium or a cost for it, right?
#
Nothing happens for free.
#
So they've probably had to lose the value of some of their wealth, trying to launder
#
it or convert it, you know, the premium goes up during demonetization because you have
#
only 60 days to make your arrangements.
#
It would have been different for those who converted it pre demonetization, but that's
#
what has really happened.
#
And it is very difficult to impose coercive policies on Indians because we are just so
#
used to it that we find a way out of it.
#
And one of the interesting things about jugat is that it's often sometimes spoken of
#
admiringly as if, see, this is a trait that we have and how clever we are at all of this.
#
But the truth is that jugat is actually something that has come about because of bad circumstances.
#
Like you say, we are experts at circumventing laws and regulation to quote you, you know,
#
and it's, it's kind of, you know, just to quote you directly, quote, through 70 years
#
of draconian regulations under socialism, Indians have honed the skill, unquote.
#
So even though we have become very good at jugat, the tragedy is that we should not have
#
had to, we have had to do it out of necessity.
#
So there are two tragedies here, right?
#
One is we got good at this kind of, you know, what we call jugat or, you know, in the literature,
#
this is called unproductive entrepreneurship.
#
We are very entrepreneurial.
#
We find a way to survive even the most hostile regulatory environment, but it's because we
#
You have to do business, you have to earn a livelihood and very often the only way to
#
earn a livelihood is violate half a dozen laws, right?
#
So everyone from, you know, your chaiwala who is outside your building to the CEO of
#
the largest Indian companies are all in this business together.
#
The question is just the scale at which they're doing it and how much money they're making
#
But everyone is circumventing laws.
#
So one tragedy is, as you pointed out, that we have to operate like this.
#
It's such a huge cost in terms of economic freedom and liberty, but also simply in terms
#
of how much India could have prospered if we didn't spend most of our resources circumventing
#
the law, but instead innovating and being genuinely entrepreneurial.
#
The second part of this tragedy is now even sensible policies, it is very difficult to
#
have the intended outcome because Indians are just so adept at circumventing policies
#
that it's very hard to design one for Indians and execute one which will have the intended
#
And if all policy tools weaken, you know, both good and bad policy tools are not going
#
to be as effective, which is not ideal in a society because there are things and when
#
I say regulation, I simply mean like how streamlined the tax system is, right?
#
So tax collection, if we agree that tax collection needs to happen and we have a government and
#
it needs to function, then it's going to be very difficult to design tools that actually
#
help us collect the tax.
#
And if you can't collect the appropriate amount of tax, then the government comes back with
#
all kinds of other stupid follow up policies.
#
So if we blunt all our policy tools because we're good at circumventing them, then we
#
basically invite a lot of trouble as a society.
#
So this is not any single individual's doing.
#
It's just we are in a very perverse system or a perverse equilibrium, which has happened
#
because the coercive state has led us here and we have no choice.
#
So that's the second tragedy.
#
And also, I'm just thinking aloud here, it would therefore seem to me that the entire
#
informal economy is basically jugar because you have really bad laws and because compliance
#
is often impossible in some industries.
#
You have no option but to, you know, set up something outside that web of rules and regulations
#
and you're part of the informal sector.
#
And people talk of the informal sector derisively as if it is something bad and as if it is
#
a moral failing to be part of the informal sector.
#
But basically what you're doing when you're in the informal sector is you are doing jugar
#
You are absolutely right.
#
I wrote about this, you know, people like to think that, you know, if only we formalize
#
the informal sector, everything would be amazing in India.
#
The truth of the matter is if we formalize the informal sector under the current regulatory
#
regime, then these firms wouldn't exist.
#
The only way that they can exist is in the shadows.
#
I really like the title of Gujjaran Das's book, the book less so, but I love the title
#
says India grows at night.
#
That's what's happening.
#
We are growing outside the harsh light of the Indian state system because if, so think
#
about this, if you know, since pakoras are our prime minister's favorite example of entrepreneurship,
#
if a pakora wala actually had to get all the licenses that are required to run a store,
#
you can't sell pakora for 10 rupees.
#
You have to sell pakora for 200 rupees and no one will buy the pakora for 200 rupees.
#
So the only way they can exist is and by the way, the pakora wala is just one very visible
#
example of informal sector because we see them in a cart standing on the sidewalk.
#
The informal sector is hugely productive.
#
Half the things that I buy when I am in India, whether it is clothes or jewelry, you know,
#
every time I'm in India, it's usually for an event like, you know, someone's getting
#
married or something like that.
#
So the first trip I make every time I'm in India is to my tailor.
#
So the entire economy, whether it is the tailor, the person, she's buying the cloth from the
#
person who's dying the cloth, the person who's embroidering the dupatta, all of it is informal
#
So it's not like only low cost goods are informal economy, everything that is done.
#
You go to Sharpur Jat, right, Hoskar's village, all these areas in Delhi, which are exempt
#
There's so much industrial activity that happens there.
#
Everything from, you know, home furnishings and I'm talking really high end stuff.
#
It's not like only the poor people are part of the informal economy.
#
We are all part of the informal economy because if you're buying your curtains without paying
#
tax or you're buying your curtains in a place where the fire code is not up to grade, you
#
are participating in the informal economy because that's exactly what's happening.
#
Half of these firms are using contract labor because they can't afford the labor law regime
#
Half of these firms are doing two kinds of books, one set of books which pay taxes, right.
#
Because when hotels or some big business buys furnishings, they need a receipt and people
#
like me, when they go to get their dupatta dyed or embroidered, I don't need a receipt.
#
So the first question the tailor asked me is, do you want parchi or you don't want parchi?
#
And if I say I don't want parchi, which is usually what I say, because I'm very curious
#
to see how the whole thing works.
#
She has an entire set of books, which is an entire supply chain, right, from the person
#
who gives the cloth to the trade to all her employees who are paid in cash, which will
#
So she has two sets of books operating.
#
This is the only way to survive in India.
#
So this formalization is a way to cause people right now, you know, by using a good word
#
Formalization is beneficial when it is low cost to formalize.
#
The reason we haven't formalized is not because Indians love to be, you know, living in a
#
precarious situation where the law can get them anytime.
#
It's because they can't function in the formal economy.
#
It's simply too costly.
#
And you know, as I've been saying for ages, and I know you'll agree with me, is that everything
#
that India has achieved is an achievement of Indian society in spite of the government.
#
And people often take these sort of moral stands, like when you speak about when people
#
hear you talking about your tailor and she has two sets of books, they might think, oh,
#
she is dishonest and all that.
#
What they don't understand is the insane regulations and the cost of compliance, which forces any
#
rational person to do exactly what she is doing.
#
For example, I had an episode with a mutual friend, Madhu Menon, on restaurant regulations
#
Oh, yes, that was a great episode.
#
And in that episode, he spoke about how it was basically impossible to comply because
#
the liquor regulators would insist that there be only one door in the restaurant so they
#
can regulate the liquor coming in and out.
#
And the fire safety regulator would insist that there be more than one door.
#
And therefore, no matter what he did, one of these people was going to find him.
#
And no matter what he did, both of them were basically going to take a bribe from him.
#
And you have like 30, 40 authorities if you're a formal company, which are basically doing
#
rent seeking, you're playing a bribe all the time, the costs are insane.
#
So to formalize you can often be to finish you off.
#
I mean, on the margins, this is what makes a lot of small enterprises shut down.
#
And you know, and Madhu's episode was quite a poignant example of that as well.
#
You know, other than the few restaurants that you see inside a five star hotel, right.
#
I'm willing to bet a reasonable part of my income to say 99 percent of Indian restaurants
#
are breaking at least some laws.
#
They can't not break the laws, right.
#
It's just impossible to function without it.
#
So unless you're housed inside a five star hotel, which has to follow all the code and
#
everything, every other restaurant, low end, high end, pakoda wala to like the poshest
#
new thing, everyone is breaking at least like a bunch of regulations.
#
You know, as Madhu pointed out, either liquor or fire safety, they're making all these trade
#
off because that's the only way to survive there is, you know, we watch all these Hindi
#
movies where they say it is a sin both to give a bribe and to take a bribe.
#
Most Indians have no choice except to give a bribe, otherwise you can't function.
#
And as someone has pointed out that bribes are actually a lubricant within the system
#
because the system is so bad that if you didn't have bribes, nothing would work, which is
#
not a justification of bribes.
#
It is a condemnation of our terrible system of big government, which people expected.
#
Some people expected Mr Modi to start reforming in 2014, but instead he's done none of those
#
reforms and tried out these, you know, these stupid attempts at social engineering, which
#
even makes someone who was also a monster in our past, Indira Gandhi, look relatively
#
benign and who would have thunk someone could have, you know, pulled something like that
#
And this is, you know, I mean, you're right that the current regime is particularly draconian,
#
but we have had all these regime going back 70 years.
#
It has been going on for a really long time.
#
This kind of cost has been imposed on Indians for a really long time.
#
And the only way they have learned how to survive is through this kind of jugard or
#
unproductive entrepreneurship.
#
Now, there are two unfortunate things about this.
#
You know, one is just simply like economists would always talk about costs and benefits,
#
Resources that are used in all this unproductive jugard behavior, had they been used in productive
#
like, when I say productive, I mean, what you're actually supposed to do.
#
So if you're actually supposed to make and sell pakoras, then anytime you spend not making
#
and selling pakoras, which goes towards your enterprise is unproductive.
#
So had they been able to do this with the, you know, with their resources, with their
#
time, with their entrepreneurship, one is they could have grown much more, right?
#
India could have prospered much more.
#
Second part of it is now we have reached a point where every state policy tool has been
#
designed so badly that no matter what the tool is, even if it makes sense or doesn't
#
make sense, we just ignore it, right?
#
Now there are, you know, one thing I have observed, I've been living in the United States
#
for close to a decade, right?
#
One thing which is very curious to me and my parents just moved to Noida.
#
So traffic signals are of great interest to me now.
#
So if you see in India, you know, when a traffic light is not working, what happens?
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Everything goes smoothly.
#
If there is a jam, there will be two drivers who come out of the car who do the work of
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In the United States, if there is a traffic signal that is not working, everything will
#
just come to a standstill.
#
The world will stop because they simply don't know how to exist in a world where a traffic
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And they're like, oh my God, I can't possibly drive past this point.
#
So one great thing about Indians is even when the system is terrible, we are very robust
#
to bad systems and bad shocks.
#
We just carry on business as usual.
#
If there is the largest power outage in India, no problem.
#
If there's a power outage in New York, the universe collapses, right?
#
So that's one kind of distinction.
#
Now the unintended consequence or the bad part of that is because we know how to drive
#
when the traffic light is not working, we are now randomly disregarding traffic signals.
#
Because we know the other person would watch out, right?
#
So when I go to Noida, it's like traffic light is a suggestion.
#
You know, that whole red, yellow, green, which was taught to me when I was in first or second.
#
These are all suggestions.
#
They are not something you actually need to follow.
#
In fact, only idiots are following traffic lights in Noida, only idiots like me.
#
Everyone else is just driving exactly the way they want.
#
They're turned looking left, right, koi nahi hai, koi crazy person nahi hai, they just
#
And this is everyone's from a bullock cart to a Jeep, right?
#
Everyone is doing the exact same thing.
#
So now you have a problem.
#
If I may interrupt, the small percentage of listeners among you who have sat with me in
#
my car while I've driven, kindly considered at my behavior is completely normal in Noida.
#
I didn't know you drive like this.
#
And I drive like, you know, I drive like an American, like people who are sitting in the
#
The first thing they say is tum bahut NRI ban gayo, when I'm in India, because I'm actually
#
following traffic lights.
#
I gave up on following lanes when I'm in India, because you know, no one follows lanes.
#
But traffic lights are like, what is going on here?
#
But now think about the cost of that, right?
#
If in a system, nobody is following traffic lights, and everyone's disregarding it.
#
The first cost is the entire traffic slows down, right?
#
Because you can't drive at the speed that you really want.
#
Because you know that some idiot is going to cut you from the random side.
#
And even though it's your green light, you know, some, if you have a name for it, share
#
So some share the butter is going to come who will violate his red light, and you'll
#
only get hit and you'll only get hurt or traffic slows down.
#
Now that's a huge cost that we don't realize we pride ourselves on functioning even when
#
And there is some value to that.
#
But the cost we are paying becomes very invisible if everyone reduces their speed 10 to 15
#
You have an entire economy which is spending an additional 15% of their time on the roads
#
instead of doing something productive.
#
So in a sense, there is a scene in the unseen here in the sense that if you drive like you
#
drive in Noida, the scene effect, which is a good effect is that when the traffic lights
#
aren't working, you manage everybody kind of gets through.
#
But the unseen effect is that when that becomes normative, that everybody ignores traffic signals
#
and there are no rules and whatever, then what happens is that in the long run, and
#
we don't notice this, but things slow down and this is a metaphor in a sense for the
#
And you know, things like Noida is a great example, because when you go to Noida, you
#
should see, first of all, unlike Mumbai, they actually have roads with multiple lanes.
#
You have these four lane, five lane highways and expressways.
#
You have service lanes like the physical infrastructure is present in terms of there is there's all
#
So you would imagine the traffic can go fairly fast and people can get where they need to
#
But the slowdown in traffic is not because this road is not large enough like Mumbai.
#
The slowdown in traffic is because you can't trust that a random person won't just a pedestrian
#
won't just jump in and cross somewhere randomly, that there's only one, you know, cow will
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Some share the putter will violate his red light.
#
This is what is happening.
#
And if the share the putter drives into the cow, he's in trouble.
#
Ah, it depends on who the share the putter is that to let this is Noida or rather who
#
the share is or who the share is that actually are or, you know, the share can kill or cha-cha
#
But you know, Noida is a kind of like no, it is a great example of just anarchy on the
#
I heard this last time I was there, you know, food delivery people like when you order on
#
a food delivery app, there's a guy who comes on a moped to people steal food like that
#
People see pizza from pizza delivery guys.
#
So there are certain neighborhoods and certain streets where the food delivery guy will just
#
He'll say, no, we don't deliver to this area.
#
So now when you have this kind of anarchy, whether it is in violating a traffic signal
#
or whether the hell steals food delivery guy's food, yeah, I think that too, why would you
#
And it's one of those things where when I first heard it, there was just utter disbelief.
#
And then I was like, yeah, it's no, no, that makes sense.
#
You know, it's just one of those things.
#
So it's when you have this kind of a system where everyone is flouting the law, both the
#
draconian and the sensible laws, you know, you have this very perverse equilibrium.
#
And the more you flout the good laws, right, it's often because you don't know the difference.
#
It all seems coercive, right?
#
So you just like, yeah, the police comes when you are violating a red light or when you're
#
violating a street hawker license and the police come when I steal the pizza guy's food
#
and it's the same thing and I can just bribe and I can get out of it.
#
So that's really what's happening.
#
Jugaar almost becomes not just necessary, but also a virtuous form of civil disobedience
#
and also what I interrupted, this is a problem, doing it over Skype, we keep interrupting
#
But what I was also about to say is that Noida seems pretty much not so unusual, but like
#
a microcosm of India in a broader kind of sense.
#
Yeah, Noida might be a particularly terrible example.
#
You know, you really see it, you have all this shiny new malls and streets and then
#
you also have all this crazy lawless behavior.
#
But you have huge parts of the Indian hinterland, right, where there is no effective rule of
#
So for instance, you know, the episode that you did with Alok and Madhav on lynching,
#
and they were talking about how there is no faith that the police will come when something
#
bad happens, right, that there's a complete breakdown of any kind of law and order in
#
So people sort of take things in their own hands.
#
So in some sense, like Noida is a microcosm.
#
And it seems particularly bizarre because you also have all these good systems in Noida.
#
But there are vast parts of the hinterland where the police only shows up to take bribes,
#
right, only to be coercive.
#
And they never show up to do what they need to do.
#
And police reform is a bigger issue.
#
But let's be clear that there are very vast parts of the Indian hinterland, right, which
#
are just invisible to the people who are talking about formalization and the benefits of formalization.
#
Like you don't have functioning post offices and police stations there.
#
What formalization are we talking about?
#
So in fact, I would go further and say it's not just the Indian hinterland.
#
I think the rule of law doesn't exist anywhere in India except for the very rich and that
#
the state is mostly predatory and hardly protective.
#
Yes, and the amount of money that you have at your disposal is the only thing that determines
#
whether you can escape from the coercion and find another way or not.
#
So think about the beef ban, for instance, right?
#
Only poor people are getting stoned and lynched and beaten and their homes are being entered.
#
I know plenty of rich people who eat beef, but they live in nice apartment condos which
#
have security outside and it's getting delivered nicely by Zomato, you know.
#
Unless they live in Noida, in which case it's getting stolen.
#
Unless they live in Noida, it's getting stolen and someone else is eating it.
#
But still, what I mean is there exists a beef economy in India.
#
We are all aware of it, right?
#
But you don't hear of any rich people getting stoned.
#
It's always the poor people because they can't buy the layer of security around themselves
#
that will protect them.
#
So the amount of money you have in India determines how much you can escape this kind of state
#
coercion and the, you know, like the arbitrariness that is there in Indian enforcement because
#
of the lack of rule of law.
#
But other than that, we are all victims to the exact same problem.
#
And we can lament this forever, but I've taken enough of your time.
#
So let me kind of try and sum up what I thought were the two main insights in your article,
#
which is that in one sense, it reflects on us creditably, it reflects on our people that
#
they had the jugar and the innovativeness and the entrepreneurial energy to actually
#
get all this black money back into the system.
#
And that tells us that Indian people can be very innovative.
#
But the negative part of that is that all of this innovation is unproductive entrepreneurship
#
in that phrase that you just used, that it is forced upon us because of the predatory
#
state and because of these bad laws and regulations.
#
And I mean, Dimon, of course, is a classic example of a stupid policy, but our everyday
#
lives are surrounded by bad laws and regulations, which we have to find jugar around.
#
And the reason that that is a tragedy is that that entrepreneurial energy, that creativity
#
could have been better used in more productive ways, which would help both the individuals
#
and our great nation of India to prosper.
#
Yeah, I think that's an excellent summation of our discussion, which has gone in many,
#
many different directions.
#
So demonetization is just one example where we have really displayed our jugar and entrepreneurial
#
skills, thankfully, you know, because that means that our wealth wasn't expropriated
#
and most of the money was returned to the banks.
#
So that's the silver lining.
#
But the problem with it is that we express ourselves through the same unproductive ways
#
in every area of life, and that has a pretty big cost in terms of, you know, just how much
#
it slows down the economy or like the kind of deadweight losses that it imposes on the
#
So this and, you know, also like, you know, you can get hit at a traffic light, not just
#
the economy, also your personal safety and things like that.
#
So it's it's both a blessing because India grows at night and it is also a tremendous
#
cost that is paid for by all Indians and generations of Indians.
#
And on that dual note of hope and despair, Shruti, thanks so much for coming on the show.
#
I always learn a lot from you.
#
Thanks for having me, Amit.
#
If you enjoyed listening to this episode, go over to the episode's page on either thinkpragati.com
#
or seenunseen.in and you can check out links to all the articles that we spoke about and
#
If you want to follow Shruti on Twitter, you can do so at srajgopalan.
#
And if you follow, want to follow me on Twitter, you can do so at Amit Verma, A-M-I-T-V-A-R-M-A.
#
All our archives are available at seenunseen.in, many, many, many hours of enjoyable, productive
#
Look, up in the internet, it's a meme, no, it's a cat video, no, it's the Geek Fruit
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