India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions.
India’s Pride and Joy
Indians are celebrating that their economy has surpassed that of India’s former colonial master, the UK.
So-called educated Indians have latched on to the above visual, with full support of the Indian government. It has been shared far and wide in the national media. When you remind them that India’s population is twenty-one times that of the UK and on top of that, the British pound has taken a huge pounding because of Brexit and associated fear in the financial markets, expect to be ignored. You will be seen as anti-Indian.
Given the underlying irrationality and tribalism of India (read earlier updates for more on this), selected numbers are used to rationalize feelings and emotions. You see this everywhere in India: Science — very ironically — is used as a tool to rationalize superstitions and irrationalities.
Who needs reality when we can exist in illusions? But even this illusion – that India has superseded the UK – might disappear once the reality of India’s demonetization sinks in and the rupee falls, which it likely will once the international media recognize that Modi went for demonetization not to reduce corruption, but to transform India into a police state.
Modi’s interest was to increase tax collection, for the sake of tax collection, an approach in which rulers start to see themselves as all that matters, where citizens come to be seen as mere cogs in the service of the state.
In Modi’s imagination, if you are not a part of the formal economy — as is the case with the vast majority of desperately poor Indians, perhaps close to a billion people — you don’t count. As they are not recorded as part of the formal economy, their pain and suffering does not count either. Indeed most of their suffering and pain goes unseen and unheard — it has for the last two millennia.
The Indian stock market continues to fall, despite the fact that people know that selling their shares makes no sense, as their cash in the bank is effectively frozen. Could the stock market fall even more if bank accounts were to be unfrozen? Could the Indian rupee then fall as well, unless serious capital controls are instituted and gold-buying is restricted?
It is hard to predict the future, but those owning Indian assets from which money can still be repatriated will likely soon start to discover that India’s stock market and the rupee are possibly overvalued. Could an exodus start once money managers in New York and London start arriving at their desks at the start of the new year, after sobriety kicks in with the end of socialization and partying?
Scuffles have broken out between desperate clients and bank staff. Historically, it is commanders, kings and politicians who get all the blame. But these rulers and elites sitting in their ivory towers would never get their way if those on the front lines refused to obey unethical orders. Banks are required to provide cash to their clients when asked to do so. Their staff should have declined to accept Modi’s instructions to ration cash distribution. They should have stepped aside and let Modi deal with their clients, passing the responsibility where it belongs. Having not done that, they have become the face of Modi, or at least the face clients will take their anger out on. Banks employees are now starting to worry.
The Last Gasps of Disintegrating Institutions
These updates are not just about demonetization. They are an attempt to dissect the deeper, underlying cultural issues of India (and similar backward countries in South Asia, Middle East, Africa and South America) and why with the disappearance of the last vestiges of colonial institutions, India is starting to crumble. They are also an attempt to see what future might hold.
These updates are a story of why without the British to run them, western institutions implanted on India did not work and have mutated into something horrible. For example, education has become a tool for propaganda.
Nationalism without underlying values, is perceived by Indians as a mere geographical concept — and with indoctrination in schools it is rapidly weaving Indians into a dogmatic collective no different than those found in the Middle East. In a decade or so, India might become the Middle East on steroids.
Given its culture, which probably cannot change for centuries or perhaps millennia, India must ideally get heavily decentralized. India’s tribalism is entrenched and unchangeable, which is creating massive pressures to devolve India into its natural constituents, namely tribes. This will happen. The earlier the underlying forces are recognized, the less painful the process will become.
But as last gasps, there is a massively increased tendency toward intensifying centralization, toward instituting a police state. Increased militarization and equipment purchases, centralization of taxes, and now demonetization — all failing — are those last gasps.
Bulandshahr, Uttar Pradesh: a cop fires in the air to “calm down” agitated women outside a bank How long can they hope to control the situation if people are not getting the money that belongs to them?
A Life of Queuing: Pain for no Gain
While people in the rich world are in the cozy comforts of their homes, celebrating Christmas and the arrival of the New Year, Indians are lining up outside banks in utter cold to take out their own savings. Most are numb to why they are doing this. To a rational foreign bystander, their lack of revulsion has a certain spiritual element.
Indians have almost no history of revolting against oppression — they simply adjust to new situations. With respect to the demonetization policy, they have sheepishly accepted their predicament. As we discussed in earlier updates, this is a result of Indians’ utter lack of rationality, their failure to see what is wrong, their fatalism, the absence of revulsion against oppression, and their lack of moral instincts.
The caste system finds its roots here, where might-is-right is the governing principle, with both oppressor and oppressed failing to see anything wrong with their situations. The oppressor feels no empathy and the oppressed feels no revulsion. At best — given the lack of reason — the oppressed strives to become the oppressor.
Giving in to their predicament, many want to believe that they are queuing for some greater cause — akin to how the freshly decked out soldier feels on his way to battle — fooling themselves that this battle is needed. Of course there is no real higher cause they are worried about.
This facade of moral superiority is merely a cover for their boring and unfulfilling lives, and perhaps an unconscious expectation to get something for nothing — since Modi has offered them a windfall once the unaccounted money has been deposited. In the face of reality, however, the initial euphoria is fading.
Over the last 70 years since the British left, India’s entrenched interests, sociopaths and rulers have kept over a billion people — without any exaggeration— in an insect-like existence. This likely has been one of the biggest crimes against humanity, but has gone unnoticed and unseen. Demonetization once again has created massive suffering, most of which will never be documented.
The failure to sell at prices exceeding transportation cost is forcing farmers to dump their produce. Food prices have fallen as a cascading result of the cash crunch. Farmers are suffering hugely and one must ask what poor people are eating. This is a man-made disaster. Members of India’s middle class, lacking empathy, are happy that their food expenses are down 25% to 50%. They are however failing to consider that this temporary boon will constrict supplies in the future and eventually push prices much higher.
What did Modi Want from Demonetization?
As the deadline of 31st December 2016 to deposit all banned notes draws to a close, it is worth assessing what Modi really wanted, what he said he wanted, and what we should expect going forward.
Modi was after nothing else but to shock and awe society, to inculcate fear in people and to centralize control, something not too dissimilar to what Stalin or Mao did in their countries. He wanted to humiliate Indians.
He wanted them to commit their spirit to the service of the great nation-state, which in the imagination of Modi is represented by him. He wanted society to do a ritualistic dance and to celebrate his glory and conduct a self-cleansing exercise, through these never-ending queues.
Suffering from a massive identity crisis, non-resident Indians (NRIs) have found an emotional crutch in Modi. Not having to face any immediate problems themselves and incapable to understand the future consequences — for at the foundations irrationality rules undisturbed in them — so-called educated middle class members have euphorically approved of Modi’s demonetization.
Moreover, they are happy, as they despise small businessmen and lower caste people, who are getting hurt the most from the initial stage of demonetization. With Modi starting to be increasingly seen as joker in the international media, the emotional crutch of NRIs will soon disappear.
The time for India’s middle class will come, as the second-order and higher-order effects of the policy reveal themselves, but by then there will be no one to save the Indian middle class. Who said that a massive social engineering exercise like demonetization will not any have higher-order effects?
Anyone with the slightest understanding of philosophy and universal principles knows that a massive increase in corruption is written all over what Modi has done. Rhetorically, Modi wanted to end corruption, stamp out counterfeit currency and the financing of terrorism. Let us consider each of these.
No unusual counterfeit money was found in the process of demonetization, absolving Pakistan from the charge of having counterfeited Indian currency. Most of the banned notes have already been deposited in banks, despite desperate attempts by Modi to stall the process of depositing.
What has indeed become a massive problem is that the new notes are extremely vulnerable to being counterfeited. There are too many parts of this developing story of demonetization, but the ease with which the new notes can be counterfeited —and their many other flaws — by itself may be a major blow to the future of India’s monetary system. What if people start to refuse to accept the new notes?
This is one of the many problems with the new notes. Some are badly printed; some have ink that gets smeared. They have been extremely easy to counterfeit. If the government of 1.34 billion people, in this large-scale social engineering project cannot even design two new notes properly, on which the possibility of any stabilization of the money system rests, one can easily imagine how utterly and thoroughly incompetent India’s government is. Of course one probably has to spend some time in India to really understand the depth of this incompetence. It pays to remind ourselves that India is a single country only because the British left it that way. It is otherwise unmanageable and incapable of being controlled as a single unit. It is on its way to eventual disintegration. Modi will have hastened that trip.
Agitation in Kashmir and issues at the border with Pakistan have continued unabated. With Indians increasingly nationalistic, there is enormous popular support to continue and increase the oppression of Kashmir. The North Eastern provinces, which have historically been very unstable, have in recent weeks been very volatile.
Even if demonetization were able to control the so-called terrorism in these areas in the short-term, the problem would be back within months. India needs to solve the discontent that exists in so many of its regions and stop rampant abuses — fake encounter killings, rapes and systematic imposition of fear — conducted by its armed forces. This leaves ending corruption as the only issue.
One billion Indians with no internet are expected to use e-transactions. How did Modi come to think this was possible? Even a lot of educated people have never used an ATM. And you must pay about 2% in transaction fees and service taxes for using e-transactions. A primary school student can explain that this does not add up.
Photo credit: Reinhard Krause / Reuters
Corruption in India
As soon as one lands at the airport in Delhi, Mumbai or Chennai, one is hit with a wave of corruption, and sheer chaos. Often the custom-immigration forms are not there. Someone who acts very authoritative then rations those out. The line-ups to the immigration counter are hazy. No one really knows where one should go.
When you go to the baggage carousel, someone from customs comes over and offers to help you leave the airport unexamined, for a fat bribe. If you have something to declare, good luck, for the customs officer will know nothing about how to put a value on what you have, despite this being the only thing he does. You will waste your time and end up negotiating with them. You will be in a dark alley with no support.
When I arrived in Chennai a couple of years back with my suitcase missing, I had no choice but to go to customs to get the paperwork signed. I was asked to pay a massive custom duty on my unaccompanied bag. When they realized I wasn’t going to pay a bribe, they let me go.
Once you are out of the customs area, you encounter scammers of all sorts, all working hand in glove with the airport authorities. You must know which taxi counter to go to, or you risk paying a fortune.
A European friend who arrived in Delhi last week gave me a call from the airport. She could not find a working ATM. The banks did not convert her money at the airport. She ended up going out hunting with touts to get her money converted, a whole new dimension of corruption and abuses that Modi has inflicted on people.
A lot of girls eventually get sexually assaulted in India anyway, now even more after the demonetization. At most airports in India, you find to your surprise that you end up paying parking charges even if you never parked. The bribes are distributed from top to bottom, from the head guy of the airport to the lowest policeman in the hierarchy.
If you want a passport, you pay a bribe. If you want a driving license, you pay a bribe. If you want water or electricity coming to your house, you pay a bribe. If you go to the police or the court, you must pay a bribe.
My poor friends keep reminding me that I always talk about corruption that rich people — the top 2% of the population — face. They tell me I have no clue how much worse life gets once you start looking at distant rural places. Girls tell me the same. And I confess they are correct. In all these cases, apart from bribes, one must face the sadism of the police and bureaucrats.
Instant street justice dispensed by policemen. Might is right is what rules in India, not the rule of law.
Bribes are an essential part of India. Everyone gives and takes bribes. Everyone I know would gladly give a bribe to gain an unfair advantage over others.
The circus continues. While India queues up in front of the banks, Modi has inaugurated construction of a $500 million statue, to support Hindutava, a religious national identity. This wretched country, containing the highest number of the world’s poorest, most stunted and malnourished, must face such wastage.
Image credit: Chhatrapati Shivaji
What Should We Expect Going Forward?
Modi’s recent policies have significantly increased all-around corruption, which we have discussed in earlier updates. The Mafia has grown by leaps and bounds and tax authorities get whatever bribes they are asking for. There has been a horrendous increase in corruption among the banks for conversion of banknotes. Until now corruption did not exist at the retail level in banks.
If Modi really wanted to control corruption, he did not even have to turn his head. Wherever you look corruption stares you into the face. But Modi has actively protected institutionalized corruption. Modi has protected political parties, bureaucrats and politicians from the consequences of the banknote ban and their corrupt activities.
Nothing can control corruption in India except a ruthless decentralization of power in India. Instead, Modi is doing the exact opposite. Indeed, corruption has skyrocketed, particularly the worst one: destruction of whatever spirit still existed among small business and the poorest people.
Let us remind ourselves that Modi’s interest was not to control corruption but to shock and awe society into submission, for his personal glory. In future updates, we will delve even deeper into why corruption is so entrenched in India and why it can never go away using top-down institutional mechanisms.
Modi has set events into motion that will cripple India’s economy, with devastating effects on its poorest people. Most of the suffering will go unseen and unheard, in remote village and tribes, whose hunger and death is no one’s concern. Modi will be gone sooner rather than later, a result of his own arrogance. The problem is that whoever comes after Modi will probably make me nostalgic about Modi.
The textile industry in Ludhiana in Punjab is in severe trouble. There will be many unpredictable cascading effects on the economy and society.
Let us end this update with what one should expect in terms of monetary regulations in the near term.
Modi astutely declared demonetization on 8th November 2016, when the international press was focused on the US elections. He undertook a massive — and extremely flawed — social engineering exercise of no use to society. He did manage to escape scrutiny by the mainstream media.
He will do this again, between the start of the New Year and before Trump is installed, very likely at the turn of the year. He has promised that everything will be back to normal on 1st January 2017. Many transactions and hopes are based on the situation soon becoming normal.
Of course there is nothing on the horizon that can normalize the monetary situation for many months. He has so far released about 60 changes in rules over the last 47 days. He will have to continue to patch things up.
Eventually people will no longer be able to do the transactions they are currently doing informally. They will come to realize that their trust has been completely betrayed and their savings have been hugely constrained by Modi’s edicts.
The police state will continue to advance—slowly killing the very hosts it is feeding on. Will Modi impose capital controls and a ban on gold at the turn of the year? I would not be surprised.
I wish you very prosperous New Year 2017!
Source: zero hedge