Submitted by Jayant Bhandari via Acting-Man.com,

India’s Currency Ban – Part VI

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, and Part-V, 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.

There are undoubtedly many differences between the two gentlemen depicted above, but both appear to have mastered the age-old trick of extending one’s grip on political power by inflicting chaos.

As the deadline of 31st December 2016 approaches, Gresham’s law has been turned upside down. When they needed to be converted, the banned currency notes were trading for a 20% discount to their face value. In the meantime, the discount has disappeared and the banned notes are trading at a premium of 10%. The mafia which deals in the banned notes could not possibly be happier — it promises to be a big supporter of Modi going forward.

See if you can spot a rich person here. Rich and connected people, if they really needed to exchange banknotes, used the mafia (which employed millions of poor people to queue at banks), police (who used ID copies of old prisoners) or banks (who simply swapped the currency notes). It is the desperately poor people who have suffered.

As you read this, keep in mind that India’s GDP per capita is $1,718. When the quarter of relatively higher-earning Indians is segregated from the population of 1.34 billion, one realizes that more than a billion people — who are among the world’s poorest and most wretched — exist in appalling conditions.

These people, who earn a dollar or two a day, are now expected to use electronic media for transactions, in an economy in which electricity and the internet are unpredictable even in big cities. With no money to buy seeds or any opportunities to earn even $2 a day given the cash crunch suffered by potential employers, these hungry and desperate people are queuing up outside banks.

India has no intellectual backbone, with its middle class — in what is still an entrenched caste system — unconcerned about the man-made crisis that has hit this large number of desperately poor people.

Indians have mostly taken their troubles in stride. The international media have seen this as a sign of perseverance and a deep desire among the poorest to bring about positive fundamental change in society. In reality, the lack of protests is mostly indicative of Indians’ lack of moral instincts, a common problem with irrational societies.

Demonetization will have achieved nothing positive. But it will have seriously damaged the Indian economy. The human costs are immense and continue to pile up. This could easily — even likely — take India to autocracy and eventually, bloody and chaotic disintegration.

The demonetization policy and Modi are merely symptoms of deeper issues though. Our job must be to draw out the underlying principles in order to be able to project what might unfold in the future.

Rationality is Needed to Build and Maintain Rational Institutions

India’s political institutions and big organizations were built by the British. They have crumbled — slowly but surely — since the British left in 1947. These institutions would only have been sustainable if society at large had at best become as inclined toward critical thinking and rationality as Britain was, or at worst, if the British had continued to run the institutions. With neither being the case, the glue has come unstuck.

Over the last 300 – 400 years, the West has disseminated its technology, institutions, etc., hoping that these would provide the tools to undo tribalism, superstition and irrationality and promote critical thinking instead. Africa, the Middle East and South Asia were offered intellectual products developed in Europe over a period of 2,500 years on a platter, the finest achievements of humanity, free of charge. However, to the people on the receiving end, the plate appeared to be completely empty.

What did appear to work was the focus on trade pursued by the East India Company, and the attempt by Catholic missionaries to bring about cultural change from the bottom-up. Neither of these approaches had a chance to fully play out, and the British government took over India in 1858.

The cultural renaissance that had begun to happen in India started getting politicized and came to an abrupt halt with the death of Nobel laureate Rabindranath Tagore. The cultural renaissance had slowly ossified into the so-called independence movement. Everything took a nosedive after the British left, and continues to deteriorate today.

A British-era highway bridge in India collapsed in August 2016, killing 29 people. Amusingly the UK — even though it left India 70 years ago — maintains a database of the bridges it left behind. A few years ago, the UK alerted the Indian government that the bridge had outlived its useful life. Naturally, this alert was ignored.

Photo credit: PTI

The Pace of Institutional Decay is Picking Up

Imparting the concept of reason may look like a simple job of education to the western mind, but it has not happened and proved impossible. India (and many similar countries) did import western medicine, food, clothing, music, movies, Paris Hilton and Kim Kardashian, but completely ignored — actually failed to see — what the cornerstone of Western civilization really consists of.

When the internet brought societies closer, it was far easier to import the entertainment aspect,which is to say the high time-preference aspects of western society. The recipients perceived the facade — clothing, music, Ray-Ban sunglasses, etc. — to be what made the West so successful. They simply did not have the capacity to recognize that it was the concept of reason that made Western civilization successful.

Moreover, the free gift of technology that India received and the economic growth it promoted, has disincentivized Indians from becoming rational or virtuous. Worse, it has made educated middle class Indians extremely arrogant. The importation of western entertainment products without the constraints of rationality has led to a skyrocketing of disease, pollution, chaos, abuses and stress in India.

I thought initially that ritualistic religion would fall, in view of easy access to knowledge and information. Alas, modern technology and forced education are a heavy burden for irrational minds, and exist as mere beliefs if they are not underpinned by critical thinking.

Ritualistic religion is experiencing a significant upswing. An aggressive, nationalistic version of Hinduism — Hindutava — is spreading rapidly. India is increasingly similar to the Middle East in this respect. The institutions left by the British are in the process of mutating to accommodate the India’s underlying culture.

One Day, Even the Facade Must Vanish

Will there be democratic elections again anytime soon? If Modi loses his support, possibly not. All signs show that Modi is strengthening his position as a de facto autocrat, likely imagining himself as a kind of modern age Hitler. All his potential challengers have been sidelined.

But Indians are not Germans. India’s chaos, infighting, indiscipline and backbiting mean that no autocrat can become a copy of Hitler. One should rather be looking at Zimbabwe or Uganda for useful analogues. Modi will eventually get washed away in the chaos of India. But as India’s institutions crumble, whoever comes after Modi — perhaps a military general — will be worse.

We must regard Modi’s demonetization decree as a symptom of deeper issues at play, in order to see the direction that India has embarked on, which is not dissimilar from what is happening in much of the rest of South Asia, the Middle East, Africa, and large parts of South America.

All these people are all suffering, but they end up fighting each other while queuing up outside the banks. They fail to understand the chain of causality, and cannot see that it is Modi who is behind their predicament and anger. They have fallen for a divide-and-rule stratagem.

Is Modi Losing Support?

Modi enjoys very strong support from non-resident Indians (NRIs). In the past Indians living in the UK and the US were often asked about snake-charmers, cows and elephants on the streets of India. At one point India briefly came to be seen as the rape-capital of the world, after a number of rapes cases got international exposure.

Being tribal, NRIs could not detach themselves from what was happening in India, and felt a deep need to change perceptions about the country. In the eyes of NRIs, Modi has put India on the international map, making it look modern and progressive.

While most people around the world don’t really care about the economic non-entity of India, Modi convinced NRIs that Obama and Putin were dreaming of Modi every night. Modi gave these self-confidence-lacking NRIs vicarious confidence in their place of origin. NRIs support Modi for the emotional crutches he offers them, not because they really care for India.

Members of India’s middle class love to copy NRIs, to make sure they come across as modern and cool. On top of this, Indians have for a long time craved a strong, firm leader, someone to relieve them of self-responsibility. Modi’s huge backing among members of the salaried middle class remains firmly in place.

Dire Economic Consequences

Withholding tax is automatically deducted from the wages of members of the salaried middle class. Since they have as a rule never run a businesses, they often feel that businessmen have got a very rosy deal somehow, suspecting them of managing to manipulate their accounts to avoid paying taxes.

Instead of asking for lower taxes or becoming entrepreneurs themselves, salaried middle class members have chosen envy, insisting that those who they suspect of minimizing their tax payments should pay their “fair share”.

The middle class doesn’t see itself as suffering any disadvantages as a result of the demonetization decree, because the burden is mainly borne by the poorest people and small businesses. Given the entrenched caste system, the former are not perceived as human beings, while envy takes care of the latter.

In reality, small businessmen are the heroes of India though. They are struggling under a massive and rapacious bureaucracy. Over the past three years, additional taxes have been imposed on them and the regulatory burden has steadily increased.

Virtually every businessman I have met since the start of demonetization on November 8 2016 has told me that revenues are down by as much as 80%. Entrepreneurs were already reeling under very difficult circumstances, but now many are going bankrupt.

The sugar industry is under great pressure. Demonetization has turned what was expected to be quite a good year into a year of vast losses.

Many small businesses are facing closure and bankruptcy – in Moradabad, an estimated 60% of the artisans normally thronging the streets have disappaered. Soon these people will not even have money for food.

Coconut farmers are suffering as the dearth of currency has led to a collapse in prices.

With businesses failing, poor people are quickly losing their jobs. Migrant laborers from across the country no longer find employment and often don’t get paid what they are already owed.

Food prices are down by as much as 25% to 50%. This has hugely benefited the middle class for the time being. Alas, this fall in price is not due to excess supply, but due to a fall in demand, as poor people are struggling. Farmers are suffering severe financial problems, which will end up having serious effects on food prices in the next cycle.

When members of the middle class oppose corruption, it does not mean that they do not take and offer bribes — irrational people can happily exist with this cognitive dissonance. Particularly those working for the government are often extraordinarily corrupt. They want corruption to end, but want themselves to be exempted.

Virtually all Indians are offering and taking bribes. When they voice their views on corruption, one must interrogate them a bit and probe more deeply in order to understand what they really mean when they say they are opposed to corruption.

Long queues continue to form, with people arriving very early in the morning, hoping to get at least some cash.

Photo credit: PTI