Understanding Constitution in Two Minutes

Our Constitution was drafted and enacted by the constituent assembly to cater the needs of all and to ensure fraternity and equality amongst us. Constitution of any country is the code for its legislative, judiciary and executives, the constitution of India is for all. It is so invincible that under Article 51(A) every citizen has to be on bound fundamental duty which is rarely seen in another country.

With 25 parts, 12 schedules and 448 articles, the Indian constitution is so unique and invincible that it distinctly defines the responsibility of legislative, judiciary and executives. Legislative has to make laws, executives has to execute and judiciary has to define and protect the execution of law and may I remind you all that responsibilities of these three cannot overlap each other. It has various characteristics which inter alia contains that it's drawn from different sources, the most lengthy written Constitution, it's a Federal Constitution with strong centre, it gives Parliamentary system of Government, and contains Unique combination of Rigidity and Flexibility, with Integrated and Independent Judiciary, Fundamental Rights, Directive Principles of state policy, Secular state, Universal Adult Franchise, Special provisions for SC’s ST’s and Minorities, and Provisions for autonomous authorities.

Following the words of  Dr. Ambedkar that if we wish to preserve the Constitution in which our greatest leaders have sought to enshrine the principle of Government of the people, for the people and by the people, let us resolve not to be tardy in the recognition of the evils that lie across our path.

Demonetization: A Financial Emergency

When (08.11.2016) i started to write this blog, the Hon'ble Mr. Prime Minister of India announced the biggest breaking of his government it ever had till date which is demonetization of all the currency in circulation having Rs. 500 and Rs. 1000 denomination. This could be said the biggest move and the Mr. Prime Minister as he asserted that this tool is to curb black money. No wonder, if the move is taken at the behest of Baba Ramdev (He could be applauded for new Adam Smith as he said to the Business Standard in January 2014 that all currencies of 500 and 1000 denomination should be demonetized). But the question arises whether the black money is held in the economy only as liquid money? What impact this move will bring in the economy which has about 18 lacs of crores of currency in circulation? Does this have any impact on liquidity in wholesale as well as retail market? Is government only thinking about black money or there is some smell of other intention of the government? Let us explore!

Yes, indeed this is the bold step taken by the Government of India to curb black money. For any government which has lost its control over the gigantic breeding of black money in the economy, demonetization of bigger currency is the best tool or you can say Brahmanstra (A weapon used in Hindu methodology for complete destruction of the target). It is a welcome step and, prima facie, I welcome this and I appreciate the Government. The government has stated that this is for black money and we should have a cursory look on the economy now.  The data given by the RBI on its website reveals that total currency in circulation as on 28.10.2016 stands at Rs. 17.77 lacs crores and not only that the latest annual report of it suggests that out of this 86% comprises of 500 and 1000 notes which could roughly be Rs. 15.28 Lacs Crores. This means that after sudden demonetization, the economy shall have only Rs. 2.49 Lacs Crores of currency in circulation. Is our infrastructure ready to deal with on 14% of its liquid currency? Certainly no as India has only 12-14% shares of corporate sector in National Income and Bhagidari (Unorganised) sector has 30% shares. Even in Manufacturing sector the Bhagidari have 40% share. The Bhagidari sector is major players in manufacturing, construction, transport, trade, hotels, restaurants and personal services such as servants, drivers, maids, home tutors, grocery shops etc.

In terms of work force, 92% of India's workforce belongs to unorganized sector and they have been mostly paid in 500 and 1000 notes in cash. Data and statistics reveals that there are only 50-55 crores bank accounts opened so far out of which some are the duplication of accounts and some are dormant. A rough estimate suggests that only 10-15 crores households operate Bank Account. Now the point of panic is who shall be the biggest looser? The answer is those workforce of Bhagidari Sector who do not have a bank account. They will exchange money and possibility is there that out of which Black money could be generated. Maids and servants who  are paid irregular income shall be the biggest victim of it. Again a question is repeated whether Black Money is held in liquid cash? Answer could be both yes and no. Yes, because some domestic black money generated out of bribe and others are kept in liquid cash and no because the government of India has no official data of total black money.

Now let us trace back the status of economy. Monthly Economic Report published in September 2016 by the Ministry of Finance, Government of India, reveals that the GDP growth has declined and moreover Non Tax Revenue which includes sale of Spectrum and other licenses fees  have also declined. The report also gives a sign of worry that all three deficits viz. Revenue, Fiscal and Primary are likely to be increased by 10.3%, 10.4% and 13.4% over the year. The growth in IIP in August 2016 was (0.7)% as compared to growth of 6.3% in August 2015. Mining production declined by 5.6% in August 2016 as compared to growth of 4.5% in August 2015. Manufacturing production contracted by 0.3%. Capital goods production declined by 22.2 per cent in August 2016 due to decline in production of items like commercial vehicle, three wheelers, grinding wheels, plastic machinery and small transformers. The biggest thrust on the economy is the number of telephone subscribers in India which is declined 1059.9 mn at the end of June 2016 to 1058.9 mn at the end of July 2016. Area where the government need to come with clarity is whopping increase in planned expenditure of 26.8% and a good gesture of pose shows that non-planned expenditure increased only by 3.6%.

In most of the economy, as it is said, the writer of this line has not verified this line himself, black money is not held in liquid cash in abundance, neither arms are smuggled in local currencies usually.  Those who are accustomed to generating black money have lots of heaven instead of hard cash. Demonetization assumes that all black incomes are held in the form of cash balances, but in fact it is small part. In 1946 and 1978, demonetization was unsuccessful as the businessmen reportedly invented a number of clandestine ways to circumvent demonetization and thus the generations witnessed black money and so could be apprehended this time too. In the contrary, the general people and farmers will be the biggest victim of this. Money supply will be contracted and thus the commodities and perishable items which are in market shall be forced to sell on lower price resulting in deflation. Not only that this will contract export also as the currency shall likely to be appreciated and that will heavily impact the economy as the fundamentals shall not have any role to play in. When the incumbent government assumed power, it was said that the money is in abroad and that will have to be brought back.

The data suggests that Net Foreign  Exchange Assets of RBI as on 28.10.2016 stands at 24.49 Lacs crores i.e. 138% of currency in circulation. If 500 and 1000 denomination notes sucked from the circulation then this Foreign Exchange Assets could surge resulting in the fact that the foreign nations could be bailed out from the public money. Another apprehension is that the government could redeem sovereign debts and clear treasury bills out of this money. Not fetching money from sale of Coal Blocks, Spectrum and Disclosure Schemes (IDS) as expected could have a serious root  of this act of demonetization. Another calculation suggests that in case of sucking  all 15 lacs crores of money from circulation, RBI shall get 60,000 Crores (approximately) in form of CRR which could be utilised, inter alia, in financing a total of Rs. 31,300 crore in the financial year 2016-17 and to service the principal and interest against the Extra Budgetary Resources of Rs. 16,300 crore by Government of India to augment infrastructure spending which The Union Cabinet approved in September 2016.

Though all the above are speculations and one thing could be added that whether the infrastructure is eligible for handling raucous, if any. The wholesale market has tumbled a lot against the logic. In India, it may be said easily that the market shall not suffer, the cash in circulation to GDP ratio stands at 13-15% where as globally it is 2.5% to 8%, but in reality it is not, and thus the wholesale market as well as retail market is likely to be badly impacted. The government shall be able to avoid situation of financial emergency, i hope.