What’s apparently popular often tends to be disorderly and what’s seemingly imprudent often turns out to be prudent. That’s the story of India’s demonetisation drive – neither black, nor white; neither a candidate for outright condemnation, nor a case of unconditional adulation.
Clearly, the Prime Minister of India has administered a strong antibiotic to eliminate the sticky economic disorders rooted in fake and terror money but the process that followed the policy triggers a fundamental question – could it have been a tad less ruthless for the common man? If you take away 86% of the currency in circulation, that too at the stroke of midnight, a show stopper is guaranteed, if not a standstill. Its fleeting acknowledgment has come about through the various U-turns that the government has taken since November 8. The government could certainly have done better than that, especially given the unconditional grassroots support the disruptive move has been blessed with. The commoner on the street is unaware of the intricacies of the move, but is wishful (more than wilful) in his or her faith in the sanctity of the larger cause.
Notwithstanding the slippages, the government has certainly issued a bold statement on the chronic problems of the Indian economy that were gloriously left untouched by the earlier regime. The attack on black money, at least arithmetically, means an aid to recapitalisation of the NPA-ridden banking sector (that would supposedly soar in a utopian era of almost cent percent digital transactions), while the strike on unaccounted money is a potent warning to the hoarding tribe. Whether it helps the inflation objective is another question.
Probably the biggest impact would be felt on the shady turf of election funding. A cash crunch in this area is good for the nation’s health. A large part of the well-heeled populace which appears dead against the move has no option: they can neither defend the fortress of their accounted money, nor surrender in good faith. If the move can somehow arrest the unreal soaring of real estate, India would make a phenomenal leap forward in this sector blessed with enormous potential, more so in the elusive zone of affordable housing.
On the flip side, a prolonged phase of economic slowdown stares at us with stern eyes. The role of India’s informal sector in seeding activity and hence generating traction can hardly ever be overemphasised. The currency vacuum is sure to hit this segment which will have a cascading effect on household consumption and private investment. The hold back on big ticket spends – both personal and industrial – will surely impact GDP prospects in the medium term.
But as an M&A and corporate lawyer, what positively intrigues me is the potential circuitous impact of this move on corporate governance. It is a given that the unorganised and SME tribe will now have to come to terms with the reality of scrupulous scrutiny and rigorous tax compliance. Their chartered accountants would no longer be inventive in suggesting measures to save gross revenues from the inevitability of accounting pronouncement. Of course, we would see more and more new firms being registered and business restructured but there would be obvious limits on the ways out in the new scenario.
But for the corporate sector, demonetisation would have a deeper impact. Whether companies resort to window dressing to inflate their demonetisation-hit time span of the ongoing year, in a bid to prove their competitive edge by citing attractive balance sheets, is another question. But the larger truth is that corporates would now have to revisit their tried and tested story-telling techniques in the leading light of ethics and integrity. The tighter compliance norms that the demonetisation drive has ushered in now calls for an inevitable overhaul of the governance mechanism in ensuring accountability and ethical practices, rigorous monitoring of transactions, and building a rich repository of compliance guidelines for enabling future decision and direction in sensitive and fraud-prone situations. A largely cashless environment will now make transparency an all-pervasive mandate. It will no longer be a cosmetic option thrust on the executive class by the proprietary class. Even the role of independent directors is likely to assume a whole new meaning in the new environment.
As a leading Indian financial conglomerate has aptly pointed out, this move appears to be the result of meticulous planning that followed a string of preceding, and seemingly disparate measures –beginning with the clarion call to open Jan Dhan bank accounts which was followed by the mandate that called for cash declarations in income tax returns and succeeded by the appeal to declare cash and pay tax due on it. While the first provided a conduit to route money into banks, the second sought to check excessive deposits. Now, this ban on high-denomination notes seeks to check the money circulation and improve tax collection.
Of course, all has not gone in copybook fashion and glaring execution hurdles occurred at every stage but there’s little to doubt the government’s intention. The media and intelligentsia across the globe are free to point out what the demonetisation narrative conveniently overlooks – one of them being the extent of black money that funds legitimate trade and commerce in India. But there’s no reason why these detractors should downright condemn it as a maladroit, mindless move. If they do so, their intentions are in doubt.
(Nitin Potdar is M&A partner at J. Sagar Associates Views expressed are personal )
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