Thursday, November 10, 2016

Understanding the Phasing Out of Higher Denomination Fiat Currency in India

By Rahul V Kumar*

The Government of India has decided to phase out the existing higher denomination (500 and 1000 Rupees note) currency from circulation. Many have hailed this decision as an important step to eliminate black money from the system. At the broadest level, I put forward a hypothesis that the decision has many possibilities to strengthen the role of the state. A stronger state has its own consequences on individual freedom and liberty. This, in turn, has more potential to create an unstable monetary environment in the long term. Given the distant possibility of a complete wipe out of black money, there are a few immediate considerations that are worthy of analysis. Arbitrary and quick decisions from the side of the government will be carefully observed by the business community. This could lead to precautionary measures adopted by these groups in future to avoid discretionary government decisions like the present phasing out.

Arbitrary and dramatic decisions could lead to distrust in government handling of money supply in the economy. Lack of trust in fiat currency could have negative impact on the banking system and the control of credit by the government. Distrust of business in the currency system, however, could be seen as a positive step towards the rise of newer forms of decentralised currencies in the country. Online monetary exchanges and crypto currency would be used for future business transactions. But, the broader consequence of increase in demand for plastic currency and crypto currency could be to transfer illegality from paper currency to plastic currency sector, until the existing monetary institutions are allowed to undergo positive transformations. Credit and debit card frauds, which are increasingly reported, are likely to expand. An illegal economy in online transactions is likely to thrive.

Illegality in currency arose primarily because an artificial demand was created for paper currency by making it fiat money. The hypothesis of the current decision was that all the fiat currency and illegal notes of higher denomination stored in vaults and in circulation will be affected. The possible surge in demand for lower denomination currency was predicted and steps taken to deal with it. The heterogeneity of the country, the differential growth rates of different states, inequalities within these states, sectoral differences and so on make any analysis of the impact of policies in India difficult. Different people perceive the impact differently.

An important consequence of wiping out higher denomination currency is that production in the economy is likely to be affected in the near term. All activities that were supported and carried out using illegal money will immediately come to a halt. How the economy copes with this situation should be speculated. The coping strategies would result in a surge in the demand for employment. In the absence of development of suitable employment opportunities, it is likely that the government will find new avenues to intervene in determining economic opportunities. In other words, reaction in the business sector would be reflected with a strong rise in the government sector.

To prevent crime in the economy requires a broader canvas to determine the origin of the crime. Crime in fiat money originated, when fiat money was made valuable. This has origins in how the states evolved and gained control over monetary transactions. Hence, the new policy can be seen only as a strategic move by the current government, which converted a long-term problem in the monetary system into a political opportunity. It need not correct the flaws in the system.

*The Author is Research Consultant at Centre for Public Policy Research. Views are personal and does not represent that of CPPR

Monday, August 22, 2016

Re-examining the roots of the stray dog menace

By Rahul V Kumar*

The Problem

With the number of stray dog attacks increasing in Kerala, the major debate has been whether or not to eliminate these animals from the street. Animal rights activists vociferously challenge all plans to kill dogs. A humane way is suggested; to sterilize dogs and thereby control the population. There is another group which considers that the government’s lax attitude towards waste disposal has resulted in the menace. They suggest new methods in waste management. A third group considers empowering local area governance structures to deal with the problem. All these are indeed valid points and have been important to analyse the stray dog menace in Kerala. However, the issue of stray dog menace has significant roots in the changes taking place in Kerala’s social and economic features. These changes also indicate significant institutional deficits in accommodating new policies.

A Hypothesis

The main reason for sudden spurt of stray dogs can indeed be traced back to our inefficient waste management measures. It would be but naive to consider that all waste leads to the rise of the dog population. A better hypothesis is that specific waste particles might be contributing towards this phenomenon. A notable feature in Kerala today is the significant shift in the eating habits of individuals. Consumers prefer more meat and chicken in their diet than other food substitutes. This is also reflected in the rise of a large number of poultry farms and fast food joints serving chicken and meat products. The reason for such a shift in the eating habits could be because chicken and meat products have become cheaper and more affordable in real terms to the population in Kerala. More affordability of cheap food sources has created a demand for these items, and the market has come forward to satiate it. The problem of rising stray dog population could directly be traced to the negative externalities generated by these farms and food joints. Much of these externalities are created due to improper disposal of waste from these enterprises.

What this means and what we should do

What this indicates is that there are rapid changes occurring in the lifestyle and food habits of the population in Kerala. However, there are very few parallel institutional changes in the society that could accommodate the evolving patterns. Rules that develop in the management of such units (as the farms and food outlets) are still in the evolutionary stages as our local and state governments seem to have never anticipated these changes. As can be easily predicted government response to the stray dog menace would be to create new departments and organizations that would thrive on this market requirement. However, that in itself would only worsen the situation than cure it. A learning lesson for the state of Kerala is to look back on why our poultry diet has substituted earlier dietary habits. As we presume this could largely be because of faulty agricultural policies that inflated prices several times during the last few decades making substitutes appear affordable.
So do we blame each other or do we find a solution to the problem? There are no clear solutions at this moment, but there is a cue that we could take from such events to prevent similar catastrophes in future. An indicative trend in such events is poor economic understanding of the society in which we leave. In an era where changes occur at a very fast pace, our governments cannot afford to have an iron hand in policy making. A liberal environment would allow for the creation of new institutions which could accommodate such changes. It is high time that the society is made free to develop such institutions.

*The Author is Research Consultant at Centre for Public Policy Research. Views are personal and does not represent that of CPPR

Wednesday, July 13, 2016

The Case of Taxing the Poor Burger in Kerala

By Rahul V Kumar*
There could be several reasons why a 14.5 per cent fat tax on a burger and related products (sandwiches, pastas, doughnuts, pizzas etc)[1] was imposed by the new Left government in Kerala. High on that list could be the possible projection by the media that the government is concerned with the health of its citizens. Given that individuals in Kerala are well aware of the various health concerns as well as emerging issues (fed by innumerable awareness campaigns, health magazines, as well as television programmes in which they directly interact with doctors) a tax on burger seems a tad too stretched to meet the goal of better health. Considering these speculations the government seems to have categorised the tax under the head of revenue generation. However, the implied notion of a tax to promote health looms large over this budgeted move. The question is does taxing to reduce consumption serve the purpose of improving health? It seems to resonate with the high taxes on alcohol which has not proven to reduce consumption. As in the case of alcohol such taxes could also be indicative of a ban on junk food in the near term.  It is very unlikely that individuals in Kerala are unaware of the health consequences of ‘junk’ food. The probability that the choice of ‘junk’ was an informed consent between the producers and the consumers seems very high. If individuals have thus chosen ‘junk’ over ‘non-junk’, it indicates that the market has strengthened in response to demand. This is same as the case where there are increasing numbers of outlets serving organic food items. Left to its own the market will signal individual choices more freely than when controlled thorough restrictive taxes. The consequences of such artificial restrictions could prove costly.
There are initially some definitional concerns in taxing selected food products. How do we define and tax a group of ingredients which are categorized as a ‘burger’ or ‘pizza’ or ‘pasta’? Suppose tomorrow these ingredients are modified to retain much of its similarities but with a change in name and form does it still stand taxing? The problem is that there are innumerable variants in which these ingredients can be assembled essentially retaining its taste. The question is: Is the burger ‘junk’ or is it the combination of ingredients that make it ‘junk’? So do we tax the burger or the ingredients which cause fat? It is only a matter of reassembling these ingredients before the market is able to retain the old habits. That said the question of what constitutes junk also needs to be re-examined. Selective taxation of food which entered our culture from outside might indicate intolerance of other cultures. Consider for instance our growing eating styles and habits in Kerala. There has been large increase in the number of small vendors serving fried snacks across the state. Individuals can be seen crowding such joints in the evenings and enjoying their share of these products. This is also due to various reasons; women working, difficulty to manage maids, inflation of the food ingredients higher to the food products etc. All these products irrespective of what they constitute are high in unhealthy fats and cholesterol. If health is a concern these eateries also stands questioned. Such small vendors are significant drivers of the market for food and food products and any restrictions on them are likely to influence demand generation in the economy. Long term effects of such policies can be examined through Bihar’s case where tax has been levied on samosas and sweets.[2] The case of a fat tax in Denmark and the ‘metabo’ law in Japan run parallel to such policies. Denmark was forced to abandon fat tax within a year of its introduction.[3]
An obvious consequence of the tax would be an increase in price of products served in the growing food industry sector in Kerala. There is an issue with the tax on basmati rice, pizza, burger and wheat products at the same time. It is unlikely that the government intends to do as it covers all the food items available in the market except our own rice. At the same time, there is an increase of tax for coconut oil that will lead to the price rise in the food served at restaurants again. In addition this could also shift usage from coconut oil to other edible oil available in the market.  Awareness and the availability of the data on the ingredients front in the so called junk food is one of the solutions rather imposing a partial ban through higher taxes. Let the data be out as in the case of Mac, KFC and Burger King. There are also questions that remain unaddressed and needs further investigation. How do we define saturated and unsaturated fat and to what percentage? Who and how we will decide the content to tax. It is like good cholesterol and bad cholesterol. Especially in Kerala, how will it affect the middle class and upper middle class who consume these? Will they be affected by this rise? What happens to the beef and other ingredients which could also be a fat source?
Obesity is a major health issue which is a concern for most developed nations. Several countries have adopted reforms and measures to decrease instances of obesity. A possible explanation in most of these reforms has been to transfer the onus to the private sector to sponsoring healthcare.[4] However, transferring healthcare cost to the private sector through taxes does not simultaneously reduce the role of the government in this sector. If health is the major concern the government ought to liberalize the sector and allow for competition to prevail. Insurance coverage could be enhanced; health vouchers could be issued; and foreign investments could be liberalized for the sector and so on. These factors could take our health status to higher levels. A tax is more likely to disrupt a growing food industry than creating a necessary safeguard for the health of citizens.

*The Author is Research Consultant at Centre for Public Policy Research. Views are personal and does not represent that of CPPR