Manmohan Singh was right. Modi's demonetisation was a disaster
The Reserve Bank’s annual report that came out on Wednesday (August 30) has revealed that 99 per cent of the demonetised currency has ingeniously been brought back into the system. If the intended goal of demonetising high value notes was to wipe out black money, it has come a cropper. Coupled with the GDP figures for the June-ended quarter that was out yesterday (August 31), the cumulative impact of these developments should come as a huge setback to the Modi government.
The use of demonetisation as a policy instrument, unheard of elsewhere in the world and a harebrained idea as it turns out, should finally be assessed for what it is – a grand failure on all counts. Narendra Modi has been trying his level best to distinguish himself from his immediate predecessors as a risk taker, but with unintended consequences. It is rumoured that the decision to undertake a project of such a grand scale as demonetisation was taken by half a dozen people, none of whom were real economists.
The alleged brain behind the idea, S Gurumurthy, is a chartered accountant and wannabe economist. He is also a well-known critic of globally recognised economists who have occupied top policy-making posts in recent times ranging from the Chief Economic Adviser (CEA) to the ex-RBI governor. On the evidence, like most of the regressive ideas of the “Swadeshi” champions, this too ended up as a disaster.
Fictional detective Sherlock Holmes would often say that it is a fallacy to theorise before you have all the evidence. Post November 8, if the right-wing intelligentsia and Sangh fellow travellers bought into the idea of demonetisation, few economists really endorsed it. (With the exception of Jagdish Bhagwati.) However, as it happens with every move, partisan politics played out and analysts and political parties took positions according to their ideological persuasions.
As things stand today, former Prime Minister Manmohan Singh’s speech in the Rajya Sabha, within a fortnight into the proclamation of the unofficial financial emergency, has proved to be prophetic in hindsight. With an unusually aggressive attack on the policy, Dr Singh tore into the government by describing it a “monumental management failure” and a case of “organised loot and legalised plunder of common people”. Partisans took turn to condemn or hail the former Prime Minister, who is also a widely-respected economist, as he predicted a two per cent drop in national income (GDP) on account of the exercise.
When common people were massively affected and more than a hundred lost their lives in the bargain, it was dubbed as a small sacrifice that would permanently change the economy and the country as a whole. If the validation of the policy by people at large were to be the clinching factor, the election results in Uttar Pradesh for the BJP would prove to be a ringing endorsement. Perhaps, that was the intended target of the policy more than anything else.
If 2016 began by commentators demanding reforms of the Modi government and asking tough questions on job creation, crony capitalism and black money stashed abroad, the narrative soon shifted to the disruption provided by demonetisation post November. As Modi successfully recast his image as a pro-poor messiah and a change agent, aided by massive propaganda, the feeble attempts of the opposition to mount a counter-narrative fizzled out.
When the government realised that most of the demonetised currency would make their way back through the banking system, goalposts were shifted. The narrative of a cashless economy/less-cash economy and digitalisation swiftly replaced the initial goals. However, as new data suggests that digital transactions have gone back to the pre-demonetisation level, even that claim has fallen apart.
As for the claims made on checking counterfeit currency, the figure of 41 crore in the RBI annual report remains a small trickle in the larger scheme of things. Moreover, the contention that the new currency is tough to duplicate has also been busted convincingly. So has the claim on ending terror financing.
The latest contention - that of the tax base going up - is also dodgy as the figure of a 25 per cent jump is less than a 27 per cent jump in previous years. All in all, apart from the limited political agenda of the ruling party, the policy has proved to be a massive flop show. If one were to take into account the massive turbulence witnessed across the length and breadth of the country owing to the ill-advised policy, it should be recorded as a historical blunder, bordering on criminal.
When the India-US nuclear deal negotiations hit multiple roadblocks in 2007-08, a diplomat quipped about George W Bush’s relative success on his engagements with India, compared to his predecessors. The diplomat explained that Bush would end up asking elementary questions and offer simple solutions to complicated problems. (Before the advent of Trump, George W Bush was the toast of the American press and had attained legendary status for his gaffes.)
Similarly, Modi has for long been known as an efficient administrator of Gujarat for his out of the box thinking and quick decision making. He is also famous for not going through files and instead arriving at decisions solely based on Powerpoint presentations and briefings, apart from his gut instinct. But when it came to taking a decision on demonetisation, these supposed virtues would not have stood him in good stead.
According to economists like Prof Arun Kumar, the hit taken by the informal sector would reflect only in the next few months and quarters as no quantifiable data are available. If poor GDP numbers and the slump in manufacturing can also be blamed on the lack of private investment and destocking on account of GST, the fact that demonetisation has turned out to be a colossal failure has now got to be finally accepted by the government.
The incoming vice-chairman of the NITI Ayog, Prof Rajeev Kumar has been tying himself up in knots trying to explain away the supposed benefits of demonetisation. In a rare slip of the tongue, he suggested on India Today that he knew of friends who had used the Jan Dhan accounts of their domestic helps and others to launder their money. Now a part of the government in his new role, where is the accountability?
In the same vein, he goes on to criticise the former finance minister P Chidambaram for his contention that the policy turned out to be a scheme to turn black money into white. Rajeev Kumar’s response to that was even more baffling when he suggested that if everyone got an equal opportunity to launder their money under the scheme, Chidambaram had no reason to complain.
In another interview on NDTV the same day, Kumar suggested that anglicised and Americanised economists trying to replicate global fixes in the Indian scenario wouldn’t yield results. One can only hope that half-witted proposals like demonetisation wouldn’t be touted as “swadeshi” counters and wannabe economists/quacks wouldn’t get to formulate economic policies after this catastrophe.