Fifty days after demonetisation was announced, an analysis

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The first 50 days up, it was expected that Prime Minister Narendra Modi would shed secrecy and publicise the achievements of the demonetisation exercise. Escalation in the war against black money and corruption seemed imminent. The country waited for another 1991 moment, when, following a crisis, Manmohan Singh had meticulously steered the economy on to a new trajectory.

Mr. Modi’s new year-eve address to the nation, marking the expiry of the first 50 days, however, contained none of this. He announced a relief package for senior citizens, women, farmers and small businesses, essentially those the demonetisation has hit hard. Instead of reform, Mr. Modi had chosen relief.

Usually relief is provided against calamities, accidents, disasters or economic slowdown. Relief for coping with government policy is rare. If a policy needs follow-up relief, it may not be well thought out. Relief for enduring demonetisation sounds less like part of an original demonetisation plan and more an afterthought.

The cageyness, along with the giveaways, suggest that the demonetisation project has not proceeded as planned and, in the absence of measurable and demonstrable achievements, the government sought to buy time and support with sops. Preclude, or at least postpone admission of failure. It could prove to be a mistake.

 

The government, for reasons best known to it, has been reluctant to divulge how carefully it had planned the demonetisation ahead of the November 8 announcement. Or the results it has achieved since then.

The exercise was presented as decisive action necessary to make long-term economic gains, even if at the cost of short-term pain — a project in nation-building. Inconveniences and losses endured are to rid the foreseeable future of corruption and black money. By design, the impact of demonetisation on such goals will have to be postponed to the (undefined) future.

But we don’t need to consult the future to understand whether the call to go ahead with the demonetisation was a calculated risk backed by sound analyses or a reckless experiment.

The story has begun to unfold.

A rushed decision, clearly

Evidence from the Reserve Bank of India (RBI) is becoming available. There are a few replies to RTIs and a parliamentary committee with which reconstruction of the demonetisation decisions is now possible.

The RBI received a letter from the government on November 7. This letter contained advice from the government for the RBI to withdraw the legal tender of the ₹500 and ₹1,000 notes in circulation. The stated objectives were threefold: mitigation of counterfeiting, terror financing and black money. The government advised the RBI to place these matters of immediacy before its Board for consideration.

The Board met the subsequent afternoon. It was working on depleted strength. Due to vacancies, just 3 of the 10 independent members attended the all-important November 8 meeting of the RBI Board. Governor Urijit Patel, Deputy Governors R. Gandhi and S.S. Mundra and two secretary-level bureaucrats from the Finance Ministry, Shaktikanta Das and Anjuly Chib Duggal, were present.

The proposal before it was for culling more than 80 per cent of the notes in circulation. With full knowledge of the inadequacy of its stock of the new ₹2,000 notes that its presses had begun printing, the RBI Board stamped its approval. Hours later, on the same evening, Mr. Modi obtained his Cabinet’s approval, and by midnight more than 80 per cent of the cash in the hands of Indians was turned into paper.

The RBI had received no reference, call for views or information from the government on demonetisation prior to November 7. One day is what it got to calculate the associated risks and potential unintended consequences. To consider the extent to which demonetisation could disrupt the economy. To weigh the costs and factors that might mitigate the potential pay-offs. To examine if there could be alternatives to demonetisation.

Unless file notings in the Prime Minister’s Office and the Finance Ministry can prove otherwise, the various written submissions of the RBI pieced together suggest that the demonetisation project was carried out in haste and without application of mind. Possibly without a plan. Perhaps on a whim.

 

A failure on several fronts

Since the government has not demonstrated results, it must at least come clean on its seriousness. It is answerable to the people of India on the rigour it had applied, the robustness of the process it followed and the priority it accorded to the honest ordinary citizen in the demonetisation scheme. Wars are not won by ducking. Nor are they won without battle strategy.

The demonetisation experiment has betrayed the state machinery’s undiminished capacity for corruption and its staggering deficiency of compassion, understanding of the social and economic complexities, and duty and respect for the dignity of ordinary and entirely innocent people.

While ordinary people braved the cash crunch and queued up at banks and ATMs for hours, in some cases for days, the raiding authorities discovered crores in the rationed new ₹2,000 notes across the country. Far from killing the black economy, as the suspension of at least four RBI employees and arrests of various bank officials show, the demonetisation has spawned new black markets — in banknotes.

The Prime Minister’s personal popularity cannot compensate for these failures of policy design, plan and implementation. The war against corruption and black money is already seen to have been lost. Essential for nation-building is an overhaul of the system; there can be no shortcuts.

In the days following Mr. Modi’s December 31 speech, hopes for a new wave of liberalisation have receded. The upcoming Union Budget on February 1 is expected to shun painful reforms and renew populism. The experience of the demonetisation was Mr. Modi’s first exposure to the system. Like many of his predecessors, Mr. Modi has converted to welfarism.

Puja Mehra is a Delhi-based journalist.

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