My thoughts on demonetization

Much like the Trump election, it was predicted that the sky would come falling down. But it has come to pass that the sun rose the next day and people went about their lives. The announcement by Prime Minister Narendra Modi to ban the 1000 and 500 rupee notes has left his political opponents frothing at their mouths, caused an exponential increase in the number of economic experts in the social media universe and has generally shaken up the system in a way not seen in the past.

Here is my attempt at making sense of the move as a non-economist and also to try and decode the reactions ranging from the frivolous to the baseless.  

First off, I write this sitting all the way across the globe having faced very minimal personal or direct impact by the decision. I didn’t have to stand in queues of any length to withdraw my money. And I have exactly one each of a thousand rupee note and a 500 rupee note - taxi fare on my next trip to India from my father – that shall now become nifty souvenirs. But of course I have been reading up on the announcement, its fall out and yes, my father has been in queues to withdraw money from the bank in India with the rest of the population.

One suspects that this announcement is rather the culmination of a sequence of planned initiatives than a knee jerk decision. The support to the aadhar card program, the jan dhan accounts and the voluntary disclosure scheme seem to support this. Yet when the announcement came, it did catch the nation by surprise. One has to admit that this government means business: there is not only intent but complementary actions to go along.

This move, bold as it may be, will not be able to bring back the black money – in other currencies – stashed away in faraway countries. Nor can it go after ill wealth stored in the form of gold, securities or real estate. And to state the obvious, this shall not rid the nation of all forms of corruption. In fact, I would go so far as to say that all the money in the mattresses may have been “converted” by some means or the other by now for say, a 20-30% commission. Indians are nothing if we aren’t crafty. Corruption will continue at the same rate/speed as before in new currency notes. And a less-cash society remains far away as a reality.

But, all things considered, I don’t think this was ever touted as a cure-all magic pill nor are we watching a Shankar movie here. When one sees it for what it is, demonetization is a first step in the right direction to go after the massive, parallel cash economy. The message is loud and clear: it will not be business as usual anymore. A system reset is perhaps not a bad idea and the prime minister has provided just that. The attempt to bring more sections of the population into the banking fold – an inevitable outcome - is an ambitious step to bring more accountability and even safety to the proceedings. E-rural banking could be the next big thing after bijli, sadak and paani. Improved tax compliance is perhaps another benefit we can expect once the dust settles. And if there is a certain measure of deterrence (conspicuously absent thus far) introduced, I would call it a small victory. There must now be at least a modicum of uncertainty in the minds of the corrupt who will have to be more cautious henceforth.

I shall readily admit that I’m not an economist and hence I won’t try to sound intelligent about the short/long term impacts of demonetization on the economy or its individual segments. Instead, I would like to put down my thoughts on the reactions to the initiative here in the blog.

Hardship to the common man. This seems to be the most popular political response with a few leaders (“The usual suspects”) espousing the cause of the common man with a new zeal rarely seen in the recent past. I didn’t get to talk to the average person on the street caught in the throes of the announcement. But catching up on snippets of media reports gives me the feeling that perhaps there is more acceptance (even if reluctant) than vehement opposition amongst the people. The netas, without fail, continue to under estimate the intelligence of the population. After all, old habits die hard.

Narendra Modi tipped off is friends. Though clichéd, any politician worth his salt will have to indulge in slander. Politics corrupts. The question is how much rather than if. And Prime Minister Narendra Modi is no exception. There have been whispers, insinuations and innuendos galore of Modi tipping off his inner circle. And I’m sure the accusers have evidence strong enough to stand in a court of law and bring an errant PM to justice. In fact, I wish someone does a Subramanian Swamy on the present government and brings to light this alleged tip-off scam. But the gut feeling is that these are mere desperate accusations aimed at gaining non-existent political mileage. Not only are any of the accusers clean themselves but neither do they have the stomach for a legal battle. In the end, a lot of hollow words thrown around.

Organized loot. When the silent one spoke, people would actually listen. But enough about the nineties. When Dr. Manmohan Singh denounced the demonetization drive in scathing words, I could only shake my head in pity. Having already fallen from grace, the noted economist has picked himself up, dusted and flung himself back down again. While he was the silent sentinel when the nation was being serial scammed by his cabinet colleagues, he has suddenly decided to become vocal. A ventriloquist’s puppet can be vocal but his words are rarely sensible and never his own. Although it is quite alright for the economist in him to be vocally critical about the move, he has offered very little constructive feedback or alternatives. It is sad that he chose to wear the ill-fitting politician’s hat instead of the economist’s. Loyalty to the Gandhi clan above everything else. And hey, in the long run we’re all dead, right?

The execution was bad. To quote Manmohan Singh, "monumental mismanagement". One has to agree that the way in which this was carried out could have been handled better. But demonetization, much like surgical strikes, can only be effective when carried out swiftly and silently. Given the nature and scale of this operation, a certain level of chaos could not have been avoided without compromising the secrecy of the plan itself. Planning ahead could have been a give away for the people in the know. Honest folks were troubled and subject to inconveniences and annoyances no doubt, but on the same token, people are aware that sometimes you cut a finger to save an arm. Besides gas, hospitals and train travel, the government could have allowed people to pay their insurance premiums, phone bills and some such other amenities to ease the situation.

The efficiency of this move to flush out the untaxed cash from the economy can be debatable and so also the execution. But merely questioning the intent, citing the flaws and taking refuge in the common man’s sufferings is predictably banal. The Prime Minister’s chair is full of thorns while the ex-Prime Minister’s is a bed of roses from which taking potshots is not terribly difficult. I have yet to see someone with the right credentials take the demonetization plan apart in a logical manner.

To borrow a popular phrase from the US presidential elections, “draining the black money swamp” is a process. And by all accounts, demonetization appears to be a good first move. At the risk of sounding too optimistic, perhaps there is more coming down the pipeline.