Demonetisation being the only game in town, though one analysed threadbare, these are my observations a week into the process.
The Good
- Prime Minister Narendra Modi proved he is nobody’s puppet. The move came as a shock to his core constituency, causing substantial losses to traders across the nation. It was a bold and brave step from a political perspective.
- Demonetisation is leading to a massive transfer of wealth from the affluent to the less well off. The most efficient way to launder money is to place old 500 and 1,000 rupee notes in the account of low-income earners and withdraw new currency once it becomes freely available, leaving an agreed percentage behind. Arun Jaitley has promised there will be no enquiries made for cash deposits lower than 2.5 lakh, providing a convenient threshold for individual deals.
- Millions of people will use banking or electronic payments for the first time as a result of demonetisation, creating long-term benefits for themselves and the economy at large.
- The government might be in for a windfall if a substantial amount of cancelled money fails to make it back to the central bank. Some experts suggest the Reserve Bank of India could transfer an equivalent amount of money to the government as dividend.
- Those hoarding undeclared cash face some form of punishment for the first time.
The Bad
- Demonetisation will not in itself end the reign of black money, or even dent it substantially. As N Chandra Mohan, Prabhat Patnaik and Pronab Sen have pointed out, demonetisation affects the stock but not the flow of black money. Once liquidity is restored, the corruption engine will run on full throttle again, creating massive new quantities of undeclared wealth.
- Even where the stock of untaxed cash is concerned, most of it is likely to be successfully converted before the deadline. Politicians, in particular, tend to control banks or have close associates who control banks, which provides them an exit route. If the main targets of a strike slip away only mildly injured, while millions of others suffer bruises or serious wounds, the wisdom of the assault must be questioned.
- The economy could suffer a substantial downswing unless the flow of money is restored quickly, as Ajay Shah has pointed out. Approaching the problem from the opposite end, Gautam Bhan draws our attention to individuals and small firms left vulnerable by this manmade crisis.
- The anti-terror facet of the notification was, in terms of logic rather than emotive appeal, the weakest link in the demonetisation argument. It was weakened further once we were told that the new Rs 2,000 notes would be as easy to counterfeit as the old Rs 1,000 ones. But Manohar Parrikar is pushing the terror angle hard, even claiming the fall in violent protests in Kashmir is a result of turning the tap off on terror funding. If that’s the case, I hope he will admit the failure of the move should hostilities resume.
- It always amazes me how elected leaders can take major decisions without considering the fallout. George Bush had no plan for Iraq after the fall of Saddam, David Cameron had no Brexit plan in place when he announced a referendum, and Modi had no clue about the ramifications of demonetisation. Surprise was necessary for the operation to have any chance of success, but focussing on the surprise rendered the administration unprepared for the enormous challenge.
The Ugly
- Raising the limit on ATM withdrawals from 2,000 to 2,500 and cash exchange from 4,000 to 4,500 is like rearranging deck chairs on the Titanic.
- The BJP is slowly but surely losing control of the media narrative. The party under Modi has been masterful in managing both mainstream media and social media, but it’s tough to keep control of a story while making a hundred million people stand in queues repeatedly to gain access to their own hard-earned money.
- Modi’s self-regard has grown boundless. He refers to himself constantly in the third person and never bothers to share credit with his team. He took it a notch higher in Goa last week when he was moved to tears by what he considered his sacrifices in the national interest.
- The BJP wheeled the Prime Minister’s mother out for a photo-op on Tuesday. A fawning reporter wrote, “Prime Minister Narendra Modi’s 97-year-old mother Hiraba today visited a bank at her village in Gandhinagar, just like other citizens, and exchanged her old notes”. But other citizens aren’t being escorted by relatives and officials to a bank branch where all business comes to a halt as the manager ceremoniously hands cash over to the customer. The episode gives the BJP’s troll army an opportunity to shout down dissent with, “If Modiji’s aged mother can do it, why can’t you suffer a little for the greater good of the nation”.
- Things are on the edge now. They might get worse once people realise their pain didn’t help the nation a whit.
As HL Mencken wrote, every human problem has a solution that is neat, plausible, and wrong.