With almost four-fifths of the 50-day period to deposit scrapped Rs 500 and Rs 1,000 notes gone and with the grievousness of the demonetisation injury apparent, the Panchatantra tale of the devoted monkey who cut off his royal master’s nose to get rid of a pesky fly that threatened his slumber comes to mind. Even more to the point is the common warning against a needlessly self-destructive over-reaction to a problem: Don’t cut off your nose to spite your face. It is a warning against acting out of pique, against pursuing revenge in a way that would damage oneself more than the object of one’s anger.
In the Bhagawad Gita (Chapter 2, Verse 63), Krishna tells Arjuna, “From anger arises infatuation; from infatuation, confusion of memory; from confusion of memory, loss of reason; and from loss of reason, one goes to complete ruin.”
History is replete with instances when acting out of pique inflicted huge costs on a nation, such as the Embargo Act of 1807 passed by the United States Congress in protest against British and French interference in US shipping. The Act had the side-effect of prohibiting nearly all American exports and most imports, greatly disrupting the US economy.
Closer home, the great 17th century Ladakh king Sengge Namgyal imposed a punitive tax on the pashm wool trade between Tibet and Kashmir, which largely went by the shortest route through Ladakh, in response to a slight by the ruler of Kashmir. The pashm then began flowing to Ludhiana and helped it become the great centre for the manufacture of woollens that it still is. Ladakh never recovered from the loss of revenue. Even if not educated in the conventional sense, seeking many options from a deep examination of the issue by the knowledgeable is a quality essential for successful leadership.
By all accounts, the decision to demonetise was by a small eclectic cabal, and when a larger-than-life figure – which Prime Minister Narendra Modi now is – is part of it, it results in a psychological malaise that the psychologist Irving Janis called groupthink. In 1961, the newly elected US president, the brilliantly educated John F Kennedy, agreed to the invasion of Cuba, and what came to be known as the Bay of Pigs Crisis set off events that almost caused a nuclear Armageddon the following year. Irving Janis was a part of the presidential commission that studied the faulty decision-making that caused so many obvious pitfalls to be ignored.
JFK’s national security was made up of the best and brightest people. Brightest of them was Richard Bissell, the Central Intelligence Agency’s deputy director in charge of operations. Bissell was a man with a brilliant track record of toppling regimes, from Iran to Guatemala, and of building the highflying U-2 spy plane. When the Yale-educated economist commended his plan to the group, each and every one in that team of the best and brightest, including Kennedy, assumed that Bissell would have applied his prodigious intellect and experience and, hence, the plan was foolproof. It was not.
But the greater lesson here was that Kennedy realised he was taken in and was the one responsible. He went public and acknowledged responsibility. He even exclaimed in public, “How could I have been so stupid?” He appointed the presidential commission and imbibed its recommendations. When the Cuban Missile Crisis happened in 1962, Kennedy was ready. He asked for options and got them all.
There is not even the slightest sign that Narendra Modi has realised the massive screw-up his demonetisation policy has turned out to be. When you abruptly withdraw high-denomination currency notes that make up 86% of the cash in circulation, or Rs 14.2 lakh crores, one would expect proper arrangements to have been made to replace them. Clearly, the government was unprepared. It had very few Rs 2,000 notes rolling out of its security presses, and no additional small-value notes to pick up the slack somewhat. The resultant cashlessness has cost the national economy hugely and devastated tens of millions of livelihoods.
The average daily wage in India is Rs 272, which means it is essential for a typical family to have a good part of that to escape starvation every day. Of the vast reservoir of over 415 million employed in the unorganised sector, about half are engaged in the farm industry, and another 10% each in construction, small-scale manufacture and retail. These are almost all daily-wage earners. Just visualise the cold hearths in these homes and children going to bed hungry. There are harrowing stories from all over the country, and the prime minister’s propagation of electronic payments and mobile banking has the air of asking starving people to eat cake instead.
The loss due to this unprecedented drop in production and income to the economy this year is expected to be around 2% of gross domestic product – that is almost Rs 2 lakh crores. The cost of printing replacement notes is expected to be between Rs 40,000 crores and Rs 50,000 crores.
The prime minister made out that demonetisation would mean the extinguishing of black money and all that did not come back to the banks would be its bonus. Neither theory is being borne out. The apprehension of hundreds of crores in new pink Rs 2,000 notes from all across the country, by the police as well as income tax authorities, is proof enough of that. It just proves that new money turns just as easily into black money as the old money, and nothing has changed.
But there is a larger reality. Of the Rs 14.2 lakh crores in high-denomination notes, Rs 13.2 lakh crores has come back into the system. There are 10 days still to go and it looks like Modi’s bonus will not be much. On Monday, the government announced that banks won’t be accepting more than Rs 5,000 per person in the old notes for the rest of this season of Modiness.
The incidence of counterfeits, too, was hugely exaggerated with the Reserve Bank of India stating that only 0.0006% of the money banks handle are counterfeit, with a value of Rs 29.6 crores out of the total Rs 16.4 lakh crores in circulation.
One hopes that Modi will finally realise that only 4% of the black money is kept as cash. The rest is abroad or in property or bullion. Last year, his government allowed the import of about 1,000 tons of gold, and the research body Global Financial Integrity estimated the illicit export of $83 billion in 2014. Clearly, the regime was barking at the smallest of the trees.
In recent days, the prime minister has changed his avatar from corruption fighter to pitchman for electronic payments. One cabinet minister told me that he constantly asks all his ministers if they have PayTM in their mobiles.
But there are costs to this also. The average life of a Rs 100 note is estimated to be about a year, involving between 500 and 1,000 exchanges. Every credit card or debit card or even PayTM transaction entails charges of about 2%. The merchant typically passes this on to the customer. So the charges entailed during the average lifespan of a Rs 100 note would be between Rs 1,000 and Rs 2,000. The mobile telephony charge would be about 20 paise per minute. So, think of it as an average of Rs 100-Rs 200 per Rs 100 lifespan. And a replacement note with transportation and distribution costs will not be more than Rs 5. How does this economics look to you?
But the prime minister does not seem to see it. The irony of this in a country where the average daily wage is Rs 272 and where not more than 30% have smartphones cannot be missed. But then, Modi doesn’t have uses for history, understanding of economic costs, and awareness of the consequences of policy. He is a go-getter. But going where?
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