By appointing Shaktikanta Das as governor of the Reserve Bank of India, the Bharatiya Janata Party-led National Democratic Alliance is exposing India’s economy to significant risk.
Das, a former Union economic affairs secretary and current member of the 15th Finance Commission, became a familiar face to many Indians during the tumultuous weeks that followed demonetisation in November 2016. In this period, he held two kinds of press briefings.
At the first kind, he defended the government’s decision to ban Rs 500 and Rs 1,000 notes saying, among other things, that the policy would cripple the black economy, remove counterfeit notes, spur digital payments and bring domestic savings lying idle at home into banks, making it possible for institutions to make loans at lower rates.
At the second kind, he announced several of the government’s panicked measures aimed at containing the situation as the decision to ban notes spun out of control. As queues lengthened at banks because of the severe shortage of cash, it was Das who announced the government’s decision to reduce the daily withdrawal limit from Rs 4,500 to Rs 2,000. It was also Das who announced, as new currency entered the economy slowly, the government’s decision that people could exchange their Rs 500 and Rs 1,000 notes at bank counters only once till December 30, 2016.
It was he who defended the government’s decision to mark citizens swapping their notes with indelible ink. That was because, he said, the same people were standing in queues over and over again to exchange notes. However, this decision was announced, without alerting the country’s solitary producer of indelible inks.
On the fly
It was a time when the government seemed to be learning about the effects of the note ban only as they became evident. So, when press reports wrote about the difficulties of farmers left cashless just before the rabi season, it was Das who announced the government’s decision to let farmers withdraw up Rs 25,000 against sanctioned crop loans. At the same press conference, following other press reports, he said that families preparing for a wedding could withdraw Rs 2.5 lakh as a one-time exception – after, however, proving to the bank manager’s satisfaction that a wedding was indeed on the cards.
Through it all, as government clarifications and tweaks came in fast, Das defended them all. Three months later, in February 2017, he underplayed the impacts of demonetisation saying sectors like agriculture had not been affected by it. He told Hindu Businessline: “The impact, if any, of demonetisation will not spill over to next year,” he emphasised. “It would have impacted in the last two to three months but now we are almost back to normal.”
As we know now, none of the claims Das advanced to support demonetisation materialised. India’s black economy stores illicit gains in gold, land, benami shares and offshore accounts. Demonetisation did not touch any of those. The proportion of counterfeit notes in the economy, again, was not large enough to warrant such a sledgehammer-like approach. Digital payments have slowly fallen back to pre-demonetisation levels. As for domestic savings entering the banking sector, in the months and years that followed demonetisation, families have pulled out the cash they deposited to rebuild their cash reserves at home. The only difference was: with lower trust in the banking sector than before, people began stockpiling more cash than earlier.
Impact on agriculture
That is not all. Agriculture was indeed hurt by demonetisation. Also, the ban’s impacts are evident to this day. The earnings of businessmen and self-employed people in India’s informal economy are yet to return to pre-demonetisation levels. That is one reason why, in the assembly polls of Madhya Pradesh, Chhattisgarh and Rajasthan, voters have punished the Bharatiya Janata Party. Financially, they are all worse off than they were before demonetisation.
Demonetisation is the reason Shaktikanta Das should not become governor of the Reserve Bank of India. It tells us two unnerving things about him. He either doesn’t understand how India’s economy works – or, he does understand that, but is willing to do what the government tells him.
Neither trait bodes well for the country’s economy.