Is big money freeze the new normal?

Chennai: As dramatic scenes unfolded in India’s development theatre since early 1990s’ with the big bang reforms boldly initiated by former Finance Minister Dr Manmohan Singh, it amazingly propelled the country’s growth story into a new faster orbit.

There were tears to be shed even then and pains to be borne. It forced Dr Manmohan Singh to even later warn, when he became Prime Minister, that he did not endorse ‘casino capitalism’ while unleashing the people’s entrepreneurial / animal spirits to help pull millions of Indians out of poverty, what the 2015 Nobel Economis winner Angus Deaton would term the ‘great escape’ from a vicious cycle of self-deprivation.

This model presupposed an emerging inter-dependence of nations in an age of globalisation, despite its larger hot ideological contestations with several economists terming it as the ‘ultimate phase of capitalism and global finance capital’.

The high velocity of funds movement brought markets into a sharper, yet disproportionate focus on the world stage. But thanks to India’s mixed economy and a relatively well stabilised, mature banking system, we could survive the global financial meltdown of 2008.

The underlying broad consensus, irrespective of the parties in power, in a way took forward ‘Manmohanomics’, not always a term of endearment to the wise Sardar, through successive Finance Ministers, particularly Mr. P. Chidambaram, who nonchalantly attacked man’s innate tax-avoidance propensity by reducing income-tax rates to a historic low under the then UPA regime. All these now appears to have gone for a six with the latest demonetisation of '500 and '1,000 notes from November 8 midnight.

As economic experts like Parthasarathy Shome have pointed out, the total extent of black money, after knowing what has come into the banks and what has not come into the banks, that will be liquidated or extinguished from the system would have to await an estimate by the Reserve Bank of India (RBI) on March 31, 2017 in its book of accounts.

But the Narendra Modi-led BJP government’s shock therapy through the demonetisation decision has manifested as mass pain of sudden, staggering contraction of the cash flows.

For even as per official word, over 86 per cent of the total of '16.24 lakh crore worth notes in circulation as on March 31, 2016, were rendered invalid in one midnight stroke.

Nonetheless, the stout defenders of demonetisation including political analyst and convener of ‘Swadeshi Jagran Manch’ Dr S Gurumurthy, admit there is short-term inconvenience to large masses of ordinary people, but emphasise how demonetisation has come as a much-needed big blow to both terror financing via counterfeit notes, and domestic financing of Left-wing extremism, both crucial for India’s national security.

This approach unwittingly puts a break on any debate on the larger politico-economic issues. It is nobody’s case that national security can be put in the back burner in the interests of the wider and deeper liquidity in the economic system. But psychologism in the social sciences, in whatever form it comes, be it religion or patriotism or plain disdain of modernity as undermining traditional cultures, freezes reflective thought too in trying to understanding very complex life and death issues.

It is here that the contributions of one of the most outstanding thinkers in Development Economics in the 20th century, the late Prof. I.M.D. (Ian) Little, may help to throw light. Significantly, at Oxford in the 1960s’, he was a teacher to Manmohan Singh, who later turned out to be “his (Prof. Little’s) most distinguished student”.

Basically for Prof. Little, the line between ‘positive economics’ (as lucidly elucidated in his late brilliant work, ‘Ethics, Economics & Politics- Principles of Public Policy, Oxford 2002), which is “concerned to measure economic facts and relationships and to produce causal explanations of economic events and trends, and ‘normative economics’, which is concerned with “whether one economic state of affairs is better or worse than another”, is a thin one. Thus public policy often has a strong normative content.

But it is neither entirely fanciful nor the proverbial case of ‘robbing Peter to pay Paul’. To draw from the insights of Prof. Little, ‘welfare economics’ is very closely related to ‘normative economics’.  Central to its understanding is the concept of ‘achieving a Pareto-optimum’, in taking public policy decisions for an entire state.
In simple terms, as he puts it, “a Pareto-optimum is defined as a situation where it is impossible to make one person better-off without making some other person worse-off.” But the tradeoffs in the ‘utility’ values should ensure that everyone does not get ‘worse-off’. That would make the policy instrument utterly self-defeating, like cutting the ground from under one’s feet.

In this demonetisation instance, say Peter is ‘harmed’ - those allegedly funding the black economy - but without giving those resources to the legendary Paul — the large masses of people — as 86 per cent of the liquidity in the system has been sucked out.

So, to obtain a new ‘Pareto-optimum’, wherein the new currencies distribution would get stablised, would take months. It may take three to six months, says another eminent economist, Arvind Virmani, former Chief Economic Advisor to Government of India. The rest of the pain story is told by continuing long queues before banks and ATMs’, with people hoping the manna from RBI would arrive soon.

The larger message that flows from Prof. Little’s work is: “Most of the reform movements began with a crisis, usually one of very high inflation, or large balance of payments deficit, combined with a drying up of credit so that essential imports could not be bought.” But as he adds, “stabilisation involving fiscal cutbacks, and import controls or devaluation has often occurred without any thorough-going structural reform.”

Obliquely adverting to the liberal and humanistic roots of the reform process ‘waning’ in recent years, partly due to changing political ideologies, Prof. Little, who worked in India in the late 1950s’, even lauds Dr Manmohan Singh’s role as a ‘totally honest’ reformer. But Dr Singh lacked “any personal, political base”.
In retrospect, Prof Little’s remarks seem so prophetic now, for in the rush for bold and strike actions by the political executive, the light of reason, consultation, is switched off.

In what was his last public talk in Chennai before he died in February 1986 in the U.S., the great Indian thinker Jiddu Krishnamurty rounded off in a spirit of deep resignation and a tinge of sadness: “If you have a little money, you are lucky; or what else is there in this world?” “You kill a bird, there is another bird; you cannot destroy everything.” Thirty years hence in November 2016, his words could not have been more true!