Why the note ban? A lot left to explain

The centrepiece of the Narendra Modi government’s two-and-a-half-year tenure in office seems to hinge on the Prime Minister’s decision to make the Rs 500 and Rs 1,000 notes cease to be legal tender, and the ricocheting effects are still roiling in the air, impacting the daily lives of millions as well as fortunes of the BJP in the forthcoming Assembly elections, especially in that prized state of all, Uttar Pradesh. But behind the sound and fury of politics, there is a veritable sandstorm clouding the issues which are recondite at best.

Even economists on both sides of the demonetisation question, the albatross that is hanging on to the Indian economy and which shows no signs of dropping off and therefore no redeeming features of any kind, have failed to offer reasonable opinions. They include Amartya Sen, who has criticised the move, and Jagdish Bhagwati, who has endorsed it, and Mr Bhagwati had gone to the extent of even praising it, but only on political grounds. There is no economic reasoning in it.

Harvard economist Kenneth Rogoff, the architect of the idea of demonetisation to chase black money in his January 2016 book, The Curse of Cash, which was on New York Times’ bestsellers list, backed off in the face of Prime Minister Narendra Modi’s big gambit, saying that it should have been done much more gradually. Rogoff’s idea itself is a weak-kneed response to the challenge of black money, and it seems even he could not, or refused to, explain how the Modi government’s November 8 decision will play itself out in terms of immediate breakdown and disruption.

It should be indeed a matter of curiosity whether the nationalist BJP would like to acknowledge the fact that it stole the idea of demonetisation, and its implied goal of a cashless economy, from a foreign source. There is the intellectually unqualified Pune-based think tank of chartered accountants and literally home-grown economists, ArthKranti Pratishthan, which is claiming that it suggested to the Prime Minister the idea of demonetisation. Of course, in their wonky plan, abolition of income-tax is the next step followed by the introduction of a bank transaction act as the use of money as such is completely digitised. The Prime Minister never displayed undue immodesty and it is likely that Arth-Kranti’s claim of intellectual property rights over the demonetisation decision would be brushed aside with the contempt that mavericks usually receive.

Politicians from all sides, of course, made no sense because all of them had no clue about the real issues underlying demonetisation. It is to be suspected that even the Prime Minister and finance minister Arun Jaitley were quite ignorant of the logic of the decision. Mr Modi was desperate to make a big bang gesture and he found one in demonetisation. Surprisingly, or unsurprisingly, former Prime Minister Manmohan Singh, who is an economist, refused to dwell on the economic rationale and stuck to popular rhetoric, though quite restrained and dignified as it is always in his case. Former finance minister P. Chidambaram meticulously pointed out the lacunae in the implementation of the policy. But both Dr Singh and Mr Chidambaram left untouched the core issue whether the idea of demonetisation holds water in its stated intention of rooting out black money. They did not want to be saying that the black money issue is not worth breaking the back of the economy at large because they feared that they would be dubbed as supporters of black money by the hyperventilating Prime Minister and his ministerial minions.

The only quarter from where an answer about the impact of demonetisation was the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), which is now entrusted with the task of setting bank interest rates, in its December 7 monetary policy statement, spelled out the effects of the measure, which implied that the growth rate for 2016-17 will slide from the estimated 7.6 per cent to 7.1 per cent, using the new measure of Gross Value Added (GVA). It noted the short-term impact in “cash-intensive sectors such as retail trade, hotels and restaurants and transportation, and in the unorganised urban sector”. It described the other effect of demonetisation as “aggregate demand compression associated with adverse wealth affects”. It expressed the view that both these effects will ease, and its projection of 7.1 per cent is seen as a recovery from the drastic impact of demonetisation. This is the nearest that we get to about an informed assessment of the situation that unfolded from November 9 onwards.

The government should have stuck to the Prime Minister’s initial reasoning that the move was intended to disrupt and disable black money, counterfeit currency and terror finance. Somewhere the politicians in power seemed to have developed cold feet over “anti-black money” rhetoric, and they looked around for a more convincing argument. So Mr Modi and Mr Jaitley strung out a new song about a cashless economy. Then came the modified version of “less cash economy”. Mr Jaitley seemed to have felt embarrassed to talk about the freaky idea of cashless economy because it was indeed hippie talk with its anarchistic overtones. So in his address to the parliamentary consultative committee on December 15, he did confess that there cannot be a completely cashless economy.

It would be futile to argue why the Modi government shifted the goalposts from black money to cashless/less cash economy. What is evident is that the government is trying to think on its feet, and changing the story as it goes along. The BJP and the government can argue, and they would be justified in doing so, that rooting out black money and ushering in digital money transactions are not exclusive.

The question that remains to be answered is the manner of decision-making in the Modi government. It seems that the Prime Minister takes the decision and the rest of the government will have to provide him the justification. There has been much speculation about how many people in the government knew about Mr Modi’s announcement on demonetisation. It seems to range from one, that is the Prime Minister, to a few, that is officials in the Prime Minister’s Office.

There is an element of recklessness in the mode of Mr Modi’s decision-making process, and this is revealed in the fact that in the name of confidentiality, there is no internal assessment or debate about major issues. It has the trappings of one-man rule, though one that is democratically elected. Of course, the polite label is that this is a presidential form of governance.