None exemplifies the perils of unilateral and autocratic decision making like demonetization does. It is the greatest disservice ever done to the country through official policy.
On the 8th of November 2016, Prime Minister Narendra Modi surprised the nation with an unsuspecting announcement. He declared the withdrawal of legal tender to all high denomination Indian currency notes (Rs.500 & Rs.1000) in circulation from the next dawn. He added that all the high-denomination notes can be surrendered to the banks within 50 days. As the high denomination notes accounted for over 87% of the total value in circulation, the move was by design expected to give a considerable shock to the economy's monetary flow. Acknowledging the sheer massiveness of the action, the PM stated that such a step was needed to fix the rot that had gotten deeply entrenched in our economy. He stressed that the action is to weed out counterfeit notes, black money, corruption and terror financing. This action was called 'Demonetization' although the meaning of the word in technical terms is slightly different.
At first instance, the intent was perceived to be very noble and a massive outpour of support for the PM was visible on social media within seconds. Twitter was abuzz with celebrity tweets in praise of the move and the bloated intelligence of the Indian middle class also went into a tailspin with insane theories on how amazing the action was. As being seen to oppose such a popular move would be risky, even the first reactions from the spokespersons of opposition parties were congratulatory in tone for the PM's move. It was only after the former finance minster P.Chidambaram came out with a scratching interview on the next day that strongly rebuked demonetization as utter stupidity, that the opposition ranks started to openly speak against it. Further, the pathetic scenes that started to play out across the country due to this artificially generated monetary crunch was also a wakeup call. Considering the catastrophic damage that demonetization had done to the country, it is important that we remember it and understand the irrationality of the move in a holistic manner.
Stupidity of Intent:
Weeding out Fake Currency: Irrespective of the numerous security features, every currency of repute gets counterfeited to some extent. Once in a while, central banks world-over usually suck out old notes and recirculate new notes with new security features to prevent the proliferation of counterfeit notes. In India, for facilitating such actions, RBI instructs commercial banks to pull out a particular type of note from circulation. Banks ensure that all the targeted notes are handed over to the RBI within the stipulated time. But such actions are usually done over long drawn time-lines and are done in a manner that doesn't disturb the money circulation. This has been the established process and it has been successfully ensuring that the proportion of counterfeited Indian Rupee stays small (less than 1% of the total money in circulation). That being the case, counterfeiting as a reason for instantly demonetizing the economy is plainly irrational.
Unearthing Black Money: Any money that changes hands in an economic transaction without being taxed is called black money. To comprehend this better, let's see the following example: "Farm income is not taxed in India. So, a farmer's earning is completely white. Let's say, the farmer takes his money and goes to a doctor for consultation. If the doctor charges a fee for the same, but doesn't declare it on his income, then the farmer's white money becomes the doctor's black money. Subsequently, if the doctor goes to watch a cinema in a big multiplex with his black money, then the doctor's black money becomes the multiplex's accounted white money." Hence, black or white is a flow variable and not a designation per se. As people holding a significant amount of black money are by default likely to be influential, it would be child's play for them to get it back into circulation, which was exactly what played out in the immediate aftermath of the November 8th announcement. Therefore, it negates logic if someone happens to think that crores of black money will be unearthed by a move like demonetization. Furthermore, unlike how it is depicted in movies of the 1990s, nobody stores unaccounted currency (a.k.a black money) in big troves. Rather, people do handle black only for transactional purposes (to avoid taxation) and get rid of the same once the deal is done. Thus, among the humongous pool of unaccounted/untaxed wealth, the currency component is granular in size.
Preventing Corruption: When a formally decipherable economy was birthed in human societies, corruption was an undesirable twin that was born with it as a consequence of human greed. So, to opine that pulling out high denomination notes instantly out of circulation would clean up that malice is hilarious and doesn't even merit a discussion. If anything, demonetization itself generated its own corruption dynamics with numerous money brokers and bank managers colluding to make the most of the opportunity that opened up. In any case, the PM never elaborated on how demonetization would eliminate corruption.
Terror Financing: For a leader like Modi, maintaining the perceived hard-liner image in his approach towards internal security and counter-terrorism operations is important. Hence, it was only natural to invoke terror financing in a move as big as demonetization. The terror stats before and after demonetization are there for all of us to see. In fact, it was the post-demonetization years of 2017 & 2018 that saw the highest militancy in Jammu & Kashmir. Naxalism in the red-corridor did decline post 2016, but that was more in line with the pre-existing trend and not one caused by the note-ban. On that note, while terror is financed by illegally routing money, it will be medieval thinking if one believes that terror outfits transact in hard-cash. The world has largely moved digital and so has terror and terror financing.
In essence, it wasn't even theoretically possible for demonetization to meet the initially stated objectives. Nonetheless, like any well oiled political machinery, the BJP stepped into damage control mode by changing the goalposts as it pleased. From black money and corruption, the demonetization narrative went to promoting digitization and formalizing the economy. The suddenness and unplanned nature of the entire episode also meant that the preparedness for the after-effects was sloppy, which only added to the hardship suffered by the masses. Almost every single citizen was inconvenienced by the long queues in front of ATMs and banks, and many small business were thrown out of gear. In this context, former Prime Minister Manmohan Singh predicted that India's growth will slowdown by 2% points as a direct consequence of demonetization and that proved correct.
Big Bang Prime Minister:
While Mr. Modi as Chief Minister was very willing to face tough questions from journalists, his approach to handling the media changed completed after becoming the Prime Minister. He has largely restricted himself to social media and his monologues in radio and television. Further, he has made it a 'Public Relations Strategy' to give out Big-Bang announcements through eloquent speeches. While such announcements greatly enhance his image and visibility in public, he leaves it to his ministerial colleagues to get into the nitty-gritties, and to face the press for subsequent elaboration. Thereby, he saves the embarrassment of being directly scrutinized for these.
Mr. Modi's ability to win elections single-handedly for his party and his arrogant persona has empowered him to take major decisions independently without any meaningful consultation with anyone. In fact, subsequent statements of the then Chief Economic Advisor Aravind Subramaniam, indicates that even he were kept in the dark till the very end during demonetization. Even senior ministers like the then Commerce Minister Nirmala Sitharaman stated that the PM had kept demonetization a secret and disclosed it to the cabinet only a few hours before the actual announcement.
The perils of unilateral and autocratic decision making without any kind of intellectual scrutiny and consultation is exemplified by demonetization like none else. In my view, this is the greatest disservice ever done to the country through an official government policy. The episode had led to the death of over 200 people (physical & financial stress and mental trauma) and had put lakhs out of jobs. Not even the most brutal of terrorist attacks could've caused so much damage to our lives and to our economy. Hence, this blatant betrayal of trust deserves a remembrance for all the loss and suffering that it had put us through.
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