The Epic of Demonetization: Part 1

Cartoon Courtesy: Satish Acharya via CartoonSatish
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The post is written by Sidhu Roy

If the volume of literature, opinions, interpretations, and news articles on Demonetization were to be consolidated it would probably put the epics of Mahabharata, and Iliad to shame.

What it means is that it continues to be the most important government initiative since Manmohan Singh signed the Nuclear Deal. One that has deepened the line of divide between the bhakt and the infidel.

Cartoon Courtesy: Satish Acharya via Cartoonist Satish Acharya Blog

Here is my take and contribution to the Demonetization saga.

Let us look at each of the reasons that we have heard as to why the government went ahead with this. Examine them, by their essence and logic. The effectiveness of this initiative should be measured with the objective in mind. Depending on the veracity of the reasons, we can then evaluate good / bad / ugly.

1. We heard that it was done to break the backbone of terror funding

2. We heard that there were printing presses of fake notes ready to inject India with a million notes to cripple its economy

So far, these two reasons have received the lowest airtime and print space. The PM did mention this in his speech though. But this has been given short shrift since it does not fit the narrative of the media which upholds (rightfully so) the inconvenience that has hit the common man.

While the impact to the common man is something that disturbs us every second, specifically when we bargain with a vegetable seller over INR 5/-, the views could have been a trifle more balanced. If this was the sole objective of this initiative, it by itself would have been worthy of 30 days of pain.

3. We heard that Demonetization was to fight the scourge of black money

In my opinion, this was the political argument to make the initiative palatable. And the PM played a smart, shrewd, political move by staking his equity in this. He seems to be winning this. Though as Swaminathan Aiyer puts it beautifully (here), this will be tested in Phase 2 which would be from January to June.

If the economy does not slow down (Noted economist Dr. Manmohan Singh, has said the GDP will shrink implying negative growth. We must consider that statement to be made more on passion than on his erudition). Black money generation will not stop. Because we will not stop it.

The Government is not a living entity. We are. We, the people, will ensure this does not stop. It does not suit us. Washing our hands off our responsibility in the garb of any reason, does not condone our actions. In summary, this was a political white lie.

Demonetization: False Claims by RBI

4. We heard that it was to push India into a digital less-cash economy (Cashless as a term would have been just fine, except that when we start to nitpick as lawyers on semantics we miss the woods for the plants!)

If the PM had put this as the stated objective, he would have been politically finished. Noble intentions will not win you elections. Will not get you public support. Even if for the good in the long run. A cashless economy is definitely desirable. Cashless does not mean 100-0. It means a bias against cash. It would have tremendous cascading impact on the economy / tax collection / welfare measures.

This was a corollary benefit – an automatic effect of demonetization. For this to sustain, the entire money should not be remonetized in the system at least for the next 6-8 months. It will take that time for people’s behavior to change.

5. We heard that it was to shore up finances for the banks reeling under monumental debt so that they can keep lending to Indian Friends of the BJP

This is classical conspiracy theory. It remains to be seen if this happens. If it does, we should not hesitate to take the pants down of the government / banks. However, if this was why it was done, the friendship must have been really really strong for the PM to even antagonize his core vote bank (the small & medium businesses). Probably would have given Jay & Veeru a run for their money on friendship!

6. We heard that it was also to give out a bonanza to all Jan Dhan account holders when the 2.5 lakh crores would not come back.

Giving out dole is not something that even PM’s biggest detractors accuse him of. However, this was his election promise. So, if he thought of this to fulfil that promise, well, there is nothing more to say. It would be myopic from an economic perspective but would assure him another term at office.

The CM of Bengal did take the social spending to an altogether different level, even at the cost of burgeoning debt, to fulfill her electoral promise. So, this has precedence in politics.

Demonetization: Who is More Patriotic – Mamata Banerjee or Narendra Modi?

7. We heard that it is to cut illegal funds which would be heaped upon hapless people of Uttar Pradesh so that BJP wins

If only funds decided India’s political destiny before elections. In the event of a hung assembly, the illegal money could be a decider. Again, the CM of Bengal, has shown that to win in an election, money is not a criteria (when she won her first term).

8. We heard that it’s the American conspiracy to spread imperialism

We did not hear this but I am sure some Marxist in India would find a reason to say this as well!

My take is that, there were a multitude of reasons to do this. It is very likely that the first two reasons were the principal drivers. It fit into the PM’s own agenda for a cleaner system (Gujarat is evidence) and matched his persona for a bold, decisive leadership. Plus, the idea of pulling the Digital India narrative into this would have been tempting as well.

The point of economic consideration – did that strike the PM? It must have. And on that, either ways it would  be a winner. If the entire amount came in, it would mean that the parallel economy would continue anyways with the benefit of tackling Point 1 & 2. If a large part did not come in, it would address Point 6. Which in effect, would boost rural consumer spending. Which means, the direct effect of the ‘black economy’ could be politically managed.

In any eventuality, Point 4 is taken care of.

Part 2 of this article will analyze the implementation – a favorite TV topic.

The post is written by Sidhu Roy

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