Demonetisation: Shock And Awe

The 8 november demonetisation move of the Narendra Modi government has had a cataclysmic effect in the country.

Prime Minister Narendra Modi’s move had a three-fold objective — to hit at the black money (and parallel economy), to check the flow of counterfeit currency across the country (by implication to check terror activities in Jammu and Kashmir and Naxal-infested states), and to progressively move towards a cashless society.

The idea was initially mooted by a Pune based socio-economic NGO ArthKranti’s Anil Bokil. Swami Ramdev and IIM-B’s R. Vaidynathan were also among the early movers of the idea. Among politicians, Andhra Pradesh chief minister N. Chandrababu Naidu was the first to suggest to the PM to ban the Rs 500 and Rs 1,000 currency notes.

The Opposition in the country, however, is not impressed. Its position was most eloquently expressed by the former Prime Minister Manmohan Singh in the Rajya Sabha last week when he said the move would result in the GDP taking a hit by almost 2 per cent.

The Opposition has also questioned the larger objectives behind the move, by arguing that 90 per cent of India is in the informal economy, and that 55 per cent of our workers are engaged in the agricultural sector. These are the sections that have been hit the hardest by the currency ban.

Critics have also argued that India, with one of the highest cash to GDP ratios in the world, depends primarily on cash transactions, and the move “makes little sense”. They also argue that just 6 per cent of black money is actually held in cash, and the bulk lies in form of gold, assets and overseas assets.

Also, the counterfeit currency argument doesn’t cut much ice, argue the critics, as they cite a 2015 Indian Statistical Institute study that said there was just Rs 400 crore of fake currency in the system (which, as The Economic and Political Weekly (EPW) has noted, is just 0.027 per cent of Rs 14.73 lakh crore worth of currency demonetised).

Bandhs have been called, stirs have been planned, and Opposition leaders have found the time to join ATM queues, to express solidarity with the aggrieved masses.

The Opposition’s sense of outrage, however, may be highly misplaced. A BW Businessworld-Huff Post-C Voter survey last week found that an overwhelming number of Indians — as much as 87 per cent of the population — actually support PM Modi’s move.

If the Opposition thinks that it will be able to make it an election plank in the states going to polls in 2017, it might be in for some shock — 83.6 per cent of the rural population in the country thinks the recent demonetisation has hurt those with black money.

Also, 86 per cent of the rural population surveyed says there is no problem in facing inconveniences in the effort to fight black economy. As much as 54.8 per cent of the rural populace thinks the support for Prime Minister Modi would go down if he were to buckle under the pressure of the likes of Mamata Banerjee and Arvind Kejriwal and roll back the move.

Among the youngsters, support for Modi soars. The move is supported by as many as 90 per cent of the below-25 population (for details, please visit www.businessworld.in).

True, challenges abound. The greatest of them is to remonetize the economy. Experts say that the timeline required to replace the existing stock of currency notes could well run into May 2017.

Forecasts from sectors such as agriculture and retail give little reason to cheer about.

Moreover, Modi appears to have antagonised the BJP’s core support base of small traders.

Government managers, however, are confident that there is no looking back on the momentous decision. What’s more, attempts are already being made to make it a major election issue in Uttar Pradesh. His supporters even argue that Modi’s announcement was in the league with ex-PM Jawaharlal Nehru’s appeal to the people to donate jewellery to fund the Sino-India war, and another ex-PM Lal Bahadur Shastri’s appeal to the people to forego one meal everyday.
But is the demonetisation move good for the economy in the long run, even if it hurts in the short term?

The jury is still out on this.

BW Businessworld recently organised a roundtable with four well-known economists (in the following pages) to shed some light on the situation. The result was a split opinion on the long-term prognosis.

While Modi’s 8 November move may be debatable, what is not open to debate is that there needs to be a concerted effort towards more reforms to keep the parallel economy in check.

Modi has already set the ball rolling by talking about state funding of elections and simultaneous holding of Lok Sabha and assembly elections. Electoral reforms are the key as political corruption is the root cause of black economy in the country.

But this won’t stop babus and politicians from asking for bribes. This won’t make lawyers, doctors, and businessmen honestly pay their taxes. How about taxation reforms and measures like doing away with the stamp duty (in BJP-ruled states, to begin with)?

All this calls for a new “Swachhta Mission”. Modi may like to take the mission to its logical culmination after having started well.

suman@businessworld.in; @skjsumankjha