Demonetisation: No Contrition and No Cash

Published: January 2, 2017 - 18:46 Updated: August 8, 2017 - 15:28

India has lost about Rs 3L crores of GDP due to an act of incredible stupidity - demonetization. The nation has to recover from this self-inflicted injury and make up for lost time and the gigantic financial loss


In 1960 after the spectacular flame out of his invasion of Cuba, US President John F Kennedy exclaimed to his closest advisors: “How could I have been so stupid?” By saying that he assumed complete responsibility for the fiasco, however ill advised he was and however ill-served he was by his officials. It was also an exclamation of contrition.

I listened to the Prime Ministers New Year’s Eve speech in Hindi keenly trying to catch a sentence of contrition or assumption of responsibility. There was none. But there was a change of tone. There were also none of his characteristic sneering, distortions of historical record and half-truths. It was as if he has got a new speechwriter as well as a new speech coach. I have no complaints with that and I hope this style will stay and the Modi we have been seeing for the past half a decade is gone forever.  India now needs a healing touch.

I have no issues with the programs he has outlined. It is necessary that after inflicting such a grievous hurt to the economy that he apply not just a palliative balm but effective medicine. But he must ask himself if all this pain was needed at all? All the government had to do to get the money back into the banks was to organize a simple and unobtrusive currency exchange. However, I hope the makeover is real and he is more open to consultation and will tell less lies?

Most of us accept that politicians are often required to tell us half-truths and outright lies. But it is important that the cup doesn’t run over and the trust is not spilled. I hope Modi is not so consumed by hubris to mistake the faith of blind followers for trust of the people? With the UP state elections around the corner, 2017 will be the  year of reckoning for him. The BJP has 72 seats in the Lok Sabha from this state now, and if they lose badly here now they can say goodbye to 2019.

India has lost about Rs 3L crores of GDP due to an act of incredible stupidity - demonetization. The nation has to recover from this self-inflicted injury and make up for lost time and the gigantic financial loss. Millions of lives were disrupted by loss of jobs and business.  It will take some doing to restore the normal flow of everyday life.

The ruling party must start looking anew at the Indians largely ignored so far, particularly the Dalits and Muslims who occupy the bottom rungs of economic classification. The distribution of ATMs and POS machines between regions and within towns and cities tells it's own tale of exclusion in this digital age and when financial inclusion is a key goal. Only 19% of the 215,000 ATMs are in rural areas. There are huge inter-regional disparities also. Bihar just has one for every 13,500 persons, while Tamil Nadu has one for every 3000 persons.

The last two months have showed who actually gets hurt when government indulges in stupid policy making. The poor and silent majority stood in lines while the wealthy and vocal went about life as usual. The majority just either went hungry or got deeper into debt. To deal  with our real problems we require government to face facts and realities as they are and not be obsessed with the facts it manufactures. The real challenge for the Modi government is to recover the pre-demonetization GDP growth trajectory by getting into a faster near term growth trend.

The essential truth is what drives our growth is a passing favorable demographic phase. But our rulers since 2000, like King Canute, think they are ordering the waves. The facts remain as before. Savings and investment are still dipping. The flight of capital abroad continues unabated. More than half of all Indians admit to paying bribes to get even the smallest entitled services and promised benefits. Tax evasion at point of sale and unrecorded transactions are as before.

But the lies have begun again. Arun Jaitely, who can never keep away from the rolling cameras, has proclaimed his version of "Mission Accomplished" and has announced the beginning of a new age. According to him here is no "black money" anymore as  everything is now locked tight in bank vaults. Jaitely said that the flow of new cash has largely replaced what was extinguished by the demonetization. The truth is that the RBI has just about replaced half of the currency taken out in terms of value. The problem is that the vast majority of these new notes are of Rs.2000, which only partially mitigates the cashlessness.

These notes are of little use in the market where the quantity of the smaller notes has remained just about as before. The small notes have now acquired a value higher than what is stated on them and the Rs.2000 note has a much lower preference. What we need is many more Rs.500, 100, 50 and 10 notes. Jaitely doesn't probably know that 98% of transactions representing about 68% of value transacted are in cash. If there isn't enough cash there are other improvised IOUs or more informal credit now filling the gaps.

People who know better state that it will be many months before the cash gap is bridged. Cashless transactions can reach meaningful levels only when the network grows exponentially and not by forced cashlessness. Change cannot happen without change. It seems like chillar minds cannot contemplate the centrality of chillar?

After the great cash grab the government indicates that next on its agenda are benami properties.  The fact is that are relatively few benami properties. Individuals who have mostly bought them with their hard earned money own most properties, but in the frenzied search for true ownership real owners will suffer. Except for politicians like those who invested in “Adarsh”, wise people with money to hide are loath to invest in properties in the names of others. Such properties seldom go back to the people who paid for them. Owning assets abroad also involves trust. Politicians usually lose much of their untaxed incomes to people entrusted to manage their money.

Who is flying with Pramod Mahajan's money now? GFI estimates an average of $46 billion annually every year for the past decade. The important takeaway here is that money gone abroad is money gone away and the only way you get it to return is by investment. This can be best done by speedily improving the ease of doing business in India. But this morning’s news is that the government is contemplating shutting down the Mauritius and Singapore routes. In this case the money will just go elsewhere.

Having had a bariatric surgery Jaitely probably believes the national economy can also be forcibly habituated to less cash by stitching up its gut? It doesn’t work that way. There is more to governance than just cash, lies and sound bytes.