The ‘Demon’ in Demonetisation

The ‘Demon’ in Demonetisation Tue, 04 Dec 2018

The ‘Demon’ in Demonetisation

On 8th November, 2016, Narendra Modi, in an authoritarian move, opened Pandora’s box. In his address to Rajya Sabha on the 23rd of November, 2016, Dr. Manmohan Singh said, “it will affect all those people who are in the informal sector of the economy… the GDP of the country can decline by 2 percent”. The words of former PM, Dr. Singh, proved prophetic as can be seen from the reports that have come out since the ill-fated move. The reports that have come out since have acknowledged the ‘elephant in the room’. The GDP growth slowed significant and subsequently India lost the status of the ‘fastest growing major economy in the world’. Various infra and other projects felt the heat as is evident from the monthly report of the Central Electricity Authority, which stated that various projects have cited demonetisation as a reason behind the delays. Modi came to power on the promise of job creation at the rate of 2 crores per year but in reality the complete opposite has happened. As per a report by the Centre for Monitoring Indian Economy (CMIE), which stated that 1.5 million jobs were lost during January-April 2017 post-demonetisation. A government that talks much about ‘Beti Bachao, Beti Padhao’ somehow managed to increase domestic violence, as reported though various studies and NGOs. There was clear spike in cases of domestic-violence post demonetisation. All this in addition to the extremely unfortunate incidences of more than 150 deaths during the ill-fated and ill-implemented exercise. Where is the accountability?

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However, even if we ignore all of the above and just focus on demonetisation’s impact on the agricultural sector, which employs more than 50 per cent of the total workforce in India and contributes around 17-18 percent to the country's GDP, it should be enough to paint the picture of demonetisation’s failure.

Impact on agriculture

The latest report by the Agriculture Ministry, which was later suspiciously (but expectedly) taken down, cleared the air on the impact of demonetisation on the biggest sector (employment wise) of the Indian economy. The report concedes that farmers were badly hit due to the move. The lack of planning is evident from the fact that demonetisation was implemented when the farmers were either selling their Kharif yield or sowing Rabi crops, and as per the report, “millions of farmers were unable to get enough cash to buy seeds and fertilisers for their winter crops. Even worse, landlords faced a problem such as paying daily wages to the farmers and purchasing agriculture needs for growing crops.”. This is evident from the fact that even National Seed Corporation failed to sell nearly 1.38 lakh quintals of wheat seeds because of the cash crunch, which did not pickup even after the government later allowed the use of old currency-notes for such transactions. How could it? The whole country was in queues. The agriculture sector is yet to recover from the shock of demonetisation, which is evident from the farmers’ distress that we are witnessing on a daily basis – the Kisan Mukti March being the latest example of it. There was severe slowdown in the agricultural sector of the Indian economy as the GVA growth – GDP minus taxes and subsidies – more than halved from 4.1 percent in 2016-17 to 1.7 percent in 2017-18, as per government data. This is due to the fact that food grain production fell by 2.8 percent during 2017-18 Kharif season. However, this is not the only criticism that demonetisation has received. It has been criticised from all walks of life. We have listed a few below.

Notable criticisms of demonetisation

  1. Former PM Dr. Manmohan Singh: In his speech in the parliament on the 23rd of November, 2016, speaking like the visionary he is, Dr. Singh stated in clear terms that demonetisation was ‘an organised loot and legalised plunder’.
  2. Nobel Laureate Amartya Sen: He termed demonetisation as a “despotic action that has struck at the root of economy based on trust.”. Prof. Sen has criticised the move for breaking the sacred trust of the economy, which forms the very basis of transaction. He said, “It (demonetisation) undermines notes, it undermines bank accounts, it undermines the entire economy of trust. That is the sense in which it is despotic”.
  3. Former RBI Governor Raghuram Rajan: The former RBI governor clearly stated to the government demonetisation was "not a good idea" and that it "was not a well-planned, well thought-out, useful exercise and I told the government that when the idea was first mooted.". If only Modi listened to anybody else’s Mann Ki Baat.
  4. Global rating agency Fitch: it stated that the move will cause disruptions in the economy, and, hence, downgraded the GDP growth forecasts for India to 6.9 per cent from 7.4 per cent, which turns out was a conservative estimate.
  5. Former Vice-President and Chief Economist of the World Bank Kaushik Basu: "It (demonetisation) was poorly designed, with scant attention paid to the laws of the market, and it is likely to fail. So far its effects have been disastrous for the middle- and lower-middle classes, as well as the poor. And the worst may be yet to come," Basu wrote in The New York Times. He further went on to say that demonetisation would have a disastrous effect on the Indian economy.
  6. Former economist at the World Bank Arun Shourie: he said that demonetisation was the 'greatest blunder in economic policy for 70 years'. He further argued, “This is a strike not on black money. It is a strike on the legal tender of India, on the currency. It is a strike on cash transactions… People who hold the black money or those who have black assets, they don't hold them in cash. One per cent of Indians hold 53 per cent of total assets in India. They don’t put their money under mattresses.”.
  7. HSBC:  "India's economic growth is expected to fall by up to 1 percentage points over the next 12 months in the wake of demonetisation, while longer-term gains will depend on follow-up reforms.”, said the giant of the global finance sector.
  8. Rajiv Bajaj: Mr. Bajaj, MD of Bajaj Auto, stated in clear terms that the whole idea of note-ban is flawed, therefore, any criticism of implementation is futile. “If the solution or the idea is right, it will go like a hot knife through butter. If the idea (demonetisation) is not working, don’t blame execution I think your idea itself is wrong,” he said at the annual NASSCOM leadership forum in Mumbai.

Two years after demonetisation several facts have come to light, like the case of exorbitant post-demonetisation deposits in ADCB – where Amit Shah is president – and other such banks headed by BJP leaders, and the subsequent exponential rise in BJP’s income. Such facts have shifted the ‘demon’ of demonetisation from an ill-implemented move to an ill-intentioned move. Now, the questions are not about the shifting goal-posts – which the government has resorted to since two years – but about the real intentions behind the move? Was it an attempt at remonetising the BJP?

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