Thursday, November 24, 2016

On India's Demonetisation

Lots of odd things happened in 2016, and I wrote about them, almost reluctantly, as they happened. And, yet, while I could not keep myself from commenting on Trump's victory, I refrained from commenting on India's 'demonetisation' move, in which the Government annulled 86% of India's currency by value, overnight. This event has more real and emotional significance to me than Trump's victory, and indeed I am in the middle of a very heated discussion, online and offline, on the issue. Yet, I chose not to comment, at least so far, because I was so divided on the issue. And, commenting now is not a pretencion of self-importance: I rather thought it was best to say how I really feel, rather than trying to project that I am indifferent (which I am not).

To start with, I should be happy because the government has made people to make sacrifices. Instead of the promised better days, the Prime Minister has called upon the middle class to be the soldiers of the ATM, which, at least so far, they have gladly responded to. This is in line with the global policy thinking about scaling back the cash economy - Kenneth Rogoff being the proponent in chief (see here) - and there may indeed be long term benefits of it. 

Besides, this will surely hit the friendly neighbourhood corruption and black money of the real estate economy, and while a lot of the assets would be hidden in Gold and London flats, the money will be drained out of circulation and reduce inflation in the near term. Or, at the least, that is one scenario.

However, I think its impact is too early to tell. While the decisiveness of the action may be commendable, its implementation, so far, has been lacklustre. If the government manages to restore normalcy in the promised 50 days, or by the end of the year, this shock therapy may yet work out. But, this looks increasingly unlikely, given the scale of the challenge and the chasm between the rhetoric and reality. A long drawn out process of adjustment may hit production, particularly agricultural production, which may have inflationary, rather than deflationary, effect on food prices. 

Given India's record of policy implementation, this is indeed a scary prospect. The human costs of the move are obvious, but this can spiral out of control and different scenarios, including famine and popular rebellion (memories of Mao's Great Leap Forward have already been invoked), are equally plausible.

True, invoking a doomsday scenario is bad politics - we have learnt that in the lead up to Brexit - but the opposition has a point that the poor has been asked to shoulder the costs of a painful adjustment. Consider, for example, a recent announcement when the very same people, who are so enthusiastically backing the demonetisation, were in near revolt: The proposal, not so long ago, that the government would tax Provident Fund withdrawals. This was a moral outrage, and all the necessary doomsday scenarios were invoked. The government, ever so sensitive to popular mood, immediately rolled back the move. I am not sure the Government has become any more decisive since then, nor the middle classes any more patriotic: Just that the people who will truly suffer here, apart from a few foolish real estate middlemen who kept money under the bed and were possibly funding the wrong political party, are not the ones the government cares about.

I know there is an Indian way of doing things. For example, Indian Masterchef format has one event where a team can remove an ingredient from the basket of another team and force them to improvise, something unthinkable in other Masterchef formats where cooking is considered an art and perfection is so overtly valued. And, Indians are rather proud of their Jugaad mentality. That the government has implemented the demonetisation so recklessly, on the assumption that people will somehow manage (and indeed, they are), is perhaps based on this world view. The point, however, is that this is the just the opposite of the psychological transformation that the government wants - the whole point of demonetisation may be the expansion of the organised economy and a new way of doing things - and this experience may tell a lot of Indians how little they can trust their government (and how little their government trusts them).


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