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Home » Opinion » Gita Gopinath is right: Demonetisation is not recommendable, either in theory or in practice

Gita Gopinath is right: Demonetisation is not recommendable, either in theory or in practice

By Chandan Karmhe
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Gita Gopinath is right: Demonetisation is not recommendable, either in theory or in practice

The world is not new to economic blunders made by over-confident rulers.
The world is not new to pain.
But perhaps sometimes, a nation must suffer in order to realise that to equate its ruler with its God, comes with its own perils.

As early as 301 AD, Roman Emperor Diocletian tried to flirt with the economics of currency by issuing the Edict on Prices, and failed. In 1294 AD, Gaykhatu Khan of Iran experimented with the legal tender in an attempt to imitate the Chinese, by introducing “chao”, which led not just to serious disturbances in that country, but also precipitated his end. A similar experiment in token currency was initiated by Muhammad Bin Tuqhlaq around 1330 AD in India, the most palpable consequence of which, second to the heavy loss suffered by the treasury, has been the transmogrification of his name into an idiomatic expression typifying an unhinged dictator.

In modern history, too, the economic blunders of an ill-timed & ill-conceived demonetisation exercise, and the concomitant foundering that follows it, has had a predictable trajectory. The Soviet Union under Gorbachev tried it: economic crises ensued, and the Union was rend asunder the very following year. North Korea under Kim Jong-II tried it, & failed, and sacrificed, quite literally, at the altar of this botched currency reform exercise was Pak Nam-gi, their Finance chief. From Myanmar to Ghana to Nigeria, demonetisation has either led to a fall in the government or an incessant turmoil in their society.

It is important, in this context, to delineate that Demonetisation was done in these countries because (& when) they were reeling under an economic crisis. India, to the contrary, presents a unique case. When Prime Minister Modi, on the 8th of November, 2016, announced his decision to withdraw the legal sanctity behind the high-valued notes— comprising 86% of the currency then in circulation — ours was not only a well-functioning economy, but as Professor Arun Kumar reminds us through his seminal work on demonetisation, it was the fastest growing economy in the world.

An important question that requires probing is: what, then,  could have made the Prime Minister invite an economic calamity like demonetisation despite (hopefully) being awake to the failures of such an exercise in other countries around the world?

Nobel laureate Daniel Kahneman provides a starting point to help grapple with this question in his book ‘Thinking Fast & Slow’, & I quote: “People can maintain an unshakable faith in any proposition, however absurd, when they are sustained by a community of like-minded believers.”

After Narendra Modi was declared the prime ministerial candidate, he met Anil Bokil from the organisation ‘Arthakranti Pratishthan’. The meeting, according to Bokil, lasted for 90 minutes. One step to tackle the problem of black money – as suggested by Bokil during the course of this meeting – was the demonetisation of high currency notes. According to reports, Mr. Modi kept meeting members of ‘Arthakranti’—an organization that had, among other things, proposed abolition of all taxes (barring custom & import duties) and their replacement by a tax on all banking transactions— even after he became the Prime Minister of India.

Baba Ramdev, considered to be someone very close to the Prime Minister, was also convinced by the members of ArthKranti regarding the desirability of this exercise.

Prime Minister’s unshakable faith in the absurd proposition of demonetisation was perhaps strengthened by a community of such like-minded believers who sustained the Prime Minister’s interest in the act.

Kahneman further argues in his book that “Leaders who have been lucky, are never punished for having taken too much risk. Instead, they are believed to have had the flair and the foresight to anticipate success and the sensible people who doubted them are seen in hindsight as mediocre, timid, and weak.”

Raghuram Rajan, the then Governor of the Reserve Bank of India, when asked for his opinion on the exercise, made it clear to the Government that demonetisation was neither well-thought, nor a useful idea.

Coincidently, Rajan ended his term in the September of 2016.

Two years later, in September 2018, Rajiv Kumar, the Vice-Chairman of NITI Aayog, on being asked about his opinion as to the cause of the economic slowdown, ascribed it to Rajan’s (then) new mechanism on NPAs, which, in his opinion, led to a deleveraging of credit like never before – terming any narrative linking demonetisation & growth slowdown as a “false narrative”.

The Prime Minister through his speech on the 8th of November, stated that by drawing out 86% of the blood from India’s well-functioning economy, he would cease circulation of black money, wipe out corruption, weed out fake currency, and curb terrorism.

The RBI, in its Annual Report brought out on the 29th of August, 2018, announced that 99.3% of the demonetised money was already back in the system.

Over a hundred people lost their lives in the harrowing days that followed demonetisation. Millions lost their jobs. Farms were hurt. Development in sectors such as the real estate came to a  screeching halt. Institutions were stripped off their reputation. The credit growth rate of banks plummeted to the lowest in sixty years. Lakhs of crores were hacked off from the GDP of India.

The RBI’s annual report also suggests that the currency in circulation has in fact increased, and remains, to this day, higher than the levels preceding demonetisation.

Demonetisation also failed in weeding out counterfeit currency. In fact, the report about the findings of the Financial Intelligence Unit (FIU), has shown that post-demonetisation, banks in this country not only received an all-time high amount of fake currency, but also detected an over 480% jump in suspicious transactions.

Demonetisation could also make no impact on either curbing corruption or terror funding.

When it finally dawned on it that demonetisation had failed in every way it could look at it, the Government decided to release its in-house lawyer, Mr Jaitley – with his unparalleled expertise in deflection – to pontificate and sermonise.

“The larger purpose of demonetisation,” Mr Jaitley said after the RBI released its annual report, “was to move India from a tax non-compliant society to a compliant society”

One thing is sure – Mr. Jaitley knows the reason why he is valued in this Government. This also perhaps explains why — despite losing the ‘safe seat’ of Amritsar in a “wave election” in favour of his party, by a margin of 1,02,770 votes, — he not only remains the Finance Minister but also keeps getting  additional charge of portfolios such as Defence, I&B, and Corporate Affairs, from time to time.

Two years hence, it does feel like demonetisation turned out to be an “organised loot” and a “legalised plunder”.

The nation owes an apology to the people who died during this exercise, & were made the guinea pigs for this experimentation. The nation owes an apology to the millions who suffered & continue to suffer.

If worth nothing else, we can only hope that this fraught exercise leaves Mr. Modi with one takeaway: the realisation that confidence is just a feeling; judgment – in a democracy – should always arise from fair evaluation.

Disclaimer: The opinions expressed in this article are the personal opinions of the author.


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