In first remarks on the demonetisation of notes of higher denomination, former prime minister Manmohan Singh Thursday tore into the government, calling the entire process a “monumental mismanagement”, an “organised loot” and “legalised plunder” of the common people. He warned of a drop in national income “by about 2 percentage points… an underestimate”.
Prime Minister Narendra Modi, who was present in Rajya Sabha when Singh spoke, later walked up to his predecessor and shook hands. But the government struck back at the former prime minister.
Finance Minister Arun Jaitley said he was “not surprised” that “those who ran the government between 2004 and 2014” never considered the “biggest corruption scandals” during their rule a “blunder” but were calling “steps to curb corruption and black money… a blunder” — records show Singh mentioned plunder which Jaitley may have heard as blunder.
Making it clear that he did not disagree with his successor’s objective of curbing black money, Singh said, “Prime Minister has been arguing that this is the way to curb black money, to prevent growth of counterfeit currency notes and also to help in control of terrorist finance activities. I do not disagree with these objectives. But I do want to point out that in the process of demonetisation, monumental mismanagement has been undertaken about which today there is no two opinion in the country as a whole.”
Quoting economist John Maynard Keynes — like Keynes, he too attended Cambridge many years later — Singh said: “Even those who say that this measure will do harm or cause distress in the short term but will be in the interest of the country in the long run should be reminded of what John Keynes said once, ‘In the long run all of us are dead’.”
“I would like to know from the Prime Minister the names of any countries he may think where people have deposited their money in banks but are not allowed to withdraw their money. This alone, I think, is enough to condemn what has been done in the name of greater good of the people of the country.”
Highlighting the cash crunch, Singh said: “Prime Minister has said that we should wait for 50 days. Well, 50 days is a short period. But for those who are poor and from the deprived sections of the society, even 50 days torture can bring about disastrous effects. And that’s why about 60-65 people have lost their lives.”
“In my opinion, the way the scheme has been implemented will hurt agricultural growth in our country, will hurt small industry, will hurt all those people who are in the informal sectors of the economy. And my own feeling is that the national income, that is the GDP, can decline by about 2 percentage points as a result of what has been done.”
“This is an underestimate, not an overestimate. Therefore, I feel that the Prime Minister must come up with some constructive proposal on how we can implement this scheme and, at the same time, prevent this distress that has been caused to the common people.”
A former RBI governor, Singh took a swipe at the Finance Ministry and the central bank: “It is no good that everyday the banking system comes with modification of the rules, the conditions under which people can withdraw money. That reflects very poorly on the Prime Minister’s office, on the Finance Minister’s office and on the Reserve Bank of India. I am very sorry that the Reserve Bank of India has been exposed to this sort of criticism which I think is fully justified.”
He referred to more than 20 modifications and changes in rules in the fortnight since the November 8 demonetisation announcement. He urged the Prime Minister to find “practical, pragmatic ways and means to relieve the distress of the people who happen to be a great majority”.
“After all, 90 per cent of our people work in the informal sector, 55 per cent of our workers in agriculture are reeling in distress. The cooperative banking system, which serves large number of people in the rural areas, is non-functional and has been prevented from handling cash… all these measures convince me that the way this scheme has been implemented is a monumental management failure, and in fact, it is a case of organised loot, legalised plunder of the common people,” Singh said.
The former Prime Minister’s estimate of a 2 percentage point drop in GDP growth rate is because of a massive disruption in economic activity. Poor sales due to weaker consumption will show up as lower revenues for corporates, with those exposed to retail sales being the most affected, said Moody’s Investor Services.
The worst hit will be the MSME (micro, small and medium enterprises) segment, that accounts for roughly 40-45 per cent of manufacturing, and 40 per cent of exports. A break in supply chain has already started hurting SMEs, and the currency withdrawal will have “serious supply-side effects” for the informal sector, said Pronab Sen, Director, International Growth Centre. Ambit Capital, in fact, estimated the GDP growth in the next two quarters to just 0.5 per cent or even negative, dragging down the full year growth rate to 3.5 per cent.
The government, meanwhile, hit back at Singh. Defending the demonetisation of Rs 500 and Rs 1,000 notes, which he called “remonetisation”, Jaitley told reporters outside Parliament House: “We were not surprised when we heard those who ran the government between 2004 and 2014 that they did not like anti-black money steps. The maximum black money was generated in the country between 2004 and 2014. The biggest corruption scandals — from the Commonwealth Games to 2G scams to coal block scandal — all took place during this period.”
“Those who never considered these scandals to be a blunder are now considering these steps to curb corruption and black money to be a blunder.” He said this would be the “exact rationale and argument” that the treasury benches will put forward in Parliament. “It’s obvious that the Opposition is uncomfortable with the debate… They are inventing and manufacturing reasons to run away from Parliament,” he said.
“It was very clear that the Opposition was not prepared for the debate. They were all taken by surprise (when the government said the Prime Minister will intervene). The very basic of their condition got knocked off. They brought in three speakers and it was clear that not many were fully prepared.”
Jaitley expressed confidence that the measures taken would have a positive impact on the economy in the long and medium term. “A lot of money that operates in the shadow economy will now become a part of the banking structure itself. Banks will have a lot more money to support the economy. Private sector investment, which was so far lacking, will now get back into the economy. The banks which were struggling because of the NPA problem will have a lot more money to lend for agriculture, infrastructure sector, social sector, trade and industry.”
“The possibility of banks having low-cost funds being available now to lend at lower cost also rises. Additionally, when more and more transactions will come into the banking network, in the long run, you will find the taxation, both direct and indirect, improving,” he said.
“Therefore, over medium and long term, there will be a positive impact on the economy. I think it would be prudent for any economist to really look beyond the immediate impact when the remonetisation process is on and look at India post remonetisation,” he said.