No one took notes

Shifting goalposts, changing playing fields: It’s clear the government didn’t think demonetisation through.

Written by P Vaidyanathan Iyer | Updated: December 19, 2016 9:33 am
demonetisation, demonetisation effect, demonetisation process, demonetisation news, black money, black money total, new currency notes, npas, modi black money, modi demonetisation It is a pity that neither the government nor RBI governor, Urjit Patel, recalled what Patel’s predecessor, Raghuram Rajan, had to say on demonetisation a little over two years ago.

On November 8, in his address to the nation, Prime Minister Narendra Modi said secrecy was essential for the demonetisation “mahayagna”, which will purify the country of corruption, black money, fake currency and terrorism. Many believed him and bought the argument that were the information to leak, it could have neutralised the scheme. While the government knew Rs 500 and Rs 1,000 notes added up to Rs 15.5 lakh crore when the decision was announced, the attorney general in the Supreme Court said the government would be satisfied even if Rs 11-12 lakh crore returned. Only when money started pouring in did the government realise that it was in a fix. This rush of deposits was seen as an evil attempt being made to douse the yagna fire. With just 10 days to go for the deadline to deposit withdrawn currency, it now looks certain the entire money will return to the banks.

Let’s take a step back, and believe, like most others, that utmost secrecy was critical to preserve the character and effectiveness of this unprecedented and bold move. But what held back the government from working out a “secret plan”? Fine, it junked the Nehruvian idea of Five-Year plans, but isn’t scenario-building an essential ingredient of any big move, particularly when it could turn out to be as disruptive as snuffing out almost 86 per cent of the total value of currency in circulation?

That the government did not have a plan, forget a “secret plan”, was apparent in the first fortnight after the prime minister addressed the nation. It is a no-brainer to expect people to deposit their old 500s and 1,000s post demonetisation. A deluge followed. With no demand for credit given poor economic activity, the immediate and safest avenue for banks to invest their surpluses was government securities (g-secs), which gives them at least a minimum, risk-free return. Naturally, demand perked for g-secs, pushing up their prices. As a corollary, the yield on these securities plunged by nearly 60 per cent over the first fortnight of demonetisation. Foreign investors exited due to lower yields, and most probably, made good capital gains by selling g-secs at higher prices. Fearing its existing g-sec stock may not be enough and to suck out excess liquidity, the RBI on November 26 hiked the Cash Reserve Ratio, the money banks are expected to keep with the RBI. Money for CRR, however, does not carry any interest and will certainly weigh adversely on bank profits in the near quarter. It’s quite strange the government and more specifically, the RBI, given the institution it is, could not plan for keeping a stock of g-secs or bonds under the market stabilisation scheme (MSS) ready in advance without impinging on “secrecy”. It was finally on December 3 the RBI got government approval to issue MSS bonds that banks could subscribe to and earn some return.

It is a pity that neither the government nor RBI governor, Urjit Patel, recalled what Patel’s predecessor, Raghuram Rajan, had to say on demonetisation a little over two years ago. To a question on demonetisation at an interactive session following his 20th Lalit Doshi Memorial Lecture on August 11, 2014 in Mumbai, Rajan said: “…my sense is the clever find ways around it. They find ways to divide up their hoard in to many smaller pieces”. Coming from a person of Rajan’s intellect, it should have been taken seriously.

At the bare minimum, revenue secretary Hasmukh Adhia and his team could have devised counter-mechanisms to tackle the ingenuity of the Indian mind. Instead of issuing one-and-a-half orders a day — 50 and still counting — the government could have simultaneously drafted another income disclosure scheme ab initio and also taken specific measures to prevent breaking up the hoard “into smaller pieces”.

This was a plan the government conceived — in the prime minister’s words — over 10 months ago. Contrast this with what the government did just eight years ago when the world was hit by the Lehman Brothers crisis in 2008. D. Subbarao, then RBI governor, later said it was baptism by fire for him since it struck within a fortnight of his taking over the office. The economic leadership quickly took charge, and drafted in talent including from the private sector. Within a month, a Liquidity Assessment Report was in place. Yes, action was being taken on a daily basis, but there weren’t any flip-flops. This was a global event, with tremendous ramifications for India — a near-run on the ICICI Bank, calls for a ban on market trading, and prospects of a collapse of the mutual fund industry. But peoples’ money was saved. In fact, India emerged more or less unscathed and its economy bounced back quickly. It’s another story how the gains were squandered in subsequent years due to poor fiscal planning and a policy paralysis during the second term of the Congress-led UPA government.

In the past 40 days, uncertainty has become the order of the day. It doesn’t serve very well particularly when confidence levels in the private sector are at a low and private investment almost moribund. World over, countries are striving for certainty in policy. The government narrative too has changed leaving the machinery itself unprepared. From a war on black money and corruption, goalposts have been shifted. The objective became bringing all the money back into the banking system; the black part is to be tracked down by the I-T department later. And now it has transformed into a wholesale push to a cashless economy. The changing goalposts have only served to leave the administrative resources of the government stretched. A new policy, a new incentive, a new scheme, every day. People have taken this in their stride — so far.

pv.iyer@expressindia.com

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    Dark Horse
    Jan 4, 2017 at 5:44 pm
    Good Luck Son, @least amongst u one of us actually belives ' Desh Bhad Raha Hain......'
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      Abhinav Gour
      Dec 18, 2016 at 6:52 pm
      Smart govt always will make necessary moves as they find culprits and their many ways to keep
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        Prashant
        Dec 19, 2016 at 6:30 am
        Again u missed v important point,,, Money deposited in banks does not make it white,,,,,I read in one of the newspaper that till now,,,60 thousands account in which 1 crore or more than that deposited have been frozen.,,,,nd it is an ongoing process
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          Sanskar
          Dec 19, 2016 at 6:11 pm
          Raghuram Rajan was the last independent governor of India, now RBI is just another subservient insution of the govt. It takes a lot of spine to stand up with conviction for the consutional insutions. The last and only independent insution left in our country is Judiciary which will be broken once NJAC comes. lt;br/gt;lt;br/gt;What is really confusing : who is in-charge of our Monetary Policy, is it RBI or the Government ? For first 30 days the government and FM issued all notifications with all flip-flops and somersaults. Now suddenly RBI entered the arena with acrobatics which no Russian gymnast can match. And it was a well planned, well considered, well conceived, well prepared and well executed de-mon exercise as per RBI and Govt !! lt;br/gt;lt;br/gt;Black money catching and other objectives may fructify or not, this exercise has exposed the disgusting deficiencies in our Financial management system, Banking system and Central bank management.
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            Abhay
            Dec 20, 2016 at 12:29 am
            Well written. Educational.
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              Anonymous
              Dec 19, 2016 at 10:25 pm
              Ther would be some disruption when something like this is being done for the first time. Also corrupt bank officials made things worse. It is always easy to make judgments midway. Let the w exercise finish. This should have been long tie ago. Some has had the courage to do it. It is always easy to be an armchair critic.
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                Haradhan Mandal
                Dec 19, 2016 at 3:31 am
                "Who is the Govt here (men behind Demonetization)"? How many people? DO they have names?
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                  Haradhan Mandal
                  Dec 19, 2016 at 3:59 am
                  PSU banks are the butt of jokes and scorns - like the other PSU in India. But they carry the the follies of the (REFORM) govt (after govt) on their backs and are made to suffer. PSU banks are NOW saddled with huge money in the accounts of the their account holders as deposits (14 Lakh crore almost now). lt;br/gt;They have to pay interest on it at 4%. UNLESS and UNTIL there is way out for this money - out of the bank - (1) thru withdrawal in CASH (which will not happen soon) and (2) thru NEFT/POS - but it still remains in the BANK as DEPOSIT :) :) . lt;br/gt;What a bind.
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                    Jim
                    Dec 19, 2016 at 3:51 am
                    2008 banking crisis was no crisis for India. Indian banks had no exposure in the affected markets. India had an advantage which was squandered away by high interest rates
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                    1. J
                      Jim
                      Dec 19, 2016 at 9:35 am
                      It's clear this pre$$ute's stash had gone waste and therefore irritated
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                        Junu
                        Dec 20, 2016 at 12:21 am
                        Government seems to have lot of free advisors. Pundits want everything to be fixed overnight. Thank god aam admi have more faith on government than so called intellectuals.
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                          K SHESHU
                          Dec 19, 2016 at 1:47 pm
                          People are ' forced' to take everything in their stride ...So far ...!
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                            Ajay G
                            Dec 19, 2016 at 5:07 am
                            Modi is a prisoner of his experience in Gujarat.The first rule of governing India is that you only make the policies you can implement. lt;br/gt; lt;br/gt;If we ignore implementation, then no doubt the Licence Raj was a brilliant idea too.
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                              ak dev
                              Dec 19, 2016 at 3:29 pm
                              These authors are wasting their as well as readers times on discussing hypothetical situations. They are simply not serious about changing the level of corruption in India as it's bread and butter.
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                                Anand Kumar
                                Dec 19, 2016 at 8:28 am
                                Brilliant ! How do you expect illiterates to write cheques ?
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                                  Observer
                                  Dec 19, 2016 at 10:40 am
                                  Your frustration is a showing!
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                                    THM
                                    Dec 19, 2016 at 5:36 am
                                    I Hope by 30th December 2016 every thing will be streamlined as promised by our Prime minister.
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                                      anonymous
                                      Dec 19, 2016 at 12:28 am
                                      The founding fathers of our country abandoned 'secrecy' in favour of 'democracy'. Anyone who doesn't know this doesn't comprehend democracy. The Prime Minister did not bother to consult all the ministers and MPs of his own party, let alone MPs of other parties. He knows that MPs represent consuencies. They are the elected representatives of the entire potion of India. They are elected because the majority in a consuency feels that they will be able to protect them (even if they can't do something for them at least they won't harm them). If the Prime Minister had neglected to consult all the representatives of the people in Parliament, at the very least he could have consulted all the MPs in his own party. What would they have said if he had asked them if it was okay to inflict hardship (almost endlessly) on the poorest of the poor? Would they have said 'yes'? It doesn't seem so. That is why when the small number of MPs who form the opposition in Parliament demanded a vote after a debate on demonetization, the government refused. But no one has raised the issue of how the Prime Minister does not trust the MPs of the BJP. More importantly, he defied democracy when he didn't consult them on a decision which would impact the poorest in all consuencies. Therefore, his decision was not a democratic decision. Anyone who says it's a democratic decision does not know that the founding fathers of our country chose 'democracy' over 'secrecy'. Hopefully, the prime minister has learnt his lesson and will not be using 'secrecy' to defend the issuance of dictatorial diktats. Plus, no one is talking about what will happen when the restriction of how much money we can withdraw is lifted. There will be longer queues outside banks. People will want to keep even more cash at home -- especially in families where weddings are to take place. Right now, the Supreme Court can't do anything because the Supreme Court cannot veto a policy. But when the restriction is lifted, and then citizens are denied their own money in cash, and someone goes to court, it'll be citizen vs the government of India and then the Supreme Court will find that the government did not keep its promise. So, basically, all this talk about cashless will go flying out of the window because the psychological trauma caused by demonetization will ensure that people keep more cash than before at home. It's simple human psychology. This business of goal-post shifting has also already failed. And frankly, it's because our Consution ensures that citizens have rights. The prime minister cannot impose restrictions endlessly and when the restrictions go, there will be an even greater demand for cash than before. 'Secrecy' in a democracy is a bad idea. It only leads to trouble. Lack of trust for BJP MPs from their leader must have demoralized them too. So sad. Everything was going so well for the BJP especially after the surgical strike at terrorists. The government should never have begun pointing guns at the meagre earnings and savings and pensions of the poorest of the poor. The prime minister reminds me about that myth about kalidas and how the poet axed the branch he was sitting on. I hope he can recover from the fall.
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                                        Avinash
                                        Dec 19, 2016 at 7:41 pm
                                        2 saal wait kiya to ye dekha...12 din me kya ukhad lenge?
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                                          Avinash
                                          Dec 19, 2016 at 7:43 pm
                                          He is frustated...try to understand his situation. Tomorrow it could be you or me.
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                                            Avinash
                                            Dec 19, 2016 at 7:46 pm
                                            I understand buddy.lt;br/gt;When we air our opinion - it is natural to get counter opinion.lt;br/gt;We should put our logic to support of deny that. lt;br/gt;lt;br/gt;Just saying like - "Modi should have rang him first", is an arrogant and illogical statement.lt;br/gt;lt;br/gt;Tell me Kam, would not have been it nicer to either support in a positive manner or oppose in a graceful manner?
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