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 With just 10 days to go for the deadline to deposit withdrawn currency, it now looks certain the entire money will return to the banks.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.

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  1. D
    Dark Horse
    Jan 4, 2017 at 5:44 pm
    Good Luck Son, @least amongst u one of us actually belives ' Desh Bhad Raha Hain......'
    1. A
      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
      1. P
        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
        1. S
          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.
          1. A
            Dec 20, 2016 at 12:29 am
            Well written. Educational.
            1. A
              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.
              1. H
                Haradhan Mandal
                Dec 19, 2016 at 3:31 am
                "Who is the Govt here (men behind Demonetization)"? How many people? DO they have names?
                1. H
                  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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