The public frenzy for getting hold of cash is visibly subsiding. However, the pressure may well be shifting to smaller towns to which currency supply may not have kept pace. Also, the next wage payment for casual workers, who may well comprise nearly 60 per cent of the workforce, is approaching. Therefore, it may be a good time to take stock, draw lessons and initiate steps to prevent short-term pains from resulting in permanent loss of economic activity.
For me, the ethical and social aspects of this dramatic move are of utmost importance. The measure represents the draining of a cesspool, created over seven decades. We are all party to its creation, either actively or in our passive acceptance of the growing vulgar ostentatious consumption that threatens to become all pervasive. Demonetisation will surely reverse, to some extent, the brazen flaunting of ill-gotten wealth. It may induce India to turn away from the Latin American model of state, with its extreme inequities and rampaging drug mafias, and hopefully, turn it towards the more equitable and honest East Asian model.
We know that black money (currency) is only a small part of the black economy. However, this does not necessarily imply that it is not worthwhile to liquidate stocks of black money without simultaneously attacking other “illegally” acquired assets. The aggregate black economy is estimated at over 30 per cent of the formal economy. Even if black money constitutes 10 per cent of this amount, it represents a cash hoard of nearly Rs 5.5 lakh crore. To try and immobilise that amount or even a substantial part would convey a strong anti-corruption signal.
Three types of criticism have been mounted against the measure. First, economic costs would far outweigh any potential benefits. Second, implementation has been badly botched. Third, it has not gone far enough because it only attacks the stock and does nothing to stymie future flows of illegal economic activity. The first and the third arguments are contradictory because the first considers the measure to be harmful, while the third demands more of the same.
A major concern has been that all those in the informal sector who have legitimate business, though carried out in cash, will be undeservedly hurt. Some may be hurt mortally and result in their permanent closure resulting in job losses and the slowdown of GDP growth. Some wild estimates see GDP growth plummeting to zero in the next two quarters and not recovering in the foreseeable future.
This is surely scare-mongering. All medium, small and even micro production enterprises (production MSMEs as opposed to wholesale or retail traders) surely have some access to formal credit sources. This must be true of MSME export units that are reported to account for 45 per cent of India’s total merchandise exports. The majority of MSMEs deal only partially in cash. Anticipating the onset of GST, many had started to move away from cash transactions as these would not receive any tax credit. Therefore to argue that demonetisation spells doom and disaster for MSMEs is sheer exaggeration.
Farmers, it was asserted by Lalu Prasad, are in deep distress and dying. This is hyperbole. Farmers can sell their kharif harvest of sugarcane to mills with receivables being directly credited to their bank accounts as always. Any amount of paddy can be sold to the FCI at the government-declared minimum support price (MSP). Agro-inputs are normally available at 30-60 day credit to virtually all farmers.
Rabi sowing is, therefore, reportedly on track, opposition parties’ grandstanding notwithstanding. In his November 16 blog on Modi’s bold move, Kenneth Rogoff, the author of The Cashless Economy, wrote: “The short-run costs are unfolding, but the long-run effects on India may well prove more than worth them, but it is very hard to know for sure at this stage.”
It is, therefore, not surprising that the opposition parties find themselves terribly short of public support. Not surprisingly, they have been patently unsuccessful in taking their protests out of Parliament to the streets, where they will be exposed to the strong public support for the PM’s move.
The implementation certainly could have been better. Admittedly, the measure was humungous in scale, cloaked in necessary secrecy and complex. The RBI and ministry of finance should own up their responsibility. To their credit, they have been learning on the job, and have been open to suggestions.
Three practical questions must be answered for further course correction. First, was the relatively short window of 50 days necessary and could it not be extended? Second, could the domestic security printing press capacity constraint not be overcome by placing orders on foreign printers to produce Rs 100 and Rs 50 notes? Printing additional quantities of these denominations would not have breached secrecy and could have augmented the much needed currency supplies? Third, given the scale and time constraint, could government departments and treasuries not be used as points for dispensing and exchanging currency to overcome the shortage of ATMs that are still being re-calibrated.
It is, of course, necessary to take steps to restrict future flow of illegal earnings without which this huge exercise could come to a naught. Some measures are already in place: Greater transparency in governance and roll back of the “inspector raj”, strictures and action against the corrupt in the central government, compulsory linking of Aadhar card with deposits and withdrawals from bank accounts and large purchases of jewellery and real estate, the impending GST, greater surveillance by the CBDT and commercial banks of brokers, developers and jewellers and Jan Dhan accounts, which are the expected conduits for laundering black money. Modi has repeatedly announced that demonetisation is but the beginning and that other steps to curb black money are in the pipeline.
Modi has risked the support of the core constituency of the BJP and RSS — traders, middlemen and small entrepreneurs. He has taken this risk because he believes the measure can help India leave behind the culture of illegality, indiscipline and ill-gotten wealth. Every country needs its “golden moment” to transform itself and surge ahead. I suspect Modi feels it in his bones that this might be that moment for India.