No one took notes

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.