The DeMon’s alternative

In a New Year’s Day interview to a news agency, Prime Minister Narendra Modi revisited his government’s demonetisation move of November 2016. Perhaps this was born of the realisation that the notebandi decision and its impact on the economy would likely define the NDA government’s term in office — but not in the way that he and his advisers had envisaged.

Specifically, Modi addressed the point that the overnight withdrawal from circulation of currency notes of ₹1,000 and ₹500 denomination, which cumulatively accounted for 86 per cent of the value of the notes in circulation, had precipitated a slowdown in the economy.

Framing that fact against a broader context, he said: “If any process is changed… take for example, the Railways: if a bogey changes tracks, there is a change in speed.” And noting that when Manmohan Singh was Finance Minister — during the years of economic reforms from 1991 — GDP growth had fallen to less than 2 per cent, Modi suggested that such slowdowns were an inevitable eventuality when the tectonic plates of the economy were shifting.

Such a characterisation of the demonetisation move is more than a little disingenuous. Modi’s larger point — that structural reforms deliver a shock to the system in the short term, which translates into slower economic growth — has at least some validity. In that sense, his invocation of the 1991 parallel is not entirely incorrect. Illustratively, in 1991-92, when the PV Narasimha Rao-headed minority government unleashed ‘big bang’ economic reforms, GDP growth did slide to a lowly 1.3 per cent. Indian corporates initially struggled to adapt to the heightened competition arising from a lowering of protectionist tariffs, and the demand contraction that accompanied the sudden and sharp devaluation of the Indian rupee.

But with the unleashing of the “animal spirits” of the economy, growth bounced back – to 5.1 per cent next year, and further to 7.3 per cent in 1994-95.

But it takes a wholesale suspension of sense and sensibility to believe that the demonetisation move — however well-intentioned it may have been in its avowed earnestness to wipe out the ‘black economy’ — counts as a reform measure in the way that an unshackling of the economy does.

Or that the slowdown it induced should, for that reason, be borne with fortitude as a small price for greater good to come in the hereafter.

One other point that Finance Minister Arun Jaitley and other officials have belaboured is that the demonetisation decision was motivated in equal parts to arrive at a “cleaner GDP”. That is, of course, a consummation devoutly to be desired.

After all, even Simon Kuznets, who is credited with the ‘invention’ of GDP as a national accounting system, wanted to exclude illegal activities, “socially harmful” industries and even most government spending — and particularly defence spending — from the GDP measure. But even there, Jaitley’s claim falters when judged against outcomes, rather than against the nobility of its objectives.

Two years after that fateful November, the preponderance of evidentiary data establishes the malefic effects of the demonetisation initiative in fairly stark terms. The proximate shock — in terms of a sharp fall in new investment proposals and new projects announced and average daily value of new investments in the immediate aftermath of demonetisation — has been compounded by a more prolonged investment slowdown.

And although this trend predates the demonetisation exercise and has been rather more gradual in India than it has been elsewhere, the magnitude of the slide was, from all accounts, deepened by that policy misadventure, and was most recently flashing an alarming “exceptionally severe” reading.

The picture is rather more bleak in respect of jobs lost, ostensibly owing to demonetisation. The findings of a survey recently made public by the Centre for Monitoring Indian Economy (CMIE) suggest that demonetisation may have directly caused job losses in excess of 35 lakh.

In fact, the survey, which covers 1.7 lakh households around the country, noted that in the immediate aftermath of the note ban, as many as 1.3 crore jobs may have been lost. A more grievous loss, one that may not be captured adequately in any data set, is in the universe of micro and small units, which had their life forces squeezed out of them in the cash-strapped days of demonetisation.

Given these manifest losses, and the fact that almost all of the objectives of demonetisation as laid out by the government in November 2016, have not been met, it is worth considering where the pursuit of a policy alternative to demonetisation may have taken the economy.

For sure, the economy of 2016 was not without challenges, but the fruitless wanderings down the rabbit-hole of the note ban, and the government’s reluctance to acknowledge its deleterious effects, only served to distract its attention from those challenges — and, in fact, compounded them all the more.

Minimum government

If the government had acted true to its avowed instincts, embraced the principle of ‘minimum government’, and governed with a light touch, it might have genuinely made for greater ease of doing business, rather more than the resort to artifice that saw it vaulting up the World Bank rankings on that count.

Such an enterprise would have likely restored confidence in the economy enough to revive private investment and set off a virtuous up-cycle of growth. Prudent, mindful deregulation focussed on unshackling the economy would also have abridged the space for red-tape corruption, addressing another core objective of the demonetisation exercise.

Additionally, all this would have rested on the foundation of an economy that would have notionally been larger (and no less ‘clean’) to the extent that it slowed down in the past two years.

As the poet said, ‘Of all sad words of tongue and pen, the saddest are these: it might have been.’

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