Many years from now, Indian children who lived through November 2016 will be able to narrate to their grandchildren their experience with the devastating effects of an economic decision that has no precedent in global economic history. Demonetisation, a term that ought to have remained confined to a short passage in economics textbooks, is now part of folklore, thanks to Prime Minister Narendra Modi’s sudden decision on November 8, 2016, to remove 86 per cent of the value of the national currency. What explains this bizarre move? Actually, nothing logical explains it even with the hindsight we have after 30 months.
The trauma of demonetisation can best be explained by drawing an analogy with terror strikes. Terrorists seek to draw mileage from the sudden and devastating impact of their actions where victims are unable to comprehend why they were attacked for no reason. This is exactly what happened after demonetisation but with one significant difference: while terror strikes are generally localised, demonetisation targeted citizens nationwide in a single instant and its impact lasted long. The most striking feature of demonetisation was the breathtaking scale of the blunder. Given the fact that the move was undertaken without consultation with experts at any institutional level, the buck stops clearly with Modi. While the trauma that the vast majority of Indians, especially the poor and the marginalised, experienced has been fairly well documented, its undermining of key Indian institutions has not been appreciated.
The immediate—and ever-changing—rationale for demonetisation was touted by Modi’s acolytes as an assault on the evil of cash, a broadside against black money, the promotion of the more modern digital payment systems and a move against the scourge of counterfeit currency. Each of these objectives has been established as bogus. Cash is king again with the levels of currency in circulation now back to normal; there is no evidence that the black money churning machine has fallen silent; digital payments, which spiked in the desperate days after demonetisation, are back to the reasonable levels they deserve; and it turned out that the scale of the counterfeit notes problem was never the one it was portrayed to be. So, with cash levels coming back to normal, does this mean that the economy and livelihoods are now back to normal?
The scale of demonetisation was a colossal shock. The fact that the impact fell disproportionately on large sections of people simply because they were dependent on cash was a significant factor. But even more important was the fact that these were exactly the same people who operated small businesses or engaged in “informal” terms of employment (see Frontline , December 9, 2016). Large sections of the peasantry operating small landholdings, agricultural and rural labour, and migrant workers were (and remain) heavily dependent on cash.
There is zero evidence that their livelihoods have returned to normal, as is testified by several other stories in this issue of Frontline from various parts of the country. Never before have agricultural commodity prices fallen in unison as they did after demonetisation. In many cases, prices are still below the levels that prevailed in November 2016. In fact, the spectacular collapse in prices since then is what has sparked off the wave of farmer protests across the country.
Indeed, if Modi did ever contemplate penance of some kind or repentance for having caused such large-scale devastation to livelihoods, all he needed to have done was just two things. One, he could have instituted a government procurement programme for agricultural produce in order to actualise state purchases of farm produce at the state-mandated minimum support price (MSP). This would have immediately arrested the collapse in prices and supported farm incomes. Recall the fact that demonetisation happened just after the harvest season of 2016, resulting in a sharp decline in prices. Indeed, by not doing this, the Modi government ensured that its announcement of MSP increases, made with great fanfare, made little difference to farm incomes.
The other measure could have been significantly scaling up the Mahatma Gandhi National Rural Employment Guarantee Scheme. Since livelihoods in both urban and rural communities collapsed immediately after demonetisation, it would have made sense to use the flagship rural employment programme to create jobs for not only rural workers but also the migrant labour that was returning home. Instead, Modi not only did little for a scheme that had been lauded for its transformative potential, but actually ridiculed it. These two measures could have, at least to some extent, countered the enormous damage caused to incomes and livelihoods after demonetisation. Instead, Modi did nothing even as livelihoods were being lost.
The institutional apparatus for managing the Indian economy, considered fairly robust and competent by developing country standards, fell to its knees during the experiment with demonetisation. Heading the troika in command was obviously the Prime Minister because he, not the Governor of the Reserve Bank of India (RBI), which is the custodian and issuer of the national currency, made the fateful announcement on November 8, 2016. The central bank and the Union Finance Ministry headed by Arun Jaitley were the other two elements of the troika who bore ultimate responsibility for the move. All three failed miserably as the economy lurched under the impact of the rash move. One of the prime institutional casualties was the Indian central bank.
Institutional failure
It is significant that when the then RBI Governor, Urjit Patel, resigned a few months ago, obviously under pressure from the Modi government, much concern was raised by the need to maintain the autonomy and independence of the RBI as an institution. This was utterly missing in the days and months after demonetisation. The RBI remained a bystander even as a large part of the value of the national currency evaporated overnight, throwing millions of Indians into turmoil. Subsequently, it failed to provide any credible information that would have given Indians a reasonable idea of the time frame in which things might return to a semblance of normalcy. In a situation of extreme shortage of currency available with banks, it failed to ensure a fair distribution of cash among banks that was based on some normative yardstick. This gave rise to widespread allegations that some banks (private versus public sector banks) or classes of customers were favoured at the expense of the vast majority of others.
The institutional failure was compounded by the fact that both the Finance Ministry and the NITI Aayog, that much-diminished replacement of the Planning Commission, were reduced to choirboys singing the Modi tune on demonetisation. The current RBI Governor, Shaktikanta Das, who was then Secretary, Economic Affairs, in the Finance Ministry, was calling the shots at the press briefings soon after demonetisation. Neither the Finance Ministry nor the RBI provided a hint to the most important question in those days: how much currency value has been put back into the system? Instead, they waffled about the virtues of digital payment systems; meanwhile, the NITI Aayog was organising lotteries as a means of promoting digital payments in order to eradicate the curse of cash.
Recent reports show that the RBI board did record serious reservations during a hurriedly arranged meeting on the evening of November 8, 2016. Sridhar Acharyulu, former Central Information Commissioner, has pointed out that these apprehensions countered the motives of the government to demonetise currency. The board pointed out that demonetisation would achieve little as a measure against black money because most of it was not in the form of cash anyway and that it was not needed as a measure to eliminate counterfeit currency, and warned that it would have adverse consequences for GDP growth. The question that has haunted sane people still remains unanswered: why was demonetisation done? The answer may lie in Hindutva’s voodoo economics, a vision of the work unhinged from the need for empirical evidence of any kind. Instead, its leading proponent, who has since scaled the heights of these institutional offices, offered this as a magic wand to counter the pervasive scourge of black money. It played on common Indians’ perception of black money as a cash-specific problem. But as events moved on, and as the goods and services tax (GST) regime rolled out in 2017, the latitude given by people to the Modi regime evaporated.
The twin strikes of demonetisation and the GST rollout, undertaken in quick succession, have largely hit the same section of people—small businesses and those involved in informal occupations. Indeed, economists trying to investigate the impact of demonetisation, much like crime-scene investigators, find the evidence has been contaminated by the GST fiasco.
Since the effects of the two events appeared as a continuum, it is impossible to separate the impact of the two. But one thing is clear: Modi’s sudden strike on the night of November 8 is likely to have fundamentally altered the expectation of stability from the Indian currency regime. If something can be trifled with once, it can happen again. The destruction of the abiding faith in the stability of the Indian currency system is Modi’s historic contribution.
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