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MOHAN GURUSWAMY | 21 DECEMBER, 2016

Demonetisation: The Cost of all this Modiness!


NEW DELHI: With almost four fifths of the fifty days gone and with the grievousness of the demonetization injury apparent the Panchatantra tale of the devoted monkey who cut off his royal masters nose to get rid of a pesky fly that threatened the royal slumber comes to mind. "Cutting off the nose to spite the face" is probably the more apt expression.

Even more to the point is the common warning against a needlessly self-destructive over-reaction to a problem: "Don't cut off your nose to spite your face". It is a warning against acting out of pique, or against pursuing revenge in a way that would damage oneself more than the object of one's anger.



In the Bhagawad Gita Krishna tells Arjuna: “From anger arises infatuation; from infatuation, confusion of memory; from confusion of memory, loss of reason; and from loss of reason, one goes to complete ruin” (Chapter 2, Verse 63).

History is replete with instances when acting out of pique inflicted huge costs on a nation. The Embargo Act of 1807 passed by the United States Congress in protest against British and French interference in U.S. shipping. The Act had the side-effect of prohibiting nearly all U.S. exports and most imports, greatly disrupting the U.S. economy."

Closer home the great Ladakh king, Senge Namgyal (1620-70), imposed a punitive tax on the pashm wool trade between Tibet and Kashmir, which largely went by the shortest route through Ladakh, in response to a slight by the ruler of Kashmir. The pashm then began flowing to Ludhiana and helped it to become the great centre for the manufacture of woolens it still is. Ladakh never recovered from the loss of revenue.

Even if not educated in the conventional sense, seeking many options from a deep examination of the issue by the knowledgeable is a quality essential for successful leadership. All great rulers rely on counsel and learn to sift through them.

By all accounts the decision to “demonetize” was by a small eclectic cabal and when a larger than life figure, which Modi now is, is part of it, a psychological malaise that the well-known psychologist Irving Janis called “groupthink” results.

In 1961 the newly elected US President, the brilliantly educated John F Kennedy, agreed to the invasion of Cuba and what came to be known as the Bay of Pigs Crisis, set off events that almost caused a nuclear Armageddon the following year. Irving Janis was a part of the Presidential Commission that studied the faulty decision-making that caused so many obvious pitfalls to be ignored.

JFK’s national security was made up of the best and brightest people. But brightest of them was Richard Bissell, the CIA’s deputy director in charge of operations. Bissell was a man with a brilliant track record of toppling regimes from Iran to Guatemala or of building the highflying U-2 spy plane. When the Yale educated economist commended his plan to the group, each and every one in that team of the best and brightest including Kennedy, assumed that Bissell would have applied his prodigious intellect and experience and hence the plan was foolproof. But it was not. But the greater lesson here was that Kennedy realized he was taken in and was the one responsible. He went public and acknowledged responsibility. He even exclaimed in public: “How could I have been so stupid.”

He appointed the Presidential Commission and imbibed its recommendations. When the Cuban Missile Crisis happened in 1962, Kennedy was ready for the Russians. He asked for options and got them all the time.

There is not even the slightest sign that Narendra Modi has realized the massive screw-up his demonetization policy has turned out to be.

When you abruptly withdraw high denomination currency notes equal to 86% of the value or Rs.14.2L crores, one would expect proper arrangements would have been made to replace what was now excluded. Clearly the government was unprepared. It had very few Rs.2000 notes rolling out of its security presses, and no additional small value notes to pick up the slack somewhat. The resultant cashlessness has cost the national economy hugely and devastated tens of millions livelihoods.

The average daily wage in India is Rs.272, which means that it is essential to have a good part of that for a typical family to have to escape starvation every day. Of the vast reservoir of over 415 million employed in the unorganized sector about half are engaged in the farm sector, another 10% each in construction, small-scale manufacture and retail. These are almost all daily wage earners. Just visualize the cold hearths in these homes and children going to bed cold and hungry. There are harrowing stories from all over the country and the PM’s propagation of electronic payments and mobile banking has the air of asking starving people to eat cake instead.

The loss due to this unprecedented drop in production and income to the economy this year is expected to be around 2% of GDP. This is almost Rs.2L crores. The cost of printing replacement notes is expected to be Rs.40-50, 000 crores.

The loss due to this unprecedented drop in production and income to the economy this year is expected to be around 2% of GDP. This is about Rs.3L crores.

A new Rs.100 note costs about Rs.2 each, while the Rs.500 and Rs. 2000 notes cost more than twice that.The cost of printing replacement notes is expected to be Rs.40-50, 000 crores.

The PM made out that demonetization was going to mean the extinguishing of “black money” and all that wont be returned to banks will be its bonus. Neither is being borne out. The apprehension of hundreds of crores in new pink 1000’s from all across the country by the police as well as the IT authorities is enough proof of that. It just proves that new money too turns as easily into black money as the old money and nothing has changed.

But there is a larger reality. Out of the Rs. 14.2L crores in high denomination notes Rs.13.2 L crores have come back into the system. There are ten days still to go and it looks that Modi’s bonus would not be much. The government has today announced that the banks won’t be accepting more than Rs.5000 per person for the rest of this season of modiness.

The incidence of counterfeits was hugely exaggerated with the RBI stating that only 0.0006% of the money the banks handle are counterfeit with a value of Rs. 29.64 crores out of the Rs.16.4L crores in circulation.

One hopes that he will finally realize that only 4% of the “black money” is kept as cash. The rest is abroad or in property or bullion. Last year his government allowed the import of about 1000 tons of gold, and Global Financial Integrity estimated the illicit export of $83 billion in 2014. Clearly the regime was barking at smallest of the trees.

In recent days the Prime Minister has changed his avatar from corruption fighter to becoming the pitchman for electronic payments. One cabinet minister told me that he constantly asks all his ministers if they have PayTM in their mobiles? His fondness for PayTM is a subject of some speculation.

But there are costs to this also. The average life of an Rs.100 note is estimated to be about a year involving between 500 to 1000 exchanges. Every credit card or debit card or even PayTM transaction entails charges about 2%. The merchant typically passes this on to the customer. So the charges entailed during the average lifespan of an Rs.100 note would be between Rs.1000 -2000. The mobile telephony charge would be about 20p per minute. So think of it as an average of Rs. 100-200 per Rs.100 lifespan. And a replacement note with transportation and distribution costs will not be more than Rs.5. How does this economics look to you?

But the PM doesn’t seem to see it. The irony of this in a country where the average daily wage is Rs.272 and where not more than 30% have smart phones cannot be missed. But then Mr.Modi doesn’t have uses for history, understanding of economic costs, and awareness of the consequences of policy. He is a go-getter. But going where? And getting what?

(Mohan Guruswamy, a Harvard scholar, is an independent columnist and author. He has held positions in government and heads the Centre for Policy Alternatives)

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