Those who have seen the movie Titanic may recall the dramatic scene when the two sailors on lookout duties in the ship’s crow’s nest (highest point on the ship’s main mast to look out for and report any approaching hazards), see the approaching iceberg and report it, but it’s too late and the ship, steaming at maximum speed, hits the iceberg to sink in freezing waters of the north Atlantic.
The maiden voyage of the Titanic suffered from poor planning and implementation as it did not cater for the dangers of high-speed steaming in waters that had icebergs. Though not an economist, I venture to write this article on demonetisation of Rs 1,000 and Rs 500 notes (comprising 86.5 per cent of the currency in circulation), with a preamble that the people of India voted Prime Minister Narendra Modi to power with a clear mandate in 2014, and he has every right to take tough or difficult decisions. Unlike the captain of the ill-fated Titanic, he has to ensure the safety of the ship and its 1,300 million passengers, while sailing in uncharted waters.
In my opinion, over 70 per cent people support the demonetisation. If initial pre-poll surveys are to be believed, the BJP is expected to win the Assembly polls in the all-important state of Uttar Pradesh and in Goa despite the hardships borne by the poor.
Media reports indicate that over 97 per cent of the demonetised money has been deposited in banks. Of course, the banks would have initially filtered out the counterfeit currency and will now go through the detailed task of filtering out the black money from the deposits and recover some more income-tax dues, which economist Mohan Guruswamy estimates could be as high as Rs 2.4 lakh crores as against his estimate of two per cent loss to GDP of Rs 3 lakh crores and Rs 40,000 to 50,000 crores for printing of new notes, and at least 220 million daily wage earners have suffered loss of work.
A more optimistic estimate would be one per cent loss to GDP — Rs 150,000 crores — but the pain has been enormous to the poor, most of whom who will still vote for Mr Modi.
To comprehend this paradox, one must understand the passive mindset of the majority of poor Indians, who voted the UPA out of power in 2014. They voted for Mr Modi, who successfully convinced the poor that he would not allow the massive scams of UPA-2 to be repeated, and would bring back black money.
No one can deny that Mr Modi is a unique politician, a master orator with phenomenal stamina for working for long hours, a clean image, and someone who, being a grassroots politician, has his pulse on the emotions of the masses. So why did the astute Mr Modi go in for demonetisation without thorough planning? He should have been fully aware that India has a sad record of good ideas going awry due to poor planning and implementation from an unaccountable bureaucracy? The 2010 Commonwealth Games fiasco is well known.
Why did he not ensure that enough Rs 100 notes had been printed and that the new Rs 2,000 and Rs 500 notes were compatible with the existing settings of over 200,000 ATMs? Was the move meant to cleanse the black money hoarded by some political parties for use in the February 2017 Assembly elections?
Also, given the large amounts of new currency being nabbed post-demonetisation by the income-tax and ED authorities, it is clear that some unscrupulous bankers too had decided to make some “easy money”.
Here, too, Mr Modi has risen higher in the eyes of the poor by his relentless drive to nab the corrupt. So while the BJP has gained politically, has the nation lost its “economic momentum” apart from losing its top spot as the “fastest-growing major economy”?
The January 6 announcement, reducing GDP growth for 2017 to 7.1 per cent of GDP (from the earlier 7.3 per cent), based only on pre-demonetisation data up to October 2016, appears to be preparing the public for further bad news after the demonetisation data is finalised.
The answers are being debated by top economists and bankers, each giving his or her views based on individual ideological convictions. And as always happens in India, the truth perhaps lies somewhere in between, and the final answer may have to await the new budget on February 1, the expected act against benami property deals and GST.
During his address to the nation on December 31, 2016, it was clear that Mr Modi had fully grasped the enormity and repercussions of the demonetisation process that he had started on November 8, and he did announce some mitigating measures.
The demonetisation has had some “speed breaker” impact on terrorist activities in Kashmir, the Maoist movement, black money and counterfeit money coming from Pakistan. Despite much brave talk by ministers, shifting to even a 40 per cent cashless digital economy from the present 18 per cent credit/debit cards, Internet banking, NEFT/SWIFT and mobile phone wallets will take up to five years, assuming a dramatic rise in electricity supply, Internet connectivity, and a strong organisation to prevent and counter cyber fraud.
Given protests by some Opposition parties, it appears that a large amount of money kept for use in the forthcoming Assembly polls in five states has become “worthless paper” or has been deposited in banks with little left for “wooing the voters”.
Maybe, the forthcoming elections will be relatively “clean”, but with economic growth slowing down (even the President mentioned this aspect on January 5), the primary question is: how soon can remonetisation be completed so that the economy starts growing at over seven per cent again, and foreign direct investment starts flowing in?
I am sure that Mr Modi has the answers. I do hope that, unlike the Titanic, which sank on its maiden voyage, India under Mr Modi’s helm will avoid hitting any more icebergs.
We have enough internal and external problems, and do not need to create new ones, specially when the majority are supporting the Prime Minister....