It seems demonetisation can never be away from the headlines for long. Just last week former Chief Economic Advisor Arvind Subramanian released extracts of his new book Of Counsel: The challenges of the Modi-Jaitley economy , in which he described demonetisation as a “massive, draconian monetary shock”.
He added that, “growth had been slowing even before but after demonetisation, the slide accelerated”. About whether he was consulted before the note ban, which rendered 86 per cent of currency invalid at one stroke, Subramanian was non-committal. But one can guess that he was kept in the dark.
Not surprisingly, the release of this extract made front page news in all newspapers, both the pink and non-pink varieties. Not surprisingly, the words “massive” and “draconian” were played up in the headlines.
Opposition remarks
Though the ex-CEA spoke about a lot of other issues in the extracts released — the IL&FS crisis, the RBI’s overall oversight on the financial sector, etc — it was demonetisation that hogged the limelight. The dominant view among the commentariat was that the ex-CEA was criticising the note ban now that he was out of the government and firmly ensconced in the world of academia. Some even suggested he was trying to move closer to the Congress by making these remarks. The Congress, on its part, played up these remarks to gain some political mileage.
Other opposition parties, such as CPI(M) and Trinamool Congress, pounced on Subramanian’s remarks and slammed the government for the note ban. They picked up Subramanian’s remarks and exhorted the government to come clean on the note ban. TMC MP Derek O’Brien’s tweet was indicative of the mood in the opposition camp: “Ladies and gentlemen, he (Arvind Subramanian) is not an official spokesperson of Trinamool Congress or Congress or DMK or Telugu Desham Party (sic) or RJD or Aam Aadmi or BSP or Left. Demonetisation was a draconian, massive shock for Indian economy, says Arvind Subramanian.”
Some even suggested that Subramanian was making these remarks to ensure good sales for his book. Going by the press coverage his book seems to have got a lot of free publicity.
Nothing really new
But was the former CEA really being critical about demonetisation? A careful reading of the extract suggests a more complex and nuanced portrayal of the whole exercise. That demonetisation had impacted growth was something the ex-CEA was candid enough to admit even in the 2017 Economic Survey , published just a few months after the note ban. So he wasn’t saying anything new now on that front. In fact, in the extract he expresses surprise that the impact of the note ban on GDP growth was not bigger than expected. To quote from the extract: “As a monetary economist, though, what is striking is how small the effect was compared to the magnitude of the shock”.
He goes on to offer a few tentative reasons for this. He feels that perhaps the economy was more resilient than we had expected and could withstand a shock as massive as demonetisation. He even suggests that people perhaps found ways to cope with the massive currency shortage by relying on traditional or informal credit arrangements.
On why people put up with such massive hardship without protesting during those months post-demonetisation is something that does intrigue the ex-CEA. The UP election victory for the BJP, which came just a few months after demonetisation, was largely seen as a vote in favour of this draconian move. But Subramanian does not believe that the poor put up with the hardship because they believed that the rich were suffering more — an argument trotted out by many commentators in that period. In fact, Subramanian is intrigued by why people who were most affected by the note ban became its ardent supporters. In the extract, he cites American political scientist Thomas Frank’s proposition on why, often, people in a democracy vote against their economic interests.
Sense of solidarity among majority
In fact, Subramanian goes on to offer some provocative arguments to explain the contradiction of the note ban exercise. He suggests that imposing a heavy cost on a large majority of population was intrinsic to the whole exercise. The logic being that if the government is willing to risk putting so many people’s lives in hardship then it surely must be serious about fighting the menace of black money and will follow up with more stringent action against the corrupt.
Also, Subramanian suggests that the masses had to be made to believe that “if it hurts me so much, it must surely hurt the rich more”. This ended up creating a sense of solidarity among the poor which, needless to say, helped the BJP reap rich political dividends, especially in the crucial UP elections.
So, to suggest that Subramanian is moving towards a “pro-Congress” stance, thanks to his observations in his upcoming book is too simplistic a reading. Sanjaya Baru, columnist and former media advisor to Manmohan Singh, at The Hindu Lit Fest in early 2017, said that demonetisation is an exercise that should excite sociologists more than economists. Subramanian’s observations in his book extract seem to endorse that view.