One can scarcely miss the irony of former Prime Minister Manmohan Singh calling the Modi government’s demonetisation move a “case of organised loot, legalised plunder of the common people”, in the Rajya Sabha on Thursday. In its second term, his own government was mired in one of the worst corruption scandals of independent India. Though Manmohan’s personal probity and integrity were never in question, there is no doubt that he let things drift and lost his grip over the administration.
So the BJP-led NDA, which came to power in 2014 lambasting the UPA for its massive corruption and ‘policy paralysis’, is now being accused of “plunder”, that too by one the country’s most soft-spoken and mild-mannered politicians. Singh also said the demonetisation and the ensuing currency crunch would lead to a two percentage point decline in GDP growth. For good measure, he quoted even Keynes, saying: “For those who say demonetisation will do harm in the short run but will be in the interest of the country in the long run, I am reminded of what John Keynes said, ‘In the long run we are all dead’.”
For Manmohan Singh, who was battered by the BJP and its allies for the 2G and coal scams, this must be a rare moment of schadenfreude .
In fact, the Government itself has conceded that growth will be hit in the short term, with Commerce Minister Nirmala Sitharaman on Wednesday acknowledging as much, though she was quick to add that the pain would be temporary.
Given the ham-handed way this government has gone about the demonetisation exercise, it’s quite baffling to see how it gave the Opposition a stick to beat it with. There is little doubt that the banking system was totally unprepared for an exercise of these mammoth proportions. Also, the government seems to have severely underestimated the demand for small denomination currency, which is quite puzzling.
Several research and rating agencies have warned of a growth decline in the coming quarters due to the demand contraction leading from the liquidity crunch. Ambit Capital was the first to cut the GDP growth forecast to 5.8 per cent from the earlier estimated 7.3 per cent for 2017-18.
Goldman Sachs, in a research note, forecast a GDP growth of 6.8 per cent for the current fiscal. Though both Moody’s and S&P yesterday warned of “disruptions” in the short run, they were careful to add that the demonetisation move will lead to long-term gains as it will bring in more tax revenue, ensure fiscal consolidation and lead to greater “formalisation of economic and financial activity”.
Whither informal economy?
This brings us to another interesting question. Now that there is such a premium being put on “greater formalisation of the economy”, is the eradication of the informal economy such a desirable thing? Given the size and scale of the informal sector, and given the number of people who depend on it (the Arjun Sengupta Committee a few years ago put the figure at more than 800 million), would not the choking of this sector lead to untold misery for millions, even if one were to concede the long-term benefits of “greater formalisation”?
A vast majority of people in this country prefer to deal in cash for their day-to-day transactions for a variety of reasons — ranging from the cultural, to economic and political. Despite bank nationalisation more than 45 years ago and the recent Jan Dhan scheme for financial inclusion, a large number of people are still underserved by the formal banking system and have to rely on informal mechanisms for their credit needs.
As economist Narendra Pani pointed out in a recent column, there are some specific advantages for people opting for cash transactions, especially in the rural economy. Also, for migrant workers, dealing in cash is crucial to be able to send home money. Besides, opting for cash transactions should not be seen as people’s reluctance to get acquainted with cashless transaction modes. There are cultural reasons at play as well, as many people feel they have better control over their expenses if they deal exclusively in cash. Urban middle-class people who groan over mounting credit card debts/payments would surely sympathise with this position.
So this thrust towards “greater formalisation” and going “cashless”, which the government so enthusiastically supports, may stem from a rather misguided notion of the benefits of a “cashless economy”, at least in the medium term.
Now, back to Manmohan Singh’s moment in Rajya Sabha yesterday. I’m sure he must be having a quiet chuckle at the government’s current discomfiture after being at the BJP’s receiving end for so long. KC Chakraborty, former RBI Deputy Governor, said in a recent newspaper interview that a proposal for demonetisation had come to the RBI during his stint a few years ago but it was rejected by the central bank as the short-term costs for the common man were seen as being too high.
So, if the Manmohan-Chidambaram duo had imposed demonetisation in a similarly ham-handed manner four or five years ago, the scorn and vitriol they would have had to endure, from political opponents and common people alike, would have been far worse than what Modi and his friends are receiving now. But that’s a story for another day!