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Critical economists, silent PM

  By Vijay Darda | 28-11-2016

Prime Minister Narendra Modi’s decision to demonetise Rs 500 and Rs1000 currency notes has literally stunned the country. It is his declared intent that the decision has been taken to unearth the black money that is eating into the vitals of the economy. The reality is that there is no reason to oppose the decision on the issue of black money. But even the prime minister acknowledges that the decision would cause some pain and the people should bear it for 50 days. He has promised that the gain then would outweigh the pain. It is here that the difference of opinion between Prime Minister Modi’s claims and the assessments of notable economists come into play. Some of them have used very colourful language to describe the effect of demonetisation on the economy. “The economy has had a heart attack,” said Indranil Sen Gupta, chief India economist at Bank of America-Merrill Lynch.

Another economist Jean Dreze who specialises in development economy, said: “Demonetisation in a booming economy is like shooting at the tyres of a racing car.” As Dreze explained the idea that demonetisation would flush out the black money from the economy is based on the hoard theory. “These claims are based on what might be called the hoard theory of black money. In this view, black money is a gigantic hoard of illegal income that keeps growing and needs to be flushed out. This is wrong. Crooks know better than to keep their illegal income in suitcases of cash. Instead, they spend, invest, launder or convert it in one way or another,” he observed. These are not the only voices from the economists who are critical of the demonetisation decision.

Bharat Ratna and Nobel laureate economist, Prof. Amartya Sen has said that both, the idea and the way it was implemented, were akin to a “despotic action” and betrayed the “authoritarian nature of the government”. He too criticised the assumption of flushing out the black money through demonetisation. “Telling the public suddenly that the promissory notes you have, do not promise anything with certainty, is a more complex manifestation of authoritarianism, allegedly justified — or so the government claims — because some of these notes, held by some crooked people, involve black money. At one stroke the move declares all Indians — indeed all holders of Indian currency — as possibly crooks, unless they can establish they are not,” he said.

Justifying his description of the government as ‘authoritarian’, Prof. Sen who is the author of the concept of development as freedom, said: “Only an authoritarian government can calmly cause such misery to the people — with millions of innocent people being deprived of their money and being subjected to suffering, inconvenience and indignity in trying to get their own money back.”

This criticism outside the Parliament is matched by the rare intervention of the former prime minister Dr Manmohan Singh in the Rajya Sabha. Dr Singh spoke hardly for seven minutes but then brought in his entire experience gathered through his different assignments in the country’s financial system and tore into the government’s implementation of the decision. He described the implementation of the decision as a “monumental mismanagement that has been undertaken about which today there is no two opinion in the country as a whole”. He also asked the prime minister to give the “names of any countries he may think where people have deposited their money in banks but are not allowed to withdraw their money. This alone, I think, is enough to condemn what has been done in the name of greater good of the people of the country.”

The former prime minister’s Rajya Sabha intervention has provided Prime Minister Narendra Modi to silence all the critics of his demonetisation policy by rebutting each of the arguments on the basis of the facts that have led the government to the demonetisation decision. He can also spell out the roadmap through which his government plans to ease the suffering of the people in the remaining period of the 50 days of promised pain. But so far Prime Minister Modi does not seem inclined to follow this path. He has opted for silence in the Parliament and aggressive eloquence outside it. He has been addressing public meetings and has been targeting the critics of the demonetisation describing them as “holders and backers of black money”.

It appears from this course of action that Prime Minister Modi is not overtly worried if the Parliament session is washed out due to his refusal to attend the proceedings and respond to the concerns of the members of the Parliament. His ministers too have not been very conciliatory towards the opposition leaders, and this has vitiated the atmosphere in the Parliament.

His appeal to the people to go cash less and to use digital money may make some sense in the long term, but in the short term with millions of people involved in the informal sector depending on cash transactions, the process of going cash less is easier said than done. In fact, before undertaking the process of demonetisation, it would have been better if the government had ensured that the people have gone cash less in huge numbers. But demonetising before achieving this change is like putting the cart before the horse.

With large parts of rural areas not being served by the banking system and the ATMs, their problems due to the demonetisation would surely result in the 2 per cent decline of the GDP as analysed by Dr Singh. All rating agencies have concurred this view, and observed that the impact of demonetisation would not be restricted to this quarter, but could extend into 2017-18. The whole thing boils down to one simple question – is the pain of demonetisation far greater than the promised gain? Right now, the answer seems to be in the affirmative, in the opinion of several economists.

Before I conclude…

There has been a shocking jailbreak in Punjab wherein the Khalistan Liberation Front (KLF) chief has escaped along with five other criminals. Coming a few months ahead of the state Assembly elections, this incident raises questions about the law and order situation in this sensitive border state. The politicking that has followed this jailbreak incident also shows the divisive nature of the polity on this issue. It appears that spectre of the return of militancy does not appear to unite the politicians and there lies the greater danger.


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Critical economists, silent PM


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