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Hard lessons from demonetisation: Try a long-term way to combat black money, avoid Bollywood-style hold-ups

Madhavan Narayanan
Judging from the fiscal actions after the electoral debacle, it seems the NDA govt is realising that some fiscal flirting may be a lesser evil compared with some monetary transgression.

What new lesson can possibly be drawn about the controversial demonetisation of high-value currency notes carried out two years ago in a stealthy manner that has already been analysed to death from various angles: political, economic, social and conceptual? One thing that can indeed be said with certainty is that the effort by Prime Minister Narendra Modi in November 2016 was a gamble. But more than a gamble, it was a measure that showed that this government was not afraid to take hard decisions where necessary. Coming as it did in the backdrop of Prime Minister Manmohan Singh's UPA government that was accused of policy paralysis, the note ban was as much a political gamble as it was an economic gamble.

Alas, what happened in the weeks that followed the 8 November 2016 demonetisation was an exercise that demonstrated the dubious genius of the Indian tax evader gamester who could put 99 percent of the so-called dirty cash back into the banking system at what seems like a relatively small cost to himself.

I had asked then two questions: "Can you cast a net to catch whales? Or worse, are there black money sharks out there who can bite their way out of the net?" In retrospect, the answer seems a "No" to the first question, and a resounding "Yes" to the second.

More important, the hardships caused to small businesses and ordinary citizens and daily wage workers showed a social cost not amenable to the simplistic arithmetic of the hold'em-up economics to catch tax thieves.

This turned out to be another Bollywood movie in which the police arrived too late on the scene. However, we just had the finance minister tweeting on what critics were hashtagging as a "Dark Day" to claim that the demonetisation exercise set the economy on a path to formalisation. In plain English, the formalisation is ostensibly a combination of a push towards electronic cash on the one hand and a crackdown on shell companies that faced some heat in the toothcombing of cash deposits that followed the end of the demonetisation drive.

We are yet to see any smoking gun evidence of significance to prove that the shell companies brought some tax cash into the exchequer's account. What the government has offered now is a vague claim that things have changed for the better. As for cash, the economy is back to its old ways of dealing in paper currency after a forced honeymoon with mobile wallets. If indeed formalisation of the economy was the issue, there was no need for Modi to ask India's citizens to give him "50 days" to combat black money as he ushered in the demonetisation drive.

With anecdotal evidence, I had within two days of the launch described the time-frame as a 50-day 'hawala window' for those who wanted to game the note ban to launder unexplainable cash. The government has since shifted goalposts, changed its tactics and put a fine spin on its gamble. The trouble with gambling is that it can be addictive. As I argued three weeks into the exercise, the government was twisting itself into jalebi-like knots to explain its position and behaving more like a local cop desperate to catch an elusive pickpocket than the administrator of the world's fastest growing economy.

Agreed there is a romantic populism to a midnight swoop or a surgical strike, agreed that black money was something the BJP had promised to eradicate, agreed that the intentions of the government were noble, but nonetheless, there seems to have been a naivete bordering on foolhardiness in the manner in which the NDA government overran the advice of the Reserve Bank of India (RBI) headed by governor Raghuram Rajan to eschew its cowboy approach to lasso in Black Buck Gangsters.

The moral of the story is that you cannot play poker in an economy that needs hands seasoned in Bridge. Maybe, we don't need bells and whistles. Maybe the crackdown on shell companies could have begun well in advance and adequate stacks of swap currency notes kept ready in stealth to make it all work without a shortage of notes.

After all, this is a country that staged two nuclear tests, one in 1974 and another in 1998 in perfect secrecy. Could it be that Modi trusted just a couple of lieutenants who he could trust and presented everybody else with a fait-accompli? It seems so.

Even if the National Democratic Alliance (NDA) government had its heart in the right place with the best of intentions, there is an old saying by Voltaire that comes to mind: "Perfect is the enemy of the good." Perhaps, there was a perfection that the Modi sarkar was seeking from an array of players including bureaucrats, bankers and administrators that it could neither manage nor control.

The BJP is right in criticising rival Congress on the ground that it is not sincere in fighting corruption but it is equally true that there is a "system" that is larger than both parties together. It is the system that needs to be fixed. This needs long-term thinking with deeper insights, not a Bollywood-style hold-up.

(The writer is a senior journalist and commentator. He tweets as @madversity)

Also See: Demonetisation anniversary: A political thriller turns two; for a struggling economy, its costs have far outweighed the gains

Demonetisation Anniversary LIVE updates: Modi govt staring at fiscal deficit crisis, says Chidambaram; 'promise of achhe din in shambles'

Two years of demonetisation: Manmohan Singh calls scheme 'ill-fated'; Arun Jaitley says it resulted in 'better quality of life'

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