Note ban sung blue

DEMONETISATION

The Economists Speak

Uma Kapila (ed)

Academic Foundation

150 pages; Rs 595

Without doubt the central government’s decision to demonetise currency notes of high denomination on November 8 was the most significant development of the year. Not only did it impact each and every Indian but it did so immediately and acutely. Not surprisingly, every Indian had a view on demonetisation. And because demonetisation was done on the pretext of curbing black money, corruption, fake currency and terrorist funding – all absolutely unexceptionable goals – it was mostly greeted by a wave of approval. People were stunned but they approved, barring one group — the economists. 

Opinion pages across newspapers were mostly full of experts who shared their take on the decision and, in stark contrast to the proverbial man on the street, the economists stood out for raising innumerable concerns, if not out rightly denouncing the move. What fuelled their criticism were the daily flip-flops by policymakers, the changing narrative on why demonetisation was undertaken to begin with and growing lack of clarity and transparency about data.

Demonetisation: The Economists Speak is a collection of articles written by noted Indian economists and, barring a few, published in various print and online platforms – including the Business Standard – over the past couple of months. The book has 20 such pieces and has entries by some of most widely followed columnists in the country such as Bibek Debroy and Ajay Shah. Mr Shah, in fact, has three contributions – the most by any one writer in the volume – and all three pieces are eminently readable and deeply insightful (Disclosure: All three appeared in this paper, for which Mr Shah writes a regular column). His first piece explains how to make sense of demonetisation, which in many ways left everyone stunned. The second piece tackles how the shocks to the macro economy will play out, and the third one explains why demonetisation came at a very bad time for the Indian economy. In fact, his first piece, also carries one of the best lines that I have read on demonetisation’s possible impact: “Is this just a temporary shock?… The key question is firm failure… Once firm failure has happened, it cannot be undone. You can turn an aquarium into fish soup, but you cannot turn fish soup back into aquarium.” 

The volume editor has done a good job of covering demonetisation from all the crucial angles while choosing the articles. Many of the pieces attempt an impact analysis — some specific, such as C S C Sekhar’s piece on Indian agriculture, and some more wide-ranging such as the piece by Suyash Rai. In fact, Mr Rai’s piece is the longest, running into 20 pages, and makes one wonder whether, regardless of the poor implementation, demonetisation was even a justified move conceptually. The only area where the collection could look weak is that there aren’t many pieces that defend demonetisation. Mr Debroy’s piece starts off the book but does not make a convincing case.

The compilation has been edited by Uma Kapila, a long-time observer of the Indian economy, and her conclusion reflects that overall sentiment. “It is now becoming clear that demonetisation, the way it was implemented, will not eliminate existing black money and corruption…. The country is being driven into an artificially created recession and the level of economic activity is declining. The revival of the economy will no doubt be a painful process, but the sooner we have a road map, the better off we will be.” 

It is hard to argue with either conclusion or with the bulk of the analysis that led her to that conclusion. Even though there are some metrics that confuse, such as the latest Index of Industrial Production, which rose by 5.7 per cent in November, most variables point to a substantial hit on economic activity. The poor third quarter results of companies, which are being declared these days, are a case in point. Most rating agencies and brokerages have rolled back the GDP growth estimates for India. So the apprehensions that various contributors in the book expressed have come through. The road map for economic recovery will be known within the next seven days, as Finance Minister Arun Jaitley stands up to present another Union Budget on February 1.

All in all, on the off chance that a reader missed all the rich analysis on demonetisation that was on display during November and December, this is an excellent compilation to bring you up to speed.