<b>Percy Mistry</b>: Collateral damage of demonetisation

A corrupt political-administrative nexus is the real disease, not black money

After 50 days, it is clear that demonetisation has failed, with severely damaging consequences. Many have attempted to defend it as an inconvenience that will be forgotten when its long-term beneficial effects take hold. Over a hundred deaths, billions of man-hours in queues waiting in vain for cash, millions of lost jobs and incomes, are mere inconveniences?
 
Instead of course-correction, through remonetisation and roll-back of counterproductive measures, Prime Minister Narendra Modi is doubling down, with the promise of more action. His bombastic rhetoric is shriller. Intending to curb black money, Modi has instead damaged millions of ordinary Indians. Whether contract labourers, farmers, traders, vegetable vendors, sole proprietors, plumbers, carpenters, doctors, lawyers, accountants or domestic help, millions of livelihoods and incomes have been impaired through misdirected draconian measures.
 
Asking people to be patient is disingenuous because demonetisation will not achieve its aim. It will not curb black money. Instead it will destabilise the Indian economy when economic portends are malignant. It will do much damage over the long term by increasing investor perceptions of unusually high policy risk in India, when such measures can be taken by one man, without any checks and balances.
 
Oddly, demonetisation is the brainchild of a consummate politician supposedly in touch with the public mood. His defenders claim he was ill-served by bureaucrats, who should have made him aware of adverse consequences and should have implemented demonetisation better. There are two problems with this argument. First, Modi has created a super-sycophantic climate in obsequious Delhi and Bharatiya Janata Party-run states. Everyone is too frightened to tell the emperor he has no clothes. Second, it is impossible to see how as monumental a folly as demonetisation could achieve more with better implementation, when it was so badly mis-designed.
 

Long winding road: People queued up outside an ATM in New Delhi to withdraw cash. Asking people to be patient is disingenuous because demonetisation will not achieve its aim

In seeking public support for demonetisation, Modi argued it was indispensable to combat: (a) black money; (b) terrorist financing; and (c) counterfeit money. These rationales justified invalidating 86% of the currency in circulation when cash accounted for 95% of transactions (75% by value). Belatedly, another rationale emerged when these proved untenable.  Demonetisation was intended to accelerate a shift to a “less-cash” economy.
 
Enough media comment has emanated to debunk the myths of (b) and (c). Demonetisation will do little to stop terrorism. It will persist till the problems of Kashmir and the North-east are resolved, politically or militarily. Counterfeit money is too small a proportion of the currency in circulation (under Rs 400 crore out of over Rs 16.6 lakh crore or .024%) to be an issue. There are more counterfeit US dollars in circulation globally. But, they do not trouble the US authorities enough to contemplate such ridiculously extreme action.
 
The argument that demonetisation is aimed at accelerating the shift to a less-cash economy is also contrived, given the dangers of doing that too fast. The bulk of India’s population is not technology-savvy. Too many people do not have usable bank accounts. The hard and soft infrastructure needed for them to transact on a nationwide basis does not exist. The pipe dream of cell phones being bank branches resonates only with delusionists confused about how far and how fast technology has advanced in India. What about the high cyber-security risks involved in this massive a transition to digitisation, exposing a vast number of bank accounts to fraud and theft? Experience from developed countries suggests that many years will pass before India can reduce cash transactions to 60% from 95% in number and to 50% from 75% in value.
 
That leaves the fallacy of demonetisation being indispensable to eliminate black money as the last myth to be debunked. It is that profound untruth, which permits Modi to keep claiming that he has the support of the public and label opponents as anti-patriotic protectors of black money. What the immediate after-effects of demonetisation suggest, however, is that instead of curbing black money, demonetisation has encouraged it through malfeasance of government officials at all levels, the Reserve Bank of India and the banking system. Black money is not the problem. It is the symptom of another underlying disease, that is, India’s rotten, corrupt political and administrative nexus (PAN). It is PAN that needs to be excised, not black money.
 
To curb black money, the strategy for Modi was not to demonetise and hurt India indiscriminately, but to target more precisely, members of PAN through “laser surgery” rather than “nuclear attack”. Most of the corrupt are known to the authorities (part of PAN) and the public. They flaunt their wealth and power, believing contemptuously that no government can restrain them. Over 80% of black money in India is traceable to PAN (central, state, and municipal) to fund elections or enrich public officials. Modi is a member of that cosy coterie — the hypocritical political-administrative nexus, funded by crony capitalists (again, widely known) to secure their pecuniary aims. What he is doing suggests that he does not want to eradicate corruption and black money but to monopolise it exclusively for the BJP’s/Rashtriya Swayamsevak Sangh’s use in the elections ahead.
 
It is impossible to conceive of black money in India being tackled decisively or durably unless the behaviour of that nexus and those who fund it is changed by targeting and punishing it in exemplary fashion. That has been talked about for eons. But little has been, or will be, done. Modi promised to deliver more than talk. But he has obfuscated and exacerbated the problem with demonetisation, which will do nothing to change the behaviour of PAN, or curb black money stocks and flows. It has and will, instead, inflict enormous collateral damage on India and on the fragile relationship between government and citizen.
 
Demonetisation cannot be rolled back. But its more damaging consequences can be mitigated. The question is whether demonetisation now needs to be followed by “de-Modi-fication” in the elections ahead to ensure that no one can inflict so much damage on India again. Will that occur? No one knows yet. Should it happen? Without doubt. 

The author is chairman, Oxford International Associates Ltd