Harvard Business Review calls Modi's election win a Bollywood blockbuster

After PM Narendra Modi took a dig at Harvard University alumni during his election campaign, the university has responded with an insightful critique of demonetisation by looking at it in the context of the BJP’s resounding electoral victory in the recently concluded state elections. The article, titled ‘Early Lessons from India’s Demonetization Experiment’, authored by Bhaskar Chakravorti, was published in Harvard Business Review on March 14. Chakravorti, a public policy professor at Tufts University, was one of the first critics of demonetisation. In a paper published on December 14, 2016, in Harvard Business Review, Chakravorti had called demonetisation a “case study in poor policy and even poorer execution. Unfortunately, it is also the poor that bear the greatest burden.”

In his latest paper, Chakravorti says: “Four months passed. The country emerged with few obvious scars. Although the impact on corruption remains to be seen, Prime Minister Narendra Modi’s government was rewarded with victory in mid-term state-level elections, seen as a referendum on its unprecedented action. Short of any singing, dancing, and costume changes, this sequence could have been taken from Bollywood, a movie industry widely known for its fantastical flights of fancy.”

To his merit, Chakravorti hasn’t just commented on BJP’s electoral victories but also sought to analyse how demonetisation played out on the minds of the Indian voter who gave an overwhelming majority to a party led by Modi. After all, another Harvard luminary Amartya Sen had described Modi’s move as a “complex manifestation of authoritarianism” that “declared all Indians as crooks”.

Chakravorti makes a point that demonetisation hasn’t really helped curb corruption that was one of the prime objectives of declaring 86 per cent of all Indian currency invalid. The article states that Indians with black money found ingenious ways of putting back their money into banks, irrespective of whether it was illegitimate or not. His argument is as follows: Corrupt people don’t generally hold their wealth in cash.

Only 6 per cent of the money detected in tax raids in 2015-16 was cash. Most corrupt people invest in stocks, business, real estate, assets bought in someone else’s name (benami) and jewellery.  He concludes, “Public policy for rooting out corruption calls for a systemic approach, with carrots and sticks to motivate cultural, institutional, and behavioural change in the long term. Silver bullets, such as drastic demonetisation, don’t work.”

Income tax raids and seizures in India have yielded little over the years. There is little reason to believe that tax investigators aided by demonetisation could boost their illegal cash haul. The department is also ill-equipped to detect illegal wealth parked in benami assets and stocks, which not just involve navigating labyrinthine transnational holding structures but also global coordination with other governments which depends on signing and effectively implementing tax data-sharing treaties. The Modi government found this out after demonetisation. It was only in 2017, a few months’ after demonetisation, that the government approved increasing the strength of the income-tax department by 73 per cent by 2018. The number of customs and excise employees is to be increased by 81 per cent by 2018. In addition, police forces for the first time in years are also to be increased by almost 100,000 in the same period. All these three departments are extremely crucial if the real targets of demonetisation have to be smoked out. Given the lengthy government hiring processes, this increase in staff strength would invariably take longer than envisaged.

This is where Chakravorti’s argument on the effectiveness of demonetisation assumes significance. His analysis also questions the reliability of economic data in India. His argument is as follows: The Central Statistics Office (CSO) estimated India’s GDP growth at 7 per cent for the quarter ended December 2016. This seemed to suggest that demonetisation had no impact on India’s GDP growth. But CSO arrived at these estimates by relying on models extrapolated using past data. When an event like demonetisation that sucks out cash from India’s huge informal economy occurs, such models become less reliable. So, India’s GDP growth story is not what is being projected. Besides, the informal sector in India produces 45 per cent of the output by employing 94 per cent of its workforce. It is hard to get reliable data about the largely cash-driven informal sector in India.

Chakravorti states, “India does not have reliable national retail sales data, so statisticians have to use production figures to estimate consumer spending. To compound the estimation challenges, these production figures include data only for listed companies, thereby underrepresenting the unregistered companies and informal manufacturing producers — the ones that are directly affected by the cash ban.”

In this Modi-Harvard war of words, one thing stands out for sure. The economists who rely on data to study the impact of demonetisation could certainly run into counter-currents that seem to defy the laws of economics.

Chakravorti catches the dilemma of an economist trying to decipher the impact of demonetisation quite vividly. He states: “On March 11, Uttar Pradesh gave the prime minister’s party a landslide election victory. While we celebrate the age of big data, it may be “big narrative” that drives the most-profound decisions: We’ve witnessed it in the UK, in the US, and now in India. When people feel that you’re fighting for them, it seems even the most concrete evidence, be it data or history, wields less and less influence. Ultimately, the victory of narrative over data may be the takeaway from India’s demonetisation saga. And that may qualify as a plot for a Bollywood blockbuster after all.”