The author is hard on the RBI, which preferred to remain silent rather than clarify various issues, considering that there were several changes made by the central bank in the conduct of exchange of old notes over the two-month period, which had bankers in a tizzy.
The subject of demonetisation has been immensely controversial, as almost everyone has a view on the motives behind the move, as well as its impact. Supporters aver that it has cleansed the system at the cost of a minor inconvenience of two months. The fact that digital transactions have caught on vindicates the move. More importantly, the way of doing business has been cleansed. Those against demonetisation argue that nothing much has been achieved and the economy took a big hit; and that the exercise was a failure. These arguments are well founded and can go to the extent of being driven by emotion. This is one reason why we require an academic examination of the subject that is based on strong arguments supported by facts. It is here that Arun Kumar, who is a well-known expert on black money, has gone into the details of this subject in his book Demonetisation and the Black Economy, where he critically examines each and every argument that was given at the time of demonetisation. Let us look at some of his arguments. First, demonetisation is never the solution to black money when the economy is going well. While it is definitely a major problem in the country, conceptually linking cash with black money is an egregious assumption that led to the unsuccessful results of the move. People can easily use cash for transactions and pass it on to others as working capital expenses. Second, the fact that the government changed the goal posts is a clear acceptance that the initial objectives of addressing issues of back money, counterfeit currency and terror funding were not addressed by this move. It also showed that the government was not sure of its motives to begin with.
Third, as virtually all the cash is back into the system, it can be argued that the intended impact did not work out. Being an economist with a socialist bent of mind, Kumar does talk eloquently on how two vulnerable sections of society were affected by this move—farmers and SMEs. He also links the effect on SMEs to the rise in NPAs with banks, as this section was affected perceptibly with large-scale unemployment in the face of collapse of business models that were driven by cash. Similarly, he attributes farmer distress to paucity of cash in a year when farm output had risen and prices had fallen. He takes this argument further and concludes that contrary to the GDP growth numbers put out by the CSO, growth would actually have been nil or negative if the full impact on the unorganised sector was taken into account. This is open to debate given the extreme conclusion that has been drawn here, but is nonetheless a view to be considered. A very insightful chapter in the book relates to the failure of institutions that came out in the open when demonetisation was announced in November and implemented over two months. This makes for interesting reading. While the reader may have her view on his argument, the author definitely provokes further thinking on the subject. On the political side, he points out that the Cabinet was not taken into confidence, which lowers the importance of this institution. Next, the Prime Minister did not think it proper to answer questions in Parliament on the subject, which the author terms as the institution of ‘accountability in a democracy’. He, however, admits that creating a Robin Hood-like image did pay rich political dividend in the elections held in various states, which cannot be disputed. He is also hard on the RBI, which preferred to remain silent rather than clarify various issues, considering that there were several changes made by the central bank in the conduct of exchange of old notes over the two-month period, which had bankers in a tizzy. The entire banking system came under stress and was severely damaged, as bankers spent months trying to deal with cash as a result of which normal business suffered. The RBI also paid a price in terms of lower surplus earned.
The next two institutions that he has spoken of are interesting. He believes that statistical organisations like the CSO and Niti Ayog went on to say that there was absolutely no impact on the economy in terms of growth or employment, which was incorrect given the ground reality. Last, even the Budget was drawn on the assumption that there was nothing abnormal in the economy on account of demonetisation, which raises the issue of credibility of such documents. All these arguments are hard-hitting and the author is direct in his view and steers clear of being diplomatic, which is typical of an economist from JNU. As there is a lot of research at the ground level that has been used to form these opinions, the author has done a thorough job and the views cannot be questioned. Even the protagonists of demonetisation would probably silently agree with most of the assertions made here. At the theoretical level, he has argued that the reason why demonetisation will never work to curb black money is because the people responsible for it—corrupt businessmen, politicians and the executive (which includes bureaucracy , police and judiciary)—what he calls the triad, has to be broken. Otherwise, black money will continue to flourish and by simply hitting the common man hard in a bid to draw out such wealth is futile and harmful for people. Does one chop off the nose to cure a cold? This is how he ends his book, which says it all.
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