Verdict after Six Months of Demonetisation

EDITORIAL

In the evening of November 8, 2016, the Government of India under Narendra Modi suddenly decided to embark on demonetisation. This was described by many, including in this column, as a “surgical strike on the Indian people”. By pulling out in one stroke high-denomination Rs 500 and Rs 1000 currency notes—that constituted 86 per cent of the total currency in circulation—the government created a severe currency crisis. Writing in this column on December 1 last year one pointed out:

This was clearly manifest today, the first pay day after the November 8 announcement: the queues before banks and ATMs today were seemingly unending. Public patience ran thin not because of being forced to stand in queues for long hours but due to the shortage of currency—there was a mass demonstration before a bank in Kolkata as well.

As for the genuine poor, their condition was brilliantly brought out in a moving article in The Indian Express on November 29, 2016 by Harsh Mander who wrote:

I have known the women and men I met in the past few days, on Delhi’s pavements, for more than a decade. They are accustomed to shiver through winter nights, to search for dirt-waged work every single day, to eat at charities on many days of no work, to beg if there was no other way. But they could not recall a time when life has been so hard.

And just at that point two leading Indian economists in the US—Nobel Laureate Amartya Sen and Prof Pranab Bardhan—came out in scathing criticism of the step. Prof Sen unequivocally affirmed that demo-netisation was a “despotic action” as “it undermines notes,... bank accounts, the entire economy of trust”, adding:

Only an authoritarian government can calmly cause such misery on the people.

And Prof Bardhan noted:

Apart from the tremendous hardship that the poor people are going through, the large informal sector in the economy will find it very difficult and time-consuming to recover from this big blow...

Six months later (this week India completed si months of demonetisation) the UN Economic and Social Survey of Asia and the Pacific 2017 has asserted that the disruption caused by demoneti-sation had “greater and longer-lasting” impacts for lower-income individuals, households and businesses that had difficulties insulating themselves against the shock. It also maintained that the government’s demonetisation measure did not impede future black money flows in new denominations (thereby puncturing the Indian establishment’s loud claim that the step was a direct attack on black money).

And today in an article in The Indian Express, Dr Kaushik Basu, the former Chief Economic Adviser, Ministry of Finance, underlines:

In brief, the benefits of demonetisation have been close to zero and the brunt of its pain has been shouldered by the poor and the lower-middle class. There are indirect indicators of this such as the fact that following demonetisation, passenger car sales did not fall, but there was a marked decline in the sales of two-wheelers.

These assertions in the UN report and Dr Basu’s article clearly vindicate the prognosis made by the leading economists six months ago, even if their warnings were summarily rejected at that time by the PM and his associates in the Finance Ministry.

May 11 s.c.