Development economist Jean Dreze has been vociferous critic of the Narendra Modi government‘s demonetisation of Rs 500 and Rs 1,000 notes a year back. He had famously warned that “demonetisation in a booming economy is like shooting at the tyres of a racing car”. A year on, it seems his caution has come true. In the first quarter of the current financial year, the GDP growth slowed to a three-year low of 5.7 percent due to twin effect of goods services tax and note ban.
On the eve of the anniversary of the most disruptive step taken by the National Democratic Alliance government, Firstpost did an email interview with Dreze. Here are the excerpts:
It’s been a year since demonetisation. Do you see it as a success or as a failure?
I think that it is best to be frank about demonetisation and admit that it was a goof-up. The objectives outlined by the prime minister in his speech of 8 November 2016 have certainly not been met. If there were other objectives, let him spell them out. Otherwise, let him accept that it was a blunder.
I used to wonder, like many other economists, what the objective of the exercise really was. Various hypotheses have been put forward. None of them really explain why the prime minister would want to take this sort of risk with the economy. Today, my hunch is that he meant what he said on 8 November last year. He really believed in the myth that black money is a gigantic hoard of cash, waiting to be raided.
Why is this a myth?
Because it reflects the common misconception that black money is a stock rather than a flow. In economics, black money essentially refers to illicit earnings. That is a flow, not a stock. Illicit earnings do not stay still and accumulate, like a hoard. They are used to buy Jaguars, shop in Dubai, fund lavish weddings and so on. In the process, black money gets laundered, so to speak. The wrong idea that illicit earnings are stashed away in an accumulating hoard is a source of endless confusion. At any particular point of time, of course, some black money is held in cash. But launching a one-off strike on that cash residual does very little to stem the flow of illicit earnings. It’s like a swipe of the mop under the running tap.
The RBI has said that almost all the money that was withdrawn has come back into the system. Does it mean that there was no black money in the system?
There is plenty of black money around, in the sense of illicit earnings. But as I said, we have to distinguish that from the myth of tainted cash hidden in suitcases. To the extent that some of that tainted cash did exist, it was neatly laundered as demonetisation unfolded. Indeed, we know that most of the high-denomination notes came back to the banks. So either demonetisation was futile, because there was very little tainted cash in the first place, or it turned into a money-laundering operation. Today, the government is saying that it will go after the laundered black money by investigating millions of bank accounts, conducting tax raids and so on. But this is just another delusion.
What do you think of cashless economy? As a country, are we ready for this transition?
I think that this idea is characteristic of a tendency to try and climb the ladder from the top. Other examples are the fixation with bullet trains and smart cities. What most people actually need is trains that run on time and cities with essential amenities. Similarly, when it comes to transactions, people need good banking services, along with the obvious convenience that cash provides on a daily basis. Effective banking services are still lacking in large parts of India. The cashless economy, if desirable at all, is a futuristic idea that has little relevance to the pressing problems that millions of people face today.
With demonetisation, even the small shopkeepers have started using Paytm or other such Apps. In a way, demonetisation has provoked us to go digital and digital means white transactions?
I have nothing against these Apps, let those who find them convenient use them. But I see no case for promoting them through coercive or reckless means such as demonetisation. At best, there is a case for facilitating or subsidising some digital payment systems.
The economic survey suggests that demonetisation has impacted the GDP growth by as much as 1.2 percent. But then any changes, even a smallest of change in our personal live, make an impact.
This estimate is highly speculative, and the correct figure may be much worse. But assuming it’s 1.2 percent, that is what the central and state governments combined spend on health care. In other words, the economic loss from demonetisation was equivalent to a whole year’s public expenditure on health. My fear is that the loss will not end there, and that demonetisation will turn out to have pushed India onto the slippery slope of economic slowdown and adverse expectations. The main issue, however, is not GDP growth but what happens to people’s lives. In that respect, what happened in the first two months of demonetisation alone was an unforgivable catastrophe.
How do you see remuneration, particularly to weaker sections of society like those engaged in MNREGA getting it straight into their bank account. It negates role of middlemen in whatever capacity taking cuts. Would you call it a welcome move?
The payment of NREGA wages into bank accounts began almost 10 years ago. In fact, the big breakthrough in financial inclusion in India came with NREGA, much before Jan Dhan Yojana. I think that bank payment of NREGA wages is not a bad thing, except that the banking system is still unequal to the task. Payments are routinely delayed and bank premises are awfully overcrowded in many areas. That is why I feel that what people need today is good banking services, not the rosy promise of a cashless economy.