Ever since Prime Minister Narendra Modi announced his government’s decision to demonetise high denomination notes, his political opponents have been accusing him of acting recklessly and taking a momentous decision without adequate thought or preparation, thereby disrupting the lives of millions of Indians, ruining small businesses and causing long-term harm to the Indian economy.
This criticism may not hold if one re-visits his public utterances before November 8 and also examines the growth of black money and wealth between 2004-2014 and the consequences of continued Manmohan Singh style pussy-footing for the nation’s economy.
So first, the question as to whether Modi had foolishly rushed in where angels fear to tread or whether demonetisation was part of a well-thought out strategy. There were several occasions when Modi touched upon the issue of ewallets or electronic banking prior to November 8, but there was one occasion during which he made his intentions absolutely clear. That was on May 22 during his show on All India Radio—Mann ki Baat.
For those who listened to him that day, November 8 would have held no surprises. Obviously, Modi was mulling this option quite some time ago, because even as early as May—a full five months prior to demonetisation—he had urged people in his radio programme to move from cash to a less-cash economy when he said: “We will have to change our old habits... the world is moving towards a cashless society... through electronic technology... there is no question of our wallets getting stolen.
The Pradhan Mantri Jan Dhan Yojana has ensured that almost every family came into the banking system and got a Ru- Pay Card, which is useful both as a debit and credit card; also, with the very small instrument called Point of Sale machines now in vogue, one can make payments.
Then there is the Bank on Mobile—the Universal Payment Interface banking; and finally, there is the Aadhar card and the fact that practically everyone in the country has a mobile phone. There is no need to carry around any cash. Therefore, by synchronising Jan Dhan, Aadhar and the mobile (J.A.M), we can move ahead towards a cashless society” He virtually prepared the minds of his listeners that day to what was coming when he said, “If we learn and adapt ourselves to use these services, then we will not require currency… businesses will function automatically... underhand dealings will stop, the influence of black money will be reduced.
So I appeal to my countrymen, that we should at least make a beginning. Once we start, we will move ahead with great ease.” He also called upon people to overcome the fear of the unknown. He said 20 years ago who would have thought that so many people would have mobile phones. “Yet, we caught on to it and now we cannot do without cell phones. Maybe this cashless society assumes a similar form. But the sooner this happens, the better it will be,” he said. Could any prime minister have been more explicit than this about his intention to launch a major assault on black money, demonetise currency and nudge the society towards a less-cash economy?
The second line of attack on Modi is demonetisation is wholly unnecessary and that he had needlessly put the nation’s economy in peril. This was best answered by S Gurumurthy, a well-known writer and commentator on economic and political issues. According to him, Modi was compelled to administer a dose of “bitter tea” because of the pathetic economic management by his predecessor, Dr Manmohan Singh. If Modi had not taken the tough decision, it would have been disastrous for India’s economy. In his lecture at the Vivekananda International Centre in Delhi last week, Gurumurthy presented data to show how Dr Singh had failed. Here are some of his main arguments:
Though GDP grew at an envious rate during 2004- 2010, it never created new jobs because much of the alleged growth was brought about by asset inflation. Real estate and gold prices sky-rocketed and created a false notion of growth. As a result, while the GDP grew by 8.4 per cent per annum, the number of jobs it created was a meagre 2.7 million. Further, the amount of black money in the economy ballooned and generated black wealth.
There was a huge unrecorded economy which demonetisation is putting an end to. The clue to huge asset inflation lay in the rising unmonitored High Denomination Notes (HDN) cash stock with the public. Explaining why demonetisation was inevitable, he said HDNs with the public more than doubled from 34 per cent in 2004 to 79 per cent in 2010. On November 8 it was 87 per cent. The average annual rise in HDNs was between 51- 63 per cent from 2004-2013.
Also, even more worrisome was the Reserve Bank’s opinion that two-thirds of the `1,000 notes and one-third of the `500 notes—that is over `6 lakh crore—never returned to banks after they were issued. The unmonitored HDNs roaming outside banks—black cash —drove up gold and land prices.
The curse — asset inflation inspired jobless growth — seemed irreversible until a method was found to catch the unmonitored high denomination currency that was fuelling this false sense of growth. Even a week after this lecture, which was widely reported, there has been no credible response to the question—why did HDN shoot up between 2004-2014? But now we know why hoarders of black money, including political parties, were taken unawares by the November 8 announcement. They never listened to Narendra Modi’s Mann ki Baat!