Demonetisation is billed by Prime Minister Narendra Modi as his personal policy. He justifies it by saying that to be effective it required absolute secrecy. So much so that he didn't even inform his own Cabinet. But this has only turned a routine economic measure into a moral crusade. Modi's initiative was poorly planned and executed because he took it all upon himself, perhaps to gain popularity. It's time India relied on institutions, instead of the wisdom of one leader, to make and implement big policy decisions. For no single person can get everything right in such a huge endeavour.
We don't know if Modi considered all the pitfalls and alternatives... because under the Indian system he has no obligation to share his thoughts or get approval...
This is not the first time an Indian Prime Minister has resorted to a drastic populist measure in secrecy, without scrutiny and advice. Indira Gandhi's nationalisation of banks in 1969 comes immediately to mind. This bad policy was also hugely popular. It was also billed as necessary for India's "national interest". It was also devised in top secrecy and announced suddenly. Granville Austin, the famous chronicler of India's Constitution, exposed that the secret ordinance nationalising banks was the work of only four people in the prime minister's Secretariat. The draft was prepared within one evening. Austin writes that "after a few minor modifications, the ordinance went to an afternoon cabinet meeting, where it was approved unopposed. No minister had seen the text before the meeting, and after it copies were retrieved to prevent leaks". Indira Gandhi announced the ordinance in a radio broadcast that evening. She said the banking system "has necessarily to be inspired by a larger social purpose".
The 1969 bank nationalisation was publicly hailed. It became the core of Indira Gandhi's Garibi Hatao programme. Even Jana Sangh supported it. In the next election, she won a huge majority in Parliament, winning 352 seats. This established Indira Gandhi so firmly that five years later she would announce her infamous Emergency.
Modi's decision is not blatant socialism, as was the bank nationalisation, but it's aimed at benefiting the poor by penalising the rich. He said in his announcement, "Let us ensure that the nation's wealth benefits the poor." His pursuit has gone beyond just removing black money; he wants all hoarders of cash to suffer, and rich and poor to stand in the same lines. Laudable goals, but they are impracticable. As we are seeing, all Indians, not just the rich, have been hoarders of cash, for that has been the norm in India's economic practices. And we have yet to spot a rich man standing in the lines.
One reason Modi's policy is popular is because it demonises the rich. People are happy that the rich are scrambling for cover, for a change.
The fact is Modi's policy will benefit the poor only if he introduces a full set of reforms. Almost all economists have said that if the real engines of black money are not stopped, India would end up exactly as before. They point to lowering of taxes and stamp duties, plugging tax loopholes, abolishing license raj, reducing regulations, cutting arbitrary powers of bureaucrats, but above all, curbing political donations. The last item is the worst culprit. When a minister of Modi's own party spends 500 crores on a wedding, in the middle of his black money campaign, it doesn't give people much confidence in his pursuit.
Similarly, the economy would benefit from the money collected, but only if it is put to good use. A huge investment in infrastructure would be an excellent start, for this would produce lower level jobs. Let's hope this money is not squandered in so-called welfare schemes for the poor or in financial gimmickry with bank balance sheets. As of now, Modi's move has sucked the lifeblood out of the economy. The markets are not very optimistic. Since the announcement, both the Sensex and the rupee have tanked.
As for Modi's other aims of ending counterfeiting and hurting terrorists, there is no doubt that a change in currency notes was needed. But it should be a matter of routine. Indian currency's design, paper and printing technology should be changed regularly. The US dollar is the world's most held currency, but it has a very low counterfeiting problem. The US Treasury attributes this to "extensive US data gathering, education efforts, law enforcement and communications with banks around the world". America has never demonetised a currency note.
All Indians want Modi to succeed. But all Indians need to know that their country's big decisions are fair and well thought out. An individual-based system can never bring all Indians together.
My point is that we do not know if Modi considered all the ramifications, pitfalls and alternatives to his decision. We do not know because under the Indian system he has no obligation to share his thoughts or get approval from any other institution. And there lies the rub. For we should ensure that a decision of this magnitude — making 85% of the country's currency worthless overnight — is properly analysed. Did he consider, for example, putting in place some of the reforms simultaneously; or waiting just a few more days to avoid the wedding season; or instituting proper procedures for cooperative banks; or doing a test run with new notes in ATMs; and so on?
Clearly, our system has a problem when our chief executive cannot be held accountable for execution. It's a poor system when the top official gets the credit, but the problems are blamed on the underlings — the ministry or bureaucrats. A good system does the opposite.
The problem is that India's system of government lacks independent oversight of executive decisions. If a separate institution — typically a legislature — was empowered to approve funds, or hold hearings etc., our decisions and their execution would improve. Secrecy in such checks can still be maintained, provided the counterweight institutions are also directly accountable to the people.
An even greater advantage of a more inclusive, balanced and transparent system would be that India would unite behind its decisions. All Indians want Modi to succeed. Modi bhakts are not the only patriots. But all Indians need to know that their country's big decisions are fair and well thought out. An individual-based system can never bring all Indians together. It's time for a change.
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