Blame the perils of centralised decision-making
Known is a drop, unknown is an Ocean”. Thus goes an adage coined by Tamil poetess Avvaiyar about 1,900 years ago. The same philosophy has been propounded by thinkers across civilisations and has become a guiding principle in shaping public administration. It was precisely for this reason that Chanakya’s Arthasha-shtra, India’s ancient treatise on public administration, had asked the king to have a council of ministers for dispensing advice to him — because one person or a group of people in close circuit cannot claim to be the repository of all knowledge.
Notwithstanding theories and philosophies, Prime Minister Narendra Modi a year ago went on to implement the recommendations of his kitchen cabinet — which according to reports consisted of revenue secretary Hasmukh Adhia (appointed finance secretary yesterday), and a few young unnamed analysts who Reuters claimed had handled Mr Modi’s social media accounts.
All constitutional and institutional forums for discussing government policy, such as Parliament,
Exactly one year ago, Prime Minister Narendra Modi took the drastic step of demonetising `500 and `1000 notes, amounting to 86 per cent of the total currency in circulation. This unprecedented move was taken purportedly to wipe out black money, curb terrorism and do away with fake currency notes. Later on, the government also announced moving towards cashless economy as one of the objectives of demonetisation, which found no mention in Mr Modi’s speech on November 8.
After one year, how do we assess the impact of demonetisation on its stated aims and on the economy in general?
It was expected by many that a sizeable portion of the banned notes, amounting to `4-5 lakh crore will not come back to the banking system. These non-returned notes would be the net loss to the black economy and a gain for the RBI, since the liability on these notes will be extinguished. Mr Modi said in one of his speeches that rich people are throwing their notes in the river Ganges.
However, contrary to such exaggeration, the RBI’s Annual Report 2016-17 published on August 30, showed that out of `15.44 lakh crore worth of banned notes, `15.28 lakh crore or 99 per cent of them have come back to the banks — destroying all the claims of a windfall for RBI through extinguished liability on the account of non-deposited notes.
Faced with such an embarrassment, the government is claiming that they will unearth black money and increase tax collections even after these deposits have been made. But what do the figures say? According to the Economic Survey, it is estimated that an additional `10,587 crore tax will be collected because of demonetisation. The same report shows that the total tax collected as a share of GDP was 11.1 per cent in 2016-17, projected to increase to only 11.3 per cent in 2017-18, a rise of a mere 0.2 per cent. The personal income tax GDP ratio will increase from a paltry level of 2.2 per cent to 2.6 per cent between 2016-17 and 2017-18. The amount of black money seized (`1,003 crore till May 2017), benaami property attached (`600 crore) or identified money laundered by shell companies (reportedly `17,000 crore) does not amount to a substantial sum. The government’s the Union Cabinet, and the RBI reportedly played no role in this decision.
While the only excuse given for bypassing traditional forums is the need to maintain secrecy, the policy-makers have conveniently ignored the limitations of centralised decision-making and its pitfalls, though the fate of 125 crore people was at stake.
The ways of achieving an optimal mix of centralisation and decentralisation in decision-making is one of the oldest topics in management theory. In practice, too, the perennial dilemma of any CEO, in any part of the world, is to decide if the gains of centralisation are worth the pain it could cause.
Mr Modi, however, chose highly centralised plan, which in the process led to procedural mistakes that have wreaked havoc in India. Here are some of such mistakes:
SIZE OF NOTES: As the new notes were smaller in size than the older ones, all 2,05,328 ATMs in the country became nonfunctional until the new cash trays were incorporated in the machines. If the people behind this decision had visualised this problem, crores of people wouldn’t have had to stand in queues for long hours — argument that in the future such money will be unearthed and attached is like giving a post-dated cheque to the people, which might bounce since most of these will be challenged in the courts.
The claims regarding demonetisation stopping terrorist attacks are also completely false. As per the South Asia Terrorism Portal, in the year 2016, 382 people (civilian and military) were killed in India due to terrorism. However, in 2017, up to October 29, the number is 315. In short, there has been no perceptible impact on terrorist activities as a result of demonetisation. Terrorism is a complex socio-political issue which is funded not only by cash but by other sophisticated payment methods. To say that terrorism can be wiped out by banning currency notes is plain hyperbole.
Mr Modi’s claim about the note ban curbing fake notes is also found to be untrue. According to the RBI’s Annual Report, only `41.5 crore worth of fake notes was detected in `500 and `1000 notes deposited in the banks, which amounts to 0.003 per cent of the total deposited notes. Demonetising 86 per cent of the currency in circulation to neutralise such a minuscule amount of fake notes is utterly absurd.
With regard to cashless transactions, if we look at the data for India, it is seen that digital payments, after peaking in December 2016, are back to the levels broadly seen in SeptemberOctober 2016. It is also to be noted that ATM cash withdrawals are back to the levels before the note ban. Such trends essentially show that an overwhelming proportion of people has not moved away from cash.
While demonetisation appears to have failed in achieving its stated objectives, it has taken a heavy toll on the economy. The growth rate of GDP in the second quarter of 2017-18 has come down to 5.6 per cent, which is the lowest in the last three years. It has also hurt the informal sector where majority of the people are employed. Additionally, dividends of the RBI to the government has been more than halved from `65,876 crore to `30,659 crore. This has been a result of extra costs on new note printing (`4,554 crore) and higher interest payments on deposits, brought about due to demonetisation (`18,000 crore). The total gain in terms of higher tax collections and unearthing black money is pretty nominal compared to these losses. The time has come to ask tough questions and demand accountability from the government for pursuing such a faulty policy. (The writer is an Assistant Professor (Economics) at Institute of Development Studies) and some wouldn’t have died while doing so.
CHANGE PROBLEM: The introduction of the `2,000 note, without having an adequate number of notes with intermediate value, has led to people refusing to accept the note. This shows how disconnected were the socalled analysts who worked on this project from the PM’s house.
NO COMMON APP: Lack of common software to record an individual’s withdrawal led to rich people hiring services of the poor to exchange cash from several banks. This led to longer queues, causing misery to all of us common people.
LEAKAGES: There were reports of a few bank staff conniving with people having black money to exchange notes in off-thecounter transactions.
NO PREPARATION: Push for digital transaction was made after the chaos spread in the country due to cash shortage.
While Mr Modi’s centralised approach had won him laurels in his stint as the CM, the note ban shows a delicate balance is a must between centralisation and decentralisation.