A big, destructive bang
Post-demonetisation, this government’s reputation for decision-making and implementation lies in tatters
Finance Minister Arun Jaitley sounded more than a little exasperated this weekend, when he was asked — as he has been so often — about “big bang”, or transformational, reform. “The last two years,” said Mr Jaitley, “I was being asked where the big bang was. Now you ask if we can afford [big bangs like demonetisation].” This is, like most statements from high officials of this government, simultaneously true and false. It is true that demonetisation is a big bang — in the sense that it is accompanied by a terrific amount of noise, and nobody is sure for a while exactly what the explosion has destroyed. It is false, however, that demonetisation is any kind of transformational reform. In fact, given that it is statist in orientation, reduces choices for market participants, depends enormously on inefficient government machinery, and increases the costs of doing business for the foreseeable future, it is on pretty much every count the opposite of “reform”.
Of course, you have to feel for Mr Jaitley. Who would want to be the man nominally in charge of driving the economy when your boss orders you to swerve it into a ditch of unknown depth? And when the justifications for ditch-diving that you must repeat can change weekly, even daily? (At the time of writing, the prime minister’s stated justification was that it would mean beggars could go cashless. He had apparently seen a video on WhatsApp to that effect.)
It is not surprising therefore that, in the grab-bag of explanations, clarifications, attacks, and tearful moral posturing that has passed for government statements on demonetisation, Mr Jaitley would — almost by accident — seize on one of the most damaging. By indicating that the government views demonetisation as big-bang reform, the finance minister has destroyed two things. First, he has undermined what little remains of the government’s reputation for policymaking. And second, he has fatally weakened any defence of its failure to reform so far.
Much of what the government has done for the economy has been very limited in scope. What has not been incremental has been imposed externally — the auctioning of natural resources was mandated by the Supreme Court, for example, and the GST was merely the culmination of a decade-long process. The argument that the government and its multitude of strenuous defenders provided for this timidity was that, in India, it is difficult to spend political capital on transformational reform. Even the most powerful politician since Indira Gandhi, we were told, would have to move slowly.
In one stroke, demonetisation has rendered that argument specious. Narendra Modi has shown that if he has chosen so far to avoid transformational economic reform, it is not because he is worried about the disruption it would cause or the political opposition it would create — no, it is because he simply is not interested in doing it. Who now can claim that privatisation of big public-sector monopolies or administrative reform or labour law reform was off the table because Mr Modi was forced towards incrementalism? If you decide to plunge the world’s third-largest economy into a liquidity crisis overnight, then you cannot be described as being too cautious for shock therapy.
And as for what it reveals about the policy-making in this government — well, the less said, the better. Demonetisation cannot be defended as a good idea, poorly implemented. The first rule of governing India is that you only make the policies you can implement. If we ignore implementation, then no doubt the Licence Raj was a brilliant idea, too. No, demonetisation has to be either a good idea or a bad idea to begin with, with a clear-eyed estimation of the implementation difficulties being an integral part of the decisionmaking process.
And that is where the government’s weaknesses have been thrown into sharp relief. Not only is this the extreme example of a general problem — that this government is absurdly top-heavy, with all major initiatives coming from the prime minister’s office. But it is also emblematic of all the government’s other policy-making weaknesses: A tendency to think in terms of headlines, not of effects; a pernicious distrust of expertise; and a tendency towards statism.
In many ways, Mr Modi is a prisoner of his experience in Gujarat. As chief minister there, he had India’s best bureaucracy to work with; so he severely overestimates the agility and efficiency of the government system. His conception of political stumbling-blocks is also conditioned by his Gujarat experience — as we saw when the land acquisition ordinance had to be withdrawn, because he thought that taking farmers’ land for companies would be as easy nationwide as it was in Gujarat. And his electorate in that trading state was relatively well-off and supremely adaptable — so he tends to bet the rest of the country can adapt as swiftly to economic changes.
But above all, what is revealed here is the limitations of a government that does not believe in thinking through its actions. There is something deeply amateurish about the planning of demonetisation, as if it was done on a BJP WhatsApp group in between furious discussions about cow slaughter. Where were the professionals? Let us dispense with the fiction that “nobody could have known” about demonetisation. As is abundantly clear now, rumours and speculation about it were rife beforehand. So little would have been lost if Mr Modi had consulted, in confidence, leading economists on the subject of adaptation costs. Who briefed him of ATM penetration? Of currencyprinting timelines? Of supply chains for small and medium enterprises? Before you try something on this scale, do you not need to get the country’s foremost experts into the room, and listen carefully to their warnings and advice?
I do not deny that demonetisation is currently politically popular. It may remain so — only in long-suffering India, perhaps, will already trodden-on people accept additional inconvenience if assured that everyone else is suffering too. Given that, immediate political popularity is not how this decision should be judged. Its implementation shows that, far from being an efficient manager, Mr Modi fails comprehensively when it comes to thinking at scale. Its nature proves that, far from being a reformer constrained by politics, Mr Modi is simply a statist who thinks only in terms of politics. And its conception demonstrates that this government is simply too amateurish in terms of economic policy-making to properly address India’s deep, deep problems. Politically popular or not, the reputation of this government and its leaders should not survive this disastrous experiment.