Two years on: Note ban had no eco­nomic ra­tio­nale

It was a dis­rup­tor, taking pol­i­cy­mak­ers’ eyes off the bad-loan prob­lem

Business Standard - - OPINION -

When the de­fin­i­tive his­tory of the Naren­dra Modi govern­ment gets writ­ten, there is lit­tle doubt that de­mon­eti­sa­tion will be judged as a mis­take. In­dia was suf­fer­ing no hy­per­in­fla­tion or loss of faith in its cur­rency call­ing for a rad­i­cal re­call of notes for restor­ing macroe­co­nomic sta­bil­ity and cred­i­bil­ity of the is­su­ing author­ity. De­mon­eti­sa­tion proved to be not just an un­nec­es­sary dis­rup­tor — growth slipped to 7.1 per cent in 2016-17 and 6.5 per cent in the fol­low­ing fiscal — but also took the eyes of pol­i­cy­mak­ers off the real prob­lem in­her­ited from UPA: The moun­tain of bad loans weigh­ing down pub­lic sec­tor banks. This needed im­me­di­ate fix­ing, which the Modi govern­ment ini­tially seemed keen on. The Re­serve Bank of In­dia (RBI), in April 2015, forced banks to recog­nise the true ex­tent of their non-per­form­ing as­sets and pro­vide fully for th­ese. This was fol­lowed by the an­nounce­ment of a ~1.8 tril­lion plan for re­cap­i­tal­i­sa­tion of PSBs in Au­gust 2015 and then the land­mark In­sol­vency and Bank­ruptcy Code (IBC) be­ing en­acted in May 2016.

How­ever, the fo­cus was lost with de­mon­eti­sa­tion, as the at­ten­tion of the RBI and banks shifted to fa­cil­i­tat­ing the de­posit and ex­change of the scrapped notes and re­mon­eti­sa­tion of the econ­omy. But more than slow­ing growth and de­rail­ing re­forms, de­mon­eti­sa­tion in­flicted avoid­able pain on farm­ers, daily wage labour­ers and in­for­mal en­ter­prises used to trans­act­ing in cash. Nor did it deal a body blow to black money. The promised wind­fall of ~4-5 tril­lion proved a chimera.

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