By Prarthana Mitra
Describing demonetisation as “one of the unlikeliest economic experiments in modern Indian history,” former Chief Economic Advisor Arvind Subramanian lashed out at BJP government’s dubious economic policies in his soon-to-be-published book Of Counsel: The Challenges of the Modi-Jaitley economy, excerpts of which were reproduced by the Mint.
What the ex-CEA had said earlier?
The noted economist became the latest vocal critic of Narendra Modi’s landmark 2016 decision to do away with two currency notes of ₹500 and ₹1,000, although his earlier stance on the move had been largely positive. That is already encapsulated in the three economic surveys he oversaw, where he defended the move, although never deifying nor demonising it.
He had projected “reduced corruption, greater digitalization of the economy, increased flows of financial savings, and greater formalization of the economy, all of which could eventually lead to higher GDP growth, better tax compliance and greater tax revenues,” in the long run.
What happened in 2016?
In the upcoming memoir, Subramanian offers his hypotheses and explores the political and economic factors that may have provoked the move. Interestingly, there is still no clarity over whether he was consulted over the matter before the PM made the historic out-of-the-blue televised announcement.
In November 2016, the controversial move had seen outrage from all quarters after the Prime Minister gave his countrymen an ultimatum of one month, to exchange all soon-to-be-defunct currencies in their possession, in a supposed bid to eliminate black money from the monetary system. It led to a nationwide clamour and inconvenience as men and women formed breadlines at ATMs, that weren’t immediately equipped to churn out the new notes, and further led to the expansion of the digital wallets market in the nation.
What political and economic insights does Subramanian offer?
Published just months after his resignation in June, in Of Counsel…, the government’s former principal advisor ends his silence on its short-term implications without holding back, calling it “an unprecedented move that no country in recent history had made in normal times.”
“Demonetisation was a massive, draconian, monetary shock,” he writes. “In one fell swoop, 86 per cent of the currency in circulation was withdrawn. The real GDP growth was affected by the demonetisation. Growth had been slowing even before, but after demonetisation, the slide accelerated,” he adds, saying it could have been worse.
Comparing its political efficacy in Uttar Pradesh to US president Donald Trump’s popularity with poor white American males, Subramanian thinks that the decision to ban the high-denomination $500 and $1000 notes may have served as a symbolic purpose of anti-elite populism or rich-bashing. Knowing that the rich and their ill-begotten wealth were experiencing greater hardship enabled a certain section of India’s rural poor to embrace the hardship it caused them, explains Subramanian. It even made them demonetisation’s greatest cheerleaders, he says
He also acknowledges how the shift from cash to electronic means may have made the economy more resilient while noting that there are no comprehensive means to measure the impact on the informal sector or the GDP they contribute, till date.
Several macroeconomists including Gita Gopinath who heads the International Monetary Fund (IMF) have criticised the move, which is believed to have affected small and medium scale entrepreneurs, leaving the nation’s economy reeling in its aftermath. The Reserve Bank of India (RBI) dealt the most severe blow in August, saying that over 99% of the demonetised notes were back in the system, suggesting the drive’s failure in curbing corruption and black money. But the economic fabric of the nation has forever altered owing to demonetisation which remains, to quote Subramanian, “one of the unlikeliest economic experiments in modern Indian history.”
Prarthana Mitra is a staff writer at Qrius.