In the second week of 2024 business leaders descended on Gujarat, the home state of Narendra Modi, India’s prime minister. The occasion was the Vibrant Gujarat Global Summit, one of many gabfests at which India has courted global investors. “At a time when the world is surrounded by many uncertainties, India has emerged as a new ray of hope,” boasted Mr Modi at the event.
He is right. Although global growth is expected to slow from 2.6% last year to 2.4% in 2024, India appears to be booming. Its economy grew by 7.6% in the 12 months to the third quarter of 2023, beating nearly every forecast. Most economists expect an annual growth rate of 6% or more for the rest of this decade. Investors are seized by optimism.
The timing is good for Mr Modi. In April some 900m Indians will be eligible to vote in the largest election in world history. A big reason Mr Modi, who has been in office since 2014, is likely to win a third term is that many Indians think him a more competent manager of the world’s fifth-largest economy than they do any other candidate. Are they right?
To assess Mr Modi’s record The Economist has analysed India’s economic performance and the success of his biggest reforms. In many respects the picture is muddy—and not helped by sparse and poorly kept official data. Growth has outpaced that of most emerging economies, but India’s labour market remains weak and private-sector investment has disappointed. But that may be changing. Aided by Mr Modi’s reforms, India may be on the cusp of an investment boom that would pay off for years.
The headline growth figures reveal surprisingly little. India’s gdp per person, after adjusting for purchasing power, has grown at an average pace of 4.3% per year during Mr Modi’s decade in power. That is lower than the 6.2% achieved under Manmohan Singh, his predecessor, who also served for ten years.
image: the economist
But this slowdown was not Mr Modi’s doing: much of it is down to the bad hand he inherited. In the 2010s an infrastructure boom started to go sour. India faced what Arvind Subramanian, later a government adviser, has called a twin balance-sheet crisis, one that struck both banks and infrastructure firms. They were left loaded with bad debt, crimping investment for years afterwards. Mr Modi also took office at a time when global growth had slowed, scarred by the financial crisis of 2007-09. Then came the covid-19 pandemic. The difficult conditions meant average growth among 20 other large lower- and middle-income economies fell from 3.2% during Mr Singh’s time in office to 1.6% during Mr Modi’s. Compared with this group, India has continued to outperform (see chart 1).
Against such a turbulent backdrop, it is better to assess Mr Modi’s record by considering his stated economic objectives: to formalise the economy, improve the ease of doing business and boost manufacturing. On the first two, he has made progress. On the third, his results have so far been poor.
India’s economy has certainly become more formal under Mr Modi, albeit at a high cost. The idea has been to draw activity out of the shadow economy, which is dominated by small and inefficient firms that do not pay tax, and into the formal sphere of large, productive companies.
Mr Modi’s most controversial policy on this front has been demonetisation. In 2016 he banned the use of two large-value banknotes, accounting for 86% of rupees in circulation—surprising many even within his government. The stated aim was to render worthless the ill-gotten gains of the corrupt. But almost all the cash made its way into the banking system, suggesting that crooks had already gone cashless or laundered their money. Instead, the informal economy was crushed. Household investment and credit plunged, and growth was probably hurt. In private, even Mr Modi’s supporters in business do not mince words. “It was a disaster,” says one boss.
Demonetisation may have accelerated India’s digitisation nonetheless. The country’s digital public infrastructure now includes a universal identity scheme, a national payments system and a personal-data management system for things like tax documents. It was conceived by Mr Singh’s government, but much of it has been built under Mr Modi, who has shown the capacity of the Indian state to get big projects done. Most retail payments in cities are now digital, and most welfare transfers seamless, because Mr Modi gave almost all households bank accounts.
Those reforms made it easier for Mr Modi to ameliorate the poverty resulting from India’s disappointing job-creation record. Fearing that stubbornly low employment would stop living standards for the poorest from improving, the government now doles out welfare payments worth some 3% of gdp per year. Hundreds of government programmes send money directly to the bank accounts of the poor.
It is a big improvement on the old system, in which most welfare was distributed physically and, owing to corruption, often failed to reach its intended recipients. The poverty rate (the proportion of people living on less than $2.15 a day), has fallen from 19% in 2015 to 12% in 2021, according to the World Bank.
Digitisation has probably also drawn more economic activity into the formal sector. So has Mr Modi’s other signature economic policy: a national goods and services tax (gst), passed in 2017, which knitted together a patchwork of state levies across the country. The combination of homogenous payments and tax systems has brought India closer to a national single market than ever.
That has made doing business easier—Mr Modi’s second objective. gst has been a “game-changer”, says B. Santhanam, the regional boss of Saint-Gobain, a large French manufacturer with big investments in the southern state of Tamil Nadu. “The prime minister gets it,” adds another seasoned manufacturing executive, referring to the need to cut red tape. The government has also put serious money into physical infrastructure, such as roads and bridges. Public investment surged from around 3.5% of gdp in 2019 to nearly 4.5% in 2022 and 2023.
The results are now materialising. Mr Subramanian recently wrote that, as a share of gdp, in 2023 net revenues from the new tax regime exceeded those of the old system. This happened even as tax rates on many items fell. That more money is coming in despite lower rates suggests that the economy really is formalising.
Yet Mr Modi is not satisfied with merely formalising the economy. His third objective has been to industrialise it. In 2020 the government launched a subsidy scheme worth $26bn (1% of gdp) for products made in India. In 2021 it pledged $10bn for semiconductor companies to build plants domestically. One boss notes that Mr Modi personally takes the trouble to convince executives to invest, often in industries where they face little competition and so otherwise might not.
image: the economist
Some incentives could help new industries find their feet and show foreign bosses that India is open for business. In September Foxconn, Apple’s main supplier, said it would double its investments in India over the coming year. It currently makes some 10% of its iPhones there. Also in 2023 Micron, a chipmaker, began work on a $2.75bn plant in Gujarat that is expected to create some 5,000 jobs directly and 15,000 indirectly.
So far, however, these projects are too small to be economically significant. The value of manufactured exports as a share of gdp has stagnated at 5% over the past decade, and manufacturing’s share of the economy has fallen from about 18% under the previous government to 16%. And industrial policy is expensive. The government will bear 70% of the cost of the Micron plant—meaning it will pay nearly $100,000 per job. Tariffs are ticking up, on average, raising the cost of foreign inputs.
image: the economist
So what matters more: Mr Modi’s failures or his successes? As well as economic growth, it is worth looking at private-sector investment. It has been sluggish during Mr Modi’s time in office (see chart 2). But a boom may be coming. A recent report by Axis Bank, one of India’s largest lenders, argues that the private-investment cycle is likely to turn, thanks to healthy bank and corporate balance-sheets. Announcements of new investment projects by private corporations soared past $200bn in 2023, according to the Centre for Monitoring Indian Economy, a think-tank. That is the highest in a decade, and up 150% in nominal terms since 2019.
Although higher interest rates have sapped foreign direct investment in the past year, firms’ reported intentions to invest in India remain strong, as they seek to “de-risk” their exposure to China. There is some chance, then, that Mr Modi’s reforms will kick growth up a gear. If so, he will have earned his reputation as a successful economic manager.
The consequences of Mr Modi’s policies will take years to be felt in full. Just as an investment boom could vindicate his approach, his strategy of using welfare payments as a substitute for job creation could prove unsustainable. A failure to build local governments’ capacity to provide basic public services, such as education, may hinder growth. Subhash Chandra Garg, a former finance secretary under Mr Modi, worries that the government is too keen on “subsidies” and “freebies”, and that its “commitment to real reforms is no longer that strong.” And yet for all that, many Indians will go to the polls feeling cautiously optimistic about the economic changes that their prime minister has wrought.
The opposition to the Modi government’s ‘Agnipath’ scheme is being led by the articulate community of senior veterans on social and mainstream media, and by India’s dangerously burgeoning population of jobless youth. Especially in the Hindi heartland.
Counterintuitive though it is, we have to also note that these young people understand the nub of the ‘problem’ with Agnipath way better than the senior veterans do.
Most of the veterans are outraged because — among many things that they see as wrong with Agnipath — they think the Modi government is using the armed forces for employment generation.
The young see Agnipath as the opposite. They see it as an armed forces jobs destroyer, not generator. How, we will explain now. And why the very reason they are primarily angry makes a scheme like Agnipath good, we will explain as this argument unfolds.
First, the jobless young. They understand better not only because they know their politics better than venerable, well-meaning seniors with decades in uniform. They do as they come from the hyper-politicised and polarised heartland. They also know the hopelessness of the job market.
They see the absence of opportunity where they live and feel their own lack of skills needed for jobs in distant, booming growth zones. A government appointment whether in the railways, state government, police, anywhere is the only lifetime guarantee of a safe, well-paying job. The armed forces are by some distance the best.
We must not judge them because they “look like lumpen”, burn trains and battle with police. They are every bit as virtuous and deserving of our understanding as the millions of the best-educated who slog year after year paying enormous sums financing the booming ‘competition academy’ industry for those few UPSC jobs.
For the less resourceful or educated, for mere matriculates, an Army recruitment rally means the same thing as the big UPSC for those whose pictures you see in the full front-page advertisements in leading dailies from Unacademy, Byju’s, Vision IAS etc etc. They prepare just as assiduously for Army recruitment. How, ThePrint reporter Jyoti Yadav told us in this report from the rural heartland.
The less privileged now see Agnipath as their own version of the UPSC being taken away. See it this way. Presume that UPSC exams weren’t held for two years because of Covid while millions prepared in hope. Now you announce that the recruitment for the All India Services will only be for four years and only one-fourth will get the full tenure.
Further, for like-to-like comparison, suppose you also set a new, lower maximum age limit to ensure our civil services remain youthful, and tough luck for those who grew too old in the past two years waiting. By the way, this is precisely why the government has now made its first Agnipath rollback and given this “one-time” maximum age relaxation to 23 years from 21.
Much bigger riots might break out in the same zones of the heartland if UPSC were disrupted like this. And you know what, our middle-/upper middle-class/elite public opinion will be entirely sympathetic to them. Even more than they might have been to the anti-Mandal protests and self-immolations in 1990. The “debates” on prime time and social media (which the Modi government takes much more seriously than people like us) would sound very different from what they do at this point.
I am not supporting the ongoing Agnipath protests or dismissing concerns over these as mindlessly elitist. These are a distressing, dangerous alarm for India. That our demographic dividend is becoming a wasteful disaster with crores of unemployed young seeing a government job as the holy grail.
No government can produce this many jobs. And certainly not in the armed forces, whose balance sheets and budgets are already an HR disaster. However flawed Agnipath might be, our armed forces need radical reform. But we need to understand these angry young people’s concerns.
Senior veterans erred instinctively into seeing this as a job-creating extravaganza exploiting the armed forces. It’s the opposite. Since India hasn’t held any recruitment rallies for more than two years, a “shortfall backlog” of at least 1.3 lakh has built up. It’s a cut of about 10 per cent from the pre-pandemic strength of the armed forces.
Here’s the math. Since only about 45,000 ‘Agniveers’ will be recruited now per year (compared to the usual 60,000 at full-tenure recruitment rallies), and only one-fourth will be retained after four years, this supposed shortfall will only rise. The most elementary calculation shows that at the current rate of 50,000-60,000 retirements each year, by 2030 the armed forces will field about 25 per cent fewer personnel than they did before the Covid break.
This will be a deliberate, substantive downsizing and a desirable outcome fully in tune with the global trend. The US military heavily cut its manpower and is reducing further, diverting dollars to standoff weapons and artificial intelligence. The Chinese PLA has been similarly downsizing. Agnipath can be fine-tuned, reinvented, renamed and relaunched. But something like it is needed.
Contrary to being a wasteful job-generating extravaganza, a tour of duty approach is to cut jobs, wages and pensions. The same money can go into drones, missiles, long-range artillery and electronics and minimising casualties in battles of the future. Even proper assault rifles in a resource-starved military machine.
As respected former Army commander Lt. Gen. H.S. Panag pointed out in this article, an idea like Agnipath is well-intended, necessary and could do with improvements. But it is yet another rude reminder to the Modi government that however overwhelming, electoral popularity doesn’t empower them to enforce shock-and-awe change, no matter how virtuous. They’ve seen it with the now repealed farm laws, stalled labour codes and withdrawn land acquisition bill.
A big change has to be reasoned out, public opinion prepared. People respond to abrupt change in their hundreds of millions, have anonymity and safety in numbers unlike the few hundred fawning ruling party MPs, a few score of ministers or a dozen chief ministers.
Whether it’s land acquisition for job-creating industry and infrastructure, labour and farm reform to unleash new forces of entrepreneurship, or modernising the armed forces, you have to evangelise your ideas to people patiently. Allow a robust debate in public and Parliament instead of dismissing anyone disagreeing as anti-national or bought out by some evil force. It’s an ordinary, normal and inevitable exercise in the same democracy that gifts you extraordinary electoral power.
Finally, we need to look at the geography and politics — or shall we be cheeky and say geopolitics — of these protests. Geography first.
If you map the nearly 45 places where rioting has broken out, there will be a hornet’s nest of sorts in Bihar, eastern Uttar Pradesh, Bundelkhand, southern Haryana and Rajasthan.
We can safely classify these as India’s primary low-wage migrant labour exporting zones. Check out, for example, where the mostly poorly paid and security guards doing daily double shifts in your neighbourhood come from.
At least so far, this spark mostly hasn’t travelled South barring Secunderabad-Hyderabad. Let’s hope and pray it stays that way. Unlike the heartland, the south-of-Vindhyas states have their birth rates, education levels, investment and job creation much more sorted. It doesn’t mean that Indians there are any less patriotic.
And now the politics. With the farmers’ protests the epicentre was Punjab, the state least impressed with the Modi phenomenon in all of India as repeated elections from 2014 onwards have shown. This current anger comes almost entirely from BJP/NDA-run states, from the very core of the Modi-BJP base. It’s safe to presume that a vast majority of these angry young people are loyal Modi voters.
The lesson is, there is more to democracy than electoral popularity. You need to keep reasoning with your constituents all the time. Especially on why some drastic change they fear might be good for them. People have an immune system that detests and fears sudden change plonked on their heads.
The Modi government’s biggest flaw over these eight years has been its disinclination to accept the limitations of electoral majorities. This has already ruined land acquisition and farm reform and stalled the labour codes, and it will be tragic if the armed forces’ downsizing and modernisation is derailed too.
SHYLOCK is the big business, Antonio, the political parties. Let’s throw in Portia, symbolising law and justice, but which mostly eludes Indians currently. The news is heart-warming in the interregnum though. A brilliant woman journalist won a tenacious legal battle with an alleged sex predator of a powerful social echelon. And octogenarian leftist poet Varavara Rao got bail too, albeit for six months.
But Rao’s comrades, India’s most brilliant and selfless souls, are cramming the jails. A battery of leftist intellectuals and lawyers along with a merrily self-effacing octogenarian Jesuit priest stand accused of plotting to murder the prime minister in a laughably bizarre plot. Others are facing sedition charges for orchestrating communal violence in Delhi, which their rivals actually waged under police protection.
An American newspaper has revealed how the dubious assassination plot was structured around hacked computers that were used to plant the “evidence” of the purported crime. So, the victories here and there are welcome aberrations — happy aberrations — in a system that stands entrenched against equal rights and dignity for women and which ambushes dissenting citizens at will.
It’s no secret that major political parties receive funds from big business, which becomes a fertile ground for quid pro quo. In fact, it’s a curious rule of thumb that the parties whose leaders are in jail or face charges for alleged graft, are precisely the ones that the corporate lobbies shunned, and, therefore, did not favour with their largesse. It is also likely that the leaders didn’t accept the implied quid pro quo and chose to suffer.
It’s a bit like the movie industry. If one didn’t pick the money from the usurious market the movie is likely never going to find a theatre to screen it. Mayawati and Lalu Yadav are a case in point of politicians who have been made an example of for seeking alternative routes of raising money, tainted money, to fight costly elections, and which they mostly won. Portia will have to be more innovative than leaning on her fabled court craft and throwing in a clever interpretation of law to tilt the argument. Today, she has to weigh the cases as presented.
Chara ghotala or fodder scam is up for public scrutiny and trial by media, a bail-less crime, but an opaque defence deal has to be decided for reasons of national security through sealed envelopes in highest court rooms. This, therefore, is a political battle and has to be fought politically. It is far-fetched to think of defeating a closet patriarchy or a renegade state in a court battle.
In this regard, a key component of Prime Minister Modi’s hare-brained demonetisation move had a clever edge. He mopped up 85 per cent of India’s cash on Nov 8, 2016. The Uttar Pradesh assembly polls began on Feb 11, 2017. By cancelling big currency notes on the eve of a huge election, which Uttar Pradesh always is, he sucked out a vital resource the rivals needed to give him a good fight.
Why don’t Indian parties crowd-fund as some, but only some, sections of the left do? Even in the heartland of capitalism in the United States, Bernie Sanders could come tantalisingly close to becoming president with crowd funding. Delhi’s Aam Aadmi Party came to power with the help of this mostly shunned method of raising electoral funds. In the bargain, AAP inspired donors to see themselves as stakeholders in the great endeavour.
We read in the morning paper that India’s main opposition Congress party has run out of money. Elections are due in key states where the party could do well, primarily Assam, with clever handling. It’s a wrong time not to have money. West Bengal, Tamil Nadu, Pondicherry and Kerala are also up for polls.
Being in penury, or near penury, is, however, a good sign for the Congress party and may not be such a bad idea for India’s democracy either. Remember the tycoons muscling their way through pliable media contacts to claim cabinet berths for their acolytes in the second innings of the Congress-led alliance of Manmohan Singh? The ministry of telecommunications was crucial to the quest. And with all the deals being done to monopolise data and e-commerce today, the stakes were bound to be high. The BJP has emerged as the monopoly beneficiary of corporate donations, not least by tweaking the law to make the transactions opaque. No surprise there.
A great reason for the Congress’s financial crunch is Rahul Gandhi’s decision to make a direct connection between India’s prevailing economic crisis and Mr Modi’s patronage of his crony capitalist friends. Protesting farmers, dissenting intellectuals and assorted environmentalists across the world have seen through the plot. (Whoever can see the plot is an enemy of the state.)
On the flip side of the Congress’s course correction under Gandhi, an interview was published of Punjab’s Congress Chief Minister Amarinder Singh. He is rowing back from the bold demands by the farmers for the repeal of pro-business farm laws. Singh favours suspending the laws for two years instead of annulling them. The India Today magazine did some fact-checking to show that Singh had not met Modi’s friend Mukesh Ambani, as claimed, a day ahead of the nationwide strike by the farmers. The cordial picture of the two was from 2017.
Amarinder’s challenger in Congress is cricketer-turned-politician Navjot Sidhu, a vocal critic of big business. Shylock is hemorrhaging India. Rahul Gandhi is losing his MLAs to corporate-political pelf, the latest casualty being his government in Pondicherry. It’s time he went to the people with the bowl, an agreeable way to involve them in his bold analysis of the country’s crisis. He can start to stitch the wounds, not as a grand leader for which he must win a mandate, but as a caring citizen like those languishing in jails. The Congress will be the richer for it. Good for Portia too.
My remark on a TV show, that the “Congress must die”, has triggered a debate, perhaps somewhat prematurely, on the role of the country’s principal Opposition party in the times to come. Some of the early reactions have been virulent. Perhaps the timing of the remark made it look like an attempt to kick someone when he is down. And the metaphor of death invited strong emotional reaction.
Let me, therefore, spell out the rationale in the hope that it would generate a more serious and constructive debate. Let me begin by clarifying what this remark was not. One, it was not a knee-jerk emotional outburst in reaction to an exit poll. I had expressed a similar opinion earlier too. The broad judgment is not dependent on the exit polls, unless, of course, the Congress manages to defeat the BJP in the states where it is a direct Congress-BJP contest. Two, I harbour no animus or khundak against Congress leaders. I have said publicly that Rahul Gandhi is more sincere than most political leaders that I have met and far more intelligent than everyone thinks. ----- Also Read Opinion | Suhas Palshikar writes: Dear Yogendra, I disagree ----
Three, this is not a forecast. I know big political parties don’t die easily, and not just because they lose two elections. I don’t have Pragya Thakur’s powers to give shrapa (curse), so you may call it my wish. Finally, this wish is not born out of a congenital anti-Congressism. I have always maintained that Ram Manohar Lohia’s anti-Congressism was a short-term political tactic and must not be turned into an ideology. Unlike most Lohiaites, I have come to admire the role of Nehru and the Congress party in nation-building in the first two decades after Independence.
To my mind, the core issue is assessing the Congress’ potential in acting as a bulwark against the onslaught on the foundations of our republic. There are two assumptions here. One, the rise of the Narendra Modi-led BJP presents a threat to the core constitutional values of democracy and diversity. Two, as the principal national Opposition party, the Congress carries the first charge of protecting the republic against this onslaught.
Once we agree on these, and I think most of my critics would share these assumptions, then we can enter into a meaningful debate and disagreement on the following questions: Has the Congress done justice to this historical responsibility in the last five years? Or, can it be trusted to perform this responsibility in the foreseeable future? My answer is a clear no. The Congress is not just not up to this task, it is a hurdle for those who wish to do so.
Let us look at what the Congress did, or rather didn’t, in the last five years. The Modi regime’s economic performance was below average. Did the Congress organise any nation-wide mass movement to articulate and mobilise the farmers’ distress, or the rising unemployment among the youth, or the small traders’ anger against the way the GST was being implemented, not to speak of the disaster of demonetisation? These five years were marked by a spate of lynching of Muslims and rising atrocities against Dalits. Did the Congress even articulate it coherently in a way that would make sense to non-Muslims and non-Dalits as well?
Or take this election, after the Congress got a dream launch-pad with victory in three assembly elections. Did the Congress do something in these three states that could be presented as an alternative to the Modi regime? Did the Congress have a message for the voters of this country? No doubt, it finally came out with a decent manifesto, but that is hardly a political message for the last person. Nor did it have a credible messenger. Pitted against Modi’s communicative onslaught, Rahul Gandhi carried little appeal. The Congress did not appear to have a strategy to handle the post-Pulwama “nationalist” blitz by the BJP. And it certainly had no roadmap for building a Mahagathbandhan: Just compare how the BJP brought back the Shiv Sena and the AGP with how the Congress dealt with alliances in UP, Bihar and Delhi.
I don’t overlook the odds the Congress was up against: The Modi government’s brazen misuse of state power, its mind-boggling money power and the near complete control over mainstream media. But did the Congress do what could be done under these constraints? Besides, the only reason why mainstream parties exist and flourish is their viability and reach. The Congress cannot say everyone must come to it because this is the only party that can take on the BJP and then give reasons why it couldn’t. Let’s focus on the future. The prospects of a second Modi regime bring with it two deeper challenges to our republic. On the one hand, we are walking towards electoral authoritarianism where the electoral mandate will replace any constitutional constraints. On the other hand, there is a slide towards non-theocratic majoritarianism, where minorities are reduced to the status of second-rate citizens. Do we expect the Congress to be the principal force to combat these two dangers? To my mind, the Congress does not seem to possess the vision, the strategy or the ground strength to take on this historic responsibility. If so, the Congress is not the instrument needed to save the republic.
Worse, the Congress is an obstacle to those who want to build an alternative. A large mainstream party acts like a magnet that catches a lot of energy around it. So, even when the Congress is unable to defeat the BJP, it ends up diverting and diffusing a lot of the energy that gets drawn to it. It won’t do the job and won’t let anyone else do it. Alternative politics cannot take off until it calls the bluff of “Vote for Congress or else…”, unless it begins to carry on its work as if the Congress did not exist. This is how the metaphor of death should be understood.
Of course, parties don’t wither away or die an instant death. There are two ways in which the Congress can “die”. There is death by attrition, where a big party keeps getting marginalised and gradually loses traction with the voters. This process takes many elections, perhaps many decades. This is exactly what the BJP would wish for the Congress. But there is also death by submergence, where the remaining energy of the party gets subsumed in a new, larger coalition. There is still a lot of energy in the country to take on the challenge to our republic. The ideal “death” for the Congress would be for this energy, inside and outside the Congress, to merge into a new alternative.
The dark metaphor of death is an invitation to think about a new birth. Or a rebirth?
Change comes in many forms to different countries. Some embrace change, some resist change, and some have change thrust upon them. Take India, which was plunged into chaos on the night of November 8th, 2016, when Prime Minister Narendra Modi, in a 48-minute address, announced that some ₹14 trillion worth of ₹500 and ₹1000 notes (roughly $7.50 and $15.00)—amounting to 86 percent of all the currency in circulation in India—would become illegal as of midnight. People would have until the end of the year to deposit them in bank accounts (and pay whatever taxes and fines the authorities decided to impose on them), but they were no longer legal tender.
This unexpected shock-and-awe announcement, Modi said, fulfilled a declared campaign objective to fight “black money” or, put another way, cash made from tax evasion, crime, and corruption. The prime minister declared that his announcement would not only rid the nation of black money, it would render worthless the counterfeit notes that were reportedly printed by Pakistan to fuel terrorism against India.
The initial stunned reaction was followed by a panicky scramble to unload the expiring notes: the very night of the announcement, people rushed to petrol pumps to fill up their tanks, jewelers tripled their sales, and loans were hastily returned. There were unexpected consequences too: housewives who had salted away their savings in biscuit tins for a rainy day found their years of thrift would soon be worthless. In most cases, even their husbands had not known how much their wives had saved.
But within days the real result of the Modi announcement became apparent—the severe disruption of normal economic activity. Inept implementation made a mockery of the initial shock-and-awe. Not nearly enough new currency had been printed before the announcement (some estimates were that only 4 percent of replacement currency was printed), so banks did not even have a fraction of the money needed to meet consumer demand for new notes. Long queues snaked in, outside and around banks, foreign exchange counters (including at the international airport), and ATMs to change the old notes and withdraw new ones.
But the ATMs were largely empty, since the new notes had been made in a different size from the old ones and did not fit the existing ATMs. These needed re-calibration, a process that took tens of thousands of engineers several months to complete. The Government had not thought of making the new notes the same size as the old to avoid this obvious problem.
An additional complication was the fact that there are not enough ATMs in India: the country disposes ofonly 20 ATMs per 100,000 people, as compared to 77 in China, 114 in Brazil, and 279 in South Korea. Even South Africa has 70 ATMs per 100,000 people.
In the meantime, thanks to the slow speed of the Mint’s presses, cash was in short supply. Banks did not have enough money and so restricted withdrawals to small amounts of cash that most customers found insufficient. Though the permissible withdrawal limits kept changing, being raised and lowered confusingly, they went up with time—provided the bank had the cash available when one asked for it.
Such restrictions are arguably illegal—under which provision of law can an Indian citizen be denied access to the money in his or her own account? When, in Parliament, I asked the Finance Minister to name one country in the world that disallows people from withdrawing their own money from a bank, he could give me no reply.
Thirty days after the prime minister’s speech (in which he had asked the public to bear with inconvenience for just 50 days), only 30 percent of the currency in circulation had been restored. The Reserve Bank of India (RBI) told the Public Accounts Committee of Parliament on January 18th that it was up to 60 percent. The State Bank of India estimated that it would go up to 70 percent by the end of February.The Government’s own annual Economic Survey 2016–2017, released on February 1st, then claimed that replenishing the cash supply will be complete by March 2017—but that target too slipped. Cash shortages remained for months more; the rate of printing new ₹500 notes fell below target. It took another three months to remonetize the banking system.
The initial replacement notes all came in the form of an unusually high denomination (₹2,000 or $30) that most people did not find useful—especially since the government’s failure to print additional quantities of smaller notes meant that for weeks no one was able to make change for a ₹2000 note. Since over 90 percent of all financial transactions in India are made in cash, and over 85 percent of workers are paid their incomes in cash, the everyday economy was brought to a standstill in the last two months of the year. The recovery in the new year was slow, and official figures showed a marked slowdown in the country’s growth rate in the first quarter of 2017.
If this points to an appalling lack of elementary planning on the part of the government, the broader consequences have been far worse. The economy has plunged into chaos, and the decision looks more like a miscalculation than a masterstroke.
The lack of cash reduced both consumption and demand across the board. A booming economy that boasted the highest growth rate in the world suddenly became a cash-scarce economy. Production went down in all sectors. Small producers could not get working capital to keep their businesses going, and many had to shutdown. Daily-wage workers (a large majority of India’s labor force) lost their jobs because firms did not have the cash to pay them.
All indicators—sales, traders’ incomes, production, and employment—were down in November/December 2016; India’s GDP, as estimated by former Prime Minister Manmohan Singh, will shrink by around a full percentage point for the fiscal year. At the end of January, former Finance Minister P. Chidambaram went further, saying that he expected the rate to be no more than 6 percent in 2017–2018 and 6.5 percent in 2018–2019, extending the bad news by another two years.
The Economic Survey 2016–2017 released on January 31st by the Chief Economic Advisor to the government itself states that demonetization is an aggregate demand shock, an aggregate supply shock, an uncertainty shock, and a liquidity shock. It says that the cash crunch “must have” affected the informal economy, which accounts for nearly half of the overall GDP and about 80 percent of the employment economy—one which runs on cash.
India’s unemployment rate has shot up to a five-year high of 5 percent in 2015–2016. According to the All-India Manufacturers’ Organization (AIMO), macro- and small-scale industries and traders have incurred 60 percent job losses and a 47 percent revenue loss because of demonetization. Not only are small-and medium-sized enterprises shutting down; medium and large infrastructure companies surveyed by AIMO have reported a 35 percent drop in employment and a 45 percent drop in revenue. AIMO estimated even higher losses of jobs and revenue by the end of March.
Current estimates tell us that real estate, construction, and infrastructure, which provide the most employment after agriculture, are set to lose over 100,000 jobs in 2017. The eight lakh crore (₹8 trillion) construction industry, which employs 45 million people, has virtually ground to a halt, with a drop of 80-90 percent in income.
There has been an inventory pile-up due to low consumer demand. Local industries—footwear in Agra, garments in Tirupur—suspended work due to a lack of money. Several enterprises are now struggling to their feet, whereas many have not been able to resume at all.
The informal financial sector—rural moneylenders who provide loans that amount to 40 percent of India’s total lending—has all but collapsed.
R ural India is in bad shape. The fishing industry, dependent entirely on cash sales of freshly-caught fish, has been deeply affected. This is even affecting coastal security, as I pointed out during Question Hour in Parliament, because the cash shortage has dramatically reduced the number of boats going out to sea to about 10 percent of previous levels, thereby reducing the number of eyes and ears available to our intelligence agencies monitoring suspicious activities in our waters.
Traders are losing perishable stocks and farmers have been unloading produce below cost—since no one has the money to purchase their freshly harvested crops. Peas that Punjabi farmers sold at ₹30 a kilo only a year ago were brought down to seven rupees a kilo two months after demonetization.
The liquidity crisis has deeply affected farm production, farm prices, and agricultural credit repayments.A study by two economists at Delhi’s Indira Gandhi Institute of Development Research found that in mid-November 2016, deliveries of rice to rural wholesale markets were 61 percent below usual levels, soybeans were down 77 percent, and maize nearly 30 percent. The winter crop could not be sown in time, because no one had cash for seeds, and the resultant harvest was lower than projected.
All this has been hugely destabilizing in the short term. The prime minister asked people to be patient for 50 days, but those 50 days are long gone and it is clear that the process will take much longer before normal money supply is restored. As for the long term, as former Prime Minister Manmohan Singh trenchantly observed, quoting Keynes, “in the long run, we are all dead.”
The story of demonetization was of unnecessary suffering throughout the country. As ordinary people clutching their savings wasted hours standing patiently in queues that offered no assurance of money at the other end, fatalism battled with exasperation. Stories of individual tragedies were reported daily—of hospitals turning away patients who only had old notes, children not being fed, middle-class wage-earners unable to buy medicines for the sick, and as many as 135 people reportedly dying after collapsing in bank queues or committing suicide. Ironically, the rich—more likely to hold credit cards and be “cashless”—have been relatively unaffected; the main victims have been the poor and the lower middle-classes, who rely on cash for their daily activities.
Thus, those at the bottom of the economic pyramid are the principal victims of this supposedly “pro-poor” policy. Yet they have reacted with stoicism, swayed by the government’s assiduous public relations messaging that portrays their difficulties as a small sacrifice for the nation. “If our soldiers can stand for hours every day guarding our borders,” one popular, and hugely effective, social media meme asked, “why can’t we stand for a few hours in bank queues?”
The impact of the demonetization in terms of the cash deficit and its consequences has been particularly severe in Kerala, the state I represent in Parliament, because of the distinct character of its banking sector, in which the cooperative sector and Primary Cooperative Societies play a central role.
Overall, the cooperative banking sector is much more active and vibrant in Kerala than elsewhere in India. As a result, over 70 percent of the deposits in cooperatives in India come from Kerala; over 70 percent of the non-agricultural loans and advances made in India are made in Kerala; and over 15 percent of agricultural loans and advances disbursed in India are disbursed in Kerala. But the Reserve Bank of India prevented all 370 central district cooperative banks and 93,000 primary agricultural credit societies in the country from depositing or converting old notes after November 8th, 2016.
Keeping the cooperative banks and societies out of the note exchange process was particularly damaging for Kerala. Dairy, agriculture, and the market for fish have all been severely affected.
Tourism, vital for India’s economy, was hit hard, albeit briefly. Foreigners have been spared tragedy but not inconvenience, for they were only allowed to cash a hundred dollars a day and often had to go from bank to bank to get the money. In November 2016, for instance, tourists returned without seeing the Taj Mahal because their notes were not accepted at the ticket window, and travel plans were curtailed by lack of new money.
Tourism works by word of mouth: how will one regain the trust of foreigners that have already spread the word of their harrowing ordeals in demonetizing India?
While it is clear that the government had not done its homework before launching the scheme—and in a manner typical of the Modi Administration, had consulted very few officials within it—it is not the prime minister’s style to be on the defensive. His propagandists boasted of a “surgical strike” on black money, corruption, terrorism, and counterfeiting. Over time, it became painfully clear that those objectives had not been met. A “surgical strike” is supposed to be precisely targeted, but it is clear that the collateral damage is so extensive that the pain it has inflicted outweighed any tangible gain, at least in the short term.
In the beginning of December 2016, new victims surfaced, ranging from salary earners trying to get money out of their bank accounts and pensioners unable to receive their monthly allowances, to fathers and brides unable to finance long-planned weddings at the peak of the Hindu marriage season. As late as the end of January 2017, Indians were surviving on less than half the cash that had been in circulation at the beginning of November 2016. Shockingly, this was all happening in a country where cash represented 98 percent of all transactions by volume and 68 percent by value. While the cash is now largely back in circulation, memories of demonetization have shaken many people’s faith in the currency.
Indeed, the Modi government itself has effectively conceded that demonetization has failed and has had a severe adverse economic impact on India. In its list of achievements touted in the Economic Survey 2016–2017, the list takes note of assorted schemes continued from the previous regime, but fails to mention demonetization. The Survey also accepts that demonetization resulted in “growth slow[ing], as demonetization reduced demand (cash, private wealth) [and] supply (reduced liquidity and working capital and disrupted supply chains), and increased uncertainty” and “job losses, decline in farm incomes, social disruption, especially in cash intensive sectors.” To this must be added the economic cost of printing and replacing notes, estimated at ₹1.25 trillion.
Unfortunately, there is no evidence that any of the declared objectives of the scheme will be attained. In a largely cash-fueled economy, all cash is not “black money” and all black money is not cash. In fact most of India’s black money has been invested in real estate and other forms of property, gold and jewelry, investments in property abroad, and “round-tripping” that has seen the money return to India’s stock market as “foreign investment” via countries like Mauritius. The Modi move, therefore, touches only a small proportion of black money assets.
Worse, the government had hoped that the sudden move would eliminate a large portion of the black money holdings altogether from the government’s liabilities, since it was assumed that many hoarders would destroy their money rather than attract the attention of the taxman by declaring it. Various agencies of the government had initially estimated that around 25 to 35 percent of the demonetized banknotes would not be deposited by the stipulated dates. On November 23rd, 2016, the Attorney General of India told the Supreme Court of India that the government expected that notes worth four to five lakh crores (some $800 billion) would be rendered worthless by not being deposited.
But those who held large quantities of black money seem to have been more resourceful than the government and have found creative ways to launder their money, with the result that most of the estimated black money in circulation has flooded into the banks. Some well-placed friends of the ruling party were allegedly tipped off before Modi’s announcement, leading to suspicions that the well-connected may have had time to dump their black money stocks. Though the Reserve Bank of India has so far refused to release official figures, claiming to a parliamentary panel that they are still counting the old notes received, experts agree that the amount of black money that will eventually be wiped out will fall significantly short of the initial estimates. Indeed, there may be no liability write-off at all.
It has been widely reported that, by the end of December 2016, around 95 to 97 percent of the demonetized notes in circulation had reached the banking system. Indians abroad and the Central banks of Nepal and Bhutan, which keep some of their foreign exchange reserves in Indian currency, hold a part of the remaining notes. The actual value of notes rendered worthless will be known only after June 30th, 2017, which is the deadline for Non-Resident Indians to exchange any demonetized cash that they may hold at specified offices of the RBI.
However, it already appears to be clear that a maximum of only two to 3 percent of the demonetized notes will remain undeposited, unequivocally indicating that the demonetization exercise has failed to achieve its primary objective of cleansing the economy. The RBI Governor has conceded that there is no impact at all of demonetization on the RBI’s balance sheet.
And since corruption seems to be a way of life in India, it will not be long before the old habits of under-invoicing, fake purchase orders and bills, reporting non-existent transactions,and straightforward bribery all generate new black money all over again. The government’s plan is therefore likely to be ineffective beyond the short term, since it does nothing to control the source of black money.
Indeed, in the first six weeks after demonetization, the Income Tax Department announced it had seized ₹5 billion in unaccounted cash from people hoarding currency they could not explain.Strikingly, ₹920 million of their seizure happened to be in brand new ₹2000 notes! Cases of corrupt officials, including bank managers, being caught red-handed in illegal transactions have been reported, all of which involved the new currency. Some bank managers worked from 9 am to 5 pm telling people they had no money, and then from 5 pm to 9 pm gave money through the back door to money launderers for a fee.
Though I am by no means tarnishing all bank mangers for the sins of a few, the fact is that in its drive against corruption the government has created new forms of corruption. Black money clearly continues to be generated—it has merely changed its color and shape. Black money has become white by way of pink! And, of course, ₹2000 notes will take up less space in the briefcases of the corrupt than ₹1000 notes did.
The Prime Minister’s other declared objectives have not been met, either. Demonetization is not a necessary exercise to achieve the objective of thwarting counterfeiting, and the government’s citing of such an aim displays considerable overreach. Media reports confirm that counterfeit bills of our freshly designed currency notes are already in circulation. This could, however, have been prevented by enmeshing strong security features with the design. It seems that the government has missed the opportunity of ensuring the adoption of such security features in the new ₹500 and ₹2000 currency notes that it launched post-demonetization. This indicates a lack of foresight and inadequate planning on the government’s part. There appears to be no special new watermark, no security thread or fiber, no new latent image, and certainly no nano chip, as BJP supporters were boasting on social media!
Will a mere change of color and size render the notes safe? Shockingly, RBI has admitted that three different versions of the ₹500 note have been printed in haste. If all three versions are authentic, one can reasonably assume that this is going to confuse the public and make it easier for counterfeiters to get away with their own fake versions.
B ut still, how big of a problem is this? A study conducted by the Indian Statistical Institute in Kolkata, under the supervision of the National Investigation Agency, estimated that the value of fake Indian currency notes in circulation was about ₹400 crores, which amounted to only roughly 0.03 percent of the withdrawn currency.
It also indicated that the ability of banks to prevent counterfeit notes being deposited was limited, since their machines often fail to identify fake notes and bank tellers—overwhelmed by the pressure of the astronomically high level of deposit activity in the 50-day window period—could not make the manual effort to identify fake notes.
As a result, every indication suggests that several fake currency notes have slipped through into the banking system and become legitimized. Thus, far from hurting counterfeiters, demonetization may have helped legitimize fake currency by having it exchanged, amid the chaos, for new notes.
Prime Minister Modi also cited among his objectives the undermining of terrorist and subversive activities. He even went so far as to say, on December 27th, that “through the note ban, in one stroke, we destroyed the world of terrorism, drug mafia, human trafficking and the underworld.”
But empirical evidence collated from data on terrorist strikes and fatalities from the Global Terrorism database and the South Asian Terrorism portal shows that it is very difficult to establish a causal relationship between the number of terrorist strikes on Indian soil and the absolute levels of currency in circulation. In any case, we are seeing reports of terrorists being caught or killed in Kashmir in possession of large quantities of new notes. So where is the claimed effect on terror financing?
Meanwhile, the goalposts kept shifting: the Reserve Bank of India issued no fewer than a hundred notifications on demonetization—some 138 in 70 days until I stopped counting! Each of these was intended to tweak an earlier announcement. Many are referring to this once-respected institution as the “Reverse Bank of India” for its frequent reversals of stance on such matters as the amounts of money permissible to withdraw, the last legal date for withdrawals, and even whether depositors would have their fingers marked with indelible ink so they could not withdraw their money too often.
Demonetization has caused serious and seemingly lasting damage to India’s fledgling financial institutions, most notably the RBI, which conspicuously failed to exercise its autonomy, to anticipate the problems of Modi’s scheme, prepare its implementation better, and to alleviate its impact. The United Forum of Reserve Bank Officers and Employees wrote to the Government on January 13th, 2017, pointing to “operational mismanagement,” which has “dented RBI’s autonomy and reputation beyond repair.” The inexplicable silence of its governor, Urjit Patel, has reduced him to a lamb. But this “silence of the lamb” is eating India’s citizenry alive.
In one recent change of declared objective, the prime minister and finance minister are now talking about moving India to a “cashless society”—an idea and a phrase that was not mentioned even once in Prime Minister Modi’s original November 8th, 2016, speech. (This was hastily amended to a “less cash” society when the absurdity of the proposition was widely pointed out.) But they seem blissfully unaware of the fact that over 90 percent of retail outlets do not even have a card reader at the point of sale, that half of India’s population is unbanked—India is home to 21 percent of the world’s unbanked adults—and that the overwhelming majority of their nationals still function in a cash economy. In fact, 97 percent of retail transactions in India are conducted in cash or check. Few consumers use digital payments: only 11 percent used debit cards for payments last year. Only 6 percent of Indian merchants accept digital payments. And fewer than 2 percent of Indians have used a mobile phone to receive a payment, compared to over 60 percent of Kenyans and 11 percent of Nigerians.
As columnist T.J.S. George asked: “Are we to assume that daily wage earners, small-time farmers and sundry hawkers who don’t even know what is a bank will be happy to see the country getting rid of cash, rather than vague things like illiteracy and poverty?”
The plain fact is that the digital infrastructure for “cashlessness” simply does not exist in India.The aforementioned Economic Survey acknowledges that digital transactions face significant impediments.
Though the government hopes many will use their mobile phones for cashless payments, the Survey enumerates approximately 350 million people without cellphones (the “digitally excluded”); 350 million with regular “feature” phones, and 250 million with smartphones. A mere 34.8 percent of the country has internet access, and there are around 200 million users of digital payment services. A 2015 World Bank study of bank-account usage and dormancy rates across different regions found that only 15 percent of Indian adults reported using an account to make or receive payments.
In such an environment, a cash scarcity is economically crippling. Moreover, most mobile applications and internet banking websites are largely available in English, a language not understood by a majority of the people.
There are also appalling deficiencies in cyber-security. Ours is a country where cyber-crime flourishes; the government’s drive for cashlessness may be creating new vulnerabilities and new victims. Expecting India to become a “less cash” economy at this point is like removing 86 percent of a person’s blood circulation and then asking him to dance.
Studies confirm that most Indians who use cards use them just to withdraw cash from ATMs; making payments by plastic is still something of a novelty. Multiple stories—which might have been hilarious, if they were not so pathetic—have been told of people patriotically trying to use plastic at the few outlets that do accept cards and being told “the server is down”; of salesmen frantically rushing out onto the street from their shops with card-readers in hand hoping to catch a better signal; and of single transactions taking a dozen minutes because the card-reader keeps breaking down in mid-execution.
India offers some of the slowest broadband speeds in the world, and at least a third of the population has no reliable electricity supplies. It is all reminiscent of Marie Antoinette: “if they do not have cash, let them use plastic!”
The Government seems to be engaged in an exercise to furnish the penthouse of a building whose foundations it has not yet dug. As the Harvard Business Review noted, “India’s digital state (it ranked 42nd out of the 50 countries we studied in our Digital Evolution Index), does not engender the threshold of trust needed for cashlessness to take hold in a meaningful way.”
Worse still, there is a transaction cost involved in each digital payment that is absent in any cash exchange—so using “less cash” actually involves more expenditure for the payer. This obviously affects ordinary citizens who are used to cash, which involves no transaction costs for them. It is also expensive for merchants to adopt digital payments, which affects them adversely. Merchants highlight the high cost of even trying out these machines as a factor that is driving down interest in acceptance of digital payments. “I was thinking of installing a card machine at my store. But the banks asked for a ₹5,000 deposit,” said one merchant in a recent study.
The government is doing nothing to ensure point-of-sale machines are made available to traders, small retail outlets, and small and micro enterprises, free of cost, as I suggested in Parliament, or to remove charges for all cashless transactions.
The financial implications of moving to a “less cash” economy have raised related concerns. Dark suggestions have been made that the real beneficiaries of demonetization are the handful of companies that specialize in digital payments, especially by mobile phone. (Only 2 percent of India’s nearly one billion mobile phone users have ever used their phones to make digital payments; although this figure began shooting up after demonetization.) In addition, digital transactions, by leaving a traceable record, add to the state’s ability to monitor individuals’ expenditures. As former Finance Minister P. Chidambaram asked,
why should a young adult be forced to disclose that she bought lingerie or shoes or he bought liquor or tobacco? Why should a couple be forced to leave a trail of a private holiday? Why should an elderly person leave a record that he bought adult diapers or medicines for his ailments? Why should the government or its numerous agencies have access to our lives through access to Big Data?
These are serious questions that call into account the Government’s insouciant announcement of objectives that were never presented to Parliament for approval until three months later, when the policy was irreversible and the damage had already been done.
Equally serious is the continuing concern about the legality of the government’s action. The entire demonetization exercise had been conducted by the issuance of gazette notification no. 2652 by the Joint Secretary, Finance, under Section 26(2) of the Reserve Bank of India Act of 1934. This provision gives the Union government the limited power to demonetize certain series of the country’s currency through a notification. This provision does not, however, give the government the power to freeze bank accounts through limits on cash withdrawals, disrupt normal banking operations, and impose mandatory disclosure requirements (such as identity cards) while depositing cash into bank accounts or exchanging old notes.
The relevant provision of the aforementioned Act unambiguously states:”(1) Subject to the provisions of sub-section (2), every banknote shall be legal tender at any place in India in payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government.”
This means that the money every Indian holds in her hand or in the bank is a debt guaranteed by the government to her. Currency thus represents a ‘public debt’ owed by the government to the holders of banknotes. “I promise to pay the bearer of this note ...” vows the RBI Governor on every Indian currency note. Every currency note is a contract between the bearer and the state, something that has been signed in good faith and ratified by the prevailing law of the land. The questions that then arise—and have still been left unanswered by the government and the courts—include: Can this contract be repudiated unilaterally by the state? On what legal grounds can the RBI write off notes that it had promised to honor?
And while we are considering the issue of legality, why has the RBI not placed in the public domain the Minutes of the RBI meeting of November 8th, 2016, that was supposed to have requested the prime minister to make the announcement he did? Is it for fear of revealing the real nature of the meeting would only confirm the Bank’s surrender of its autonomy to the government? Only eight out of 21 Directors attended, and four of them were officials. Only four independent Directors were present.
This entire decision-making process was a Government exercise trampling on the autonomy of the RBI, rather than a decision of the institution meant to be in charge of India’s monetary policy.
Among the longer-term effects of this monetary disruption have been unemployment and severe dislocation of India’s informal economy; the collapse of many marginal businesses unable to survive the ongoing loss of income; severe reductions in crop yields and problems pertaining to agricultural credit; and the accelerated flight of investment out of India.
Even more worrying is the prospect of a long-lasting decline in India’s so-far robust economic growth, and the danger that it will push more Indians who were in the process of escaping poverty right back into it.
The burden of demonetization has undoubtedly been regressive, as it has most negatively affected the poor and the unbanked, which have had to lose their daily wages to stand in queues or have lost their jobs because of non-functioning markets; and they are the ones who are expected to transform their financial habits. The truly cashless are the poorest Indians, who depend on cash for their daily survival: as the Harvard Business Review puts it, “this unfortunate crisis is a case study in poor policy and even poorer execution. Unfortunately, it is also the poor that bear the greatest burden.”
While many Modi fans are blaming the implementation rather than his intent, the fiasco was inherent in the design of the policy.
It is clearly a “symbolic” policy—high ambiguity, high conflict, top-down, centralized, and authoritarian. There was no “policy skeleton,” and, worst of all, no cost-benefit analysis, no evidence that alternative policy options were considered. It is clear no impact study was done, judging by the blizzard of new official notifications every day, tweaking and fixing the regulations.
The government has presided over a non-transparent policy environment that seems entirely unconducive to the creation of a cashless society.
This is a manufactured crisis. The government, for no public benefit anyone can understand, has thrown a spanner into the works of the Indian economy. It is an ill-conceived scheme, ill-planned, poorly thought through, badly implemented, and disastrously executed. Demonetization failed in its stated objectives. Deep rooted problems, like corruption or terrorism, are not amenable to blunt, one-off policy instruments. Demonetization was the equivalent of an “anti-stimulus” policy intervention, and the consequent drag on demand has been significant. The government liked to boast of being the world’s fastest-growing major economy; it is a boast it can no longer make, since, thanks to demonetization, it slipped behind China again.
Modi came to power in 2014 promising to boost growth, create jobs for India’s youthful population, and encourage investment.These objectives lie in tatters with his ill-considered demonetization. He abolished the central government’s Planning Commission to signal that the days of top-down statist control of the economy were over, but his demonetization decision has brought back the worst days of government control. His reputation for being an efficient and competent manager is irremediably stained by the implementation disaster. How long it will take for India to recover is anyone’s guess.
