The much acclaimed “Harvard Business Review” (HBR), in a strongly worded commentary to mark one year of demonetisation, has said that demonetization in a “complex economy” should been preceded by “a sound theory; a rationale for why the underlying assumptions are valid, and the evidence for those assumptions; and cost-benefit analyses, including accounting for the systemic effects, unintended consequences, and learnings from similar actions elsewhere.”
The study, titled “One Year After India Killed Off Cash, Here’s What Other Countries Should Learn from It” and written by Bhaskar Chakravorti, senior associate dean of International Business & Finance at the Fletcher School at Tufts University, the
commentary says, “It’s unclear if any other experts have been consulted on the India policy.” Commenting on the fact that the only “expert” who might have been the inspiration was “a hitherto unknown mechanical engineer-turned-turned-social-activist named Anil Bokil”, HBR says, all that he did was ‘a five-point plan for ‘principled, prosperous, and peaceful living’ and a 94-page PowerPoint manifesto that he pitched to Prime Minister Narendra Modi.”
What are the factors that should have been considered before “invalidating cash” of Rs 500 and Rs 1000 notes,asks the study. “Invalidating 86% of the value of cash in circulation should be an automatic red flag, because it could bring the economy to the brink of chaos,” HBR answers.
Observing that “90% of India’s workers are in the informal sector, where the predominant form of payment is cash. It is hard to imagine a scenario in which such “double” invalidation would not constitute a body blow to the workforce and the economy.” “In a recent analysis of income tax probes, the cash component of undeclared wealth in India was estimated to be only about 6%. In other words, the policy instrument was aimed at the wrong target: most undisclosed wealth is held in noncash assets. All of this data was readily available and should have given the policy makers pause,” HBR continues.
There are also sharp comments on how the privileged and the rich in India get over regulations. The fact, says HBR, was the fact that “in Indian society, there is access to money-laundering networks and creative schemes for getting around rules and regulations,” rendered the step meaningless. Thus, during noteban, “people with large holdings of the old banknotes sold them at a discount to brokers who then distributed them across a network of other people to deposit smaller amounts at banks so that they would not trigger an audit.”
The result was, says HBR, “India’s central bank, the RBI, recently reported that of the estimated 15.28 trillion rupees ($239 billion) in currency taken out of circulation by demonetization, almost 99% had been returned to the banking system. The original argument for demonetization unraveled because of the strategy of leaving the holders of illegal cash stranded with useless banknotes appears to have mostly failed.”
As for the rationale that the “demonetization was good for weaning the country off its dependence on cash and moving transactions to digital platforms, thereby leading to greater efficiencies, transparency, and growth of online commerce, thereby catapulting India more forcefully into the digital age”, HBR says, “Unfortunately, here, too, the policy’s impact has fallen short.” “According to additional data from the RBI, while digital transactions did spike post-demonetization (when consumers had few alternatives), they have now dropped below the peak levels in both volume and value. Growth in digital transactions has been slowing each month since demonetization”, it says, wondering, “It is not clear why invalidating 86% of the country’s cash was necessary to promote a single payment platform.”
