In his national address on November 8, with demonetisation, Prime Minister Narendra Modi announced one of the most biggest and significant steps to curb the menace of black money in India. In a country like India where cash to GDP (Gross Domestic Product) ratio remains at 12 per cent of the economy with 87 per cent of the cash in circulation in the form of Rs 500 and Rs 1,000 notes, it was going to be a major step backed by strong political will and economic management.
Moreover, the decision was well intended considering the "electoral promise" made by the Bhartiya Janata Party (BJP) during Loks Sabha elections 2014, which was also formulated in its electoral manifesto to fight corruption and the problem of black money.
Ever since the decision came out in execution, it has been subjected to the "highest level of scrutiny" by political leaders, economists, experts and the media. However, the recent speech of former Prime Minister Manmohan Singh in Rajya Sabha has found much attention considering its "bitter critique" of the demonetisation drive by Modi government, which he termed as an exercise of "monumental mismanagement" and failure.
Considering the weight of the financial integrity and expertise of Singh on the subject, the opposition has been riding high on his words to question the government and its moves over demonetisation.
|Had Manmohan Singh not taken the future into consideration, no economic reform of 1991 would have taken place under his leadership. Credit: PTI|
However, taking note of the points raised by the former PM in his almost seven-minute address in the Upper House, we need to make a "fair and objective analysis" of what he said and what he stood for during his 10-year tenure as a prime minister.
Firstly, it is not for the first time that the demonetisation of 500 and1000 rupee notes has been done in India. For example, notes of 1000 rupees were introduced in 1938 under the British rule and then demonetised in January 1946.
Later, they were introduced in 1954 only to be demonetised in 1978 by the Janata Party.
Even the UPA rule under the leadership of Singh allowed "periodical withdrawal" of 500-rupee notes citing counterfeiting of currency. Hence, to offer straightway critique of this measure reflects a political, rather than economic judgment. No doubt the level of change this time is big, but so will be the effect of its implementation in the long run.
Secondly, it was under the UPA rule led by Singh that despite serious criticism from Supreme Court, the establishment of a Special Investigation Team (SIT) to investigate black money in India could never take off.
To quote noted lawyer Ram Jethmalani, "In spite of serious criticism by the Supreme Court, the government is unrelenting and remorseless". Given the context and history, the new "moral high ground" of the Congress, led by Singh, reflects "utter political opportunism" in the name of the Opposition.
Thirdly, on the issue of demonetisation being a "monumental mismanagement" as said by Singh, the facts on the ground reflect differently. The decision does not come in haste, but forms a series of measures that the present government has adopted towards the menace.
According to official figures, more than 25 crore Jan-Dhan accounts have been opened and nearly 20 crore "Rupay" debit cards have also been issued. The number of point of sale (PoS) terminals has substantially gone up in the recent past. But the scope is still immense. The expected introduction of Goods and Sales Tax (GST) in April 2017 would have led to better observation of accounting standards.
Moreover, the government's black money declaration scheme received Rs 65,250-crore in the IDS during the four-month window that closed in October 2016. It is expected to translate into tax collection of Rs 29,362 crore, of which the exchequer should get Rs 14,700 crore by the end of 2016-17.
All these steps were directed towards promoting greater financial transparency and more accounted transaction in India. The present demonetisation scheme forms a major part of this series rather an "impromptu decision".
Fourthly, there has been no point of disagreement over the "stated objectives" of demonetisation. Leaders like P Chidambaram and Arun Shourie have agreed with the objectives, but they do raise concern at the level of implementation. No change can take place in one day and every change has costs attached with it.
While a series of steps and measures has been taken to smoothen banking transactions for the public. Most recently, the government asked National Bank for Agriculture and Rural Development (NABARD) to release 21,000 crore of funds to farm cooperatives for onward payments to farmers.
Now coming to another point raised during Singh's speech, which would raise concerns over the trust in Indian currency among investors. It is interesting to understand that financial implications of demonetisation are many and could have a mixed set of results. It would rather inspire a "sense of confidence" among the global community that India is serious about its commitment to fight corruption. This will enhance India's ranking in ease of doing business as well as in various global indices of corruption.
Moreover, the economic strength and currency value will be improved further with the removal of counterfeit notes from the economy. It also comes as a big blow to "terror financing" in India as, in recent years, the large number of counterfeit notes were regularly discovered in states infested with terror activities.
While quoting British economist John Keynes from his seminal work A Tract of Monetary Reform (1923), the former PM said, "In the long run we all are dead", perhaps questioning the 50-day deadline by PM Modi.
He failed to acknowledge a crucial fact from his own political journey - had he not taken the future into consideration, no economic reform of 1991 would have taken place under his leadership. It is the ability of a leader to foresee the challenge and then adapt to the necessary change as soon as possible.
In India, the problem of corruption has serious implications for politics, economy and society at large. On the one hand, while it undermines the government's ability to deliver economic growth, it also poses challenges for many key variables like macro-financial stability, investment, human capital formation and productivity.
In India, black money is estimated to be between 10 and 30 per cent of the official national income. The recent demonetisation has hit the stock of unaccounted wealth kept exclusively in the form of currency. Also, the high sums of deposit for past one week have brought the large coffers of money under account books. This will result in increased tax collections and greater economic transparency.
No doubt there are some liquidity constraints impacting the production and output in the short term but once the process is undertaken, the government's confidence in the efficient management of the economy will lead to favourable returns.
It remains to be seen if it will amount to a two percent loss in the GDP, as speculated by the former PM. However, much needs to be done to reduce black money and its regular accumulation under different measures like tax incentivising and voluntary disclosures.
Also, the next step must be to reform "political funding" in India, which still remains an area of concern; on this front too, the Manmohan Singh government had failed to arrive on any kind of "political consensus".