In his interview given to India Today TV, Nobel laureate Amartya Sen comes down heavily on Prime Minister Narendra Modi’s demonetisation drive saying the whole exercise is a ‘gigantic mistake.
This is true, Sen says, both in terms of its objective of dealing with corruption as well as the objective of one rapid jump of getting into a cashless economy,’ and a ‘Napoleon moment’ for the PM, but explains why demonetisation will never be seen as Modi’s failure for a long time.
“Modi is a very good political leader, there is no doubt about it. He can certainly convince people so the Modi magic is there. People think Prime Minister is doing something to eliminate black money… Modi will continue to get the benefit of doubt… The idea that rich is suffering is appealing to poor people…,”Sen said in the interview.
Sen discredits Modi’s demonetisation move and criticise the government for undermining Reserve Bank of India’s (RBI) autonomy raising following points:
One, It was well known that only about 6-7 percent of cash is black money (unaccounted cash). Still why did Modi went on to demonetise 86 percent of notes putting the economy at risk? “These statistics were known to everyone and it must have been known to the Prime Minister as well. So if there is only 6 to 7 percent of black money in cash, how do you expect to have a major victory? It is puzzling to me,” Sen asks.
Two, the Nobel laureate questions the decision that ultimately led to the announcement of note ban on 8 November and its timing just ahead of crucial state elections. “It was indeed not even the whole of the Central government, it was a very small group around Modi. So the biggest question here, with the State Assembly elections approaching, is there an issue of federalism that needs to be addressed?," Sen asks.
Three, Sen believes that fake currency was never a problem with India and to eliminate that didn’t require to hold the economy for ransom.
Four, Sen launches a scathing attack on the government and RBI for undermining the autonomy of the institution. I don’t think this is RBI’s decision. This must be Prime Minister’s ...I don’t think RBI decides anything at this time,” adding the RBI was quite independent during Raghuram Rajan’s time.
The questions raised by the Nobel laureate, a renowned global economist and academic, should be an eye-opener to the Modi-government for the simple reason that Sen isn’t the first global economist questioned the government’s move. The context of Sen’s comments is significant. The PM hasn’t so far clarified in Parliament on specific issues - the dramatic change in the thrust and narrative of demonetisation, the uncertainty on the withdrawal off cash curbs and return of normalcy, the details of how did the idea of demonetisation come up (particularly when there is lack of clarity on the roles of RBI and government).
Even the RBI too appears to be clueless about the situation. One such report, based on an RTI query, said the RBI doesn’t have count of cash printed post demonetisation. More importantly, the government has largely downplayed the impact of demonetisation on the economy, saying the pain is only in short-term. But, the projected long-term gains of the economy are uncertain.
In a recent report, global rating agency, Fitch said, “The demonetisation of large-denomination bank notes has caused short-term disruption in India’s economy and led us to downgrade our growth forecasts for 2017. The move has some potential benefits, but the positive effects are unlikely to be strong or last long enough to make a significant difference to government finances or medium-term growth prospects.”
With about 97 percent of the demonetised notes returning to banking system, any tangible gains out of the exercise will depend on how much money the tax department manages to unearth from the deposited money in banks at the end of this exercise.
Clearly, what the government needs to first deal with the economic stalemate caused by the note ban and try getting the economy back on track, before making claims on the gains. As this writer noted in an earlier column the government’s claim that demonetisation hasn’t caused any harm to the economy doesn’t hold water as evidences on the ground shows otherwise.
Besides the damage to the economy, the perception that Modi government has totally undermined RBI’s autonomy is an equally serious problem. RBI losing its credibility would harm the economy severely. In this backdrop, the Modi government would do well paying attention to Sen’s criticism and learning from it.
Updated Date: Jan 12, 2017 16:47 PM