Demonetisation: Chidambaram may be right in calling it a non-reform, but he shouldn’t forget the past

P Chidambaram, four-time finance minister and a senior Congress leader, has been an aggressive critic of Prime Minister Narendra Modi’s 8 November demonetisation drive, much like his colleagues in Congress party such as former PM Manmohan Singh and Vice president Rahul Gandhi. On Tuesday, inaugurating the Prof T D Lakdawala lecture series at the University of Mumbai, with a talk on ‘Twenty five years of Economic Reforms and Challenges Ahead’, Chidambaram escalated his attack by stating that the authors of note ban lacked elementary knowledge of economics.

“Whoever planted the idea of demonetisation should enroll in a graduate school of economics,” said Chidambaram. Chidambaram argues why demonetisation is not an economic reform but a ‘man-made tragedy’. To support his argument that why note ban isn’t an economic reform, the former FM said an economic reform can be defined as a new model whose effectiveness could be measured with its outcomes. “A reform can be judged on the parameters of enhanced output, efficiency and distributive justice,” Chidambaram said.

 Demonetisation: Chidambaram may be right in calling it a non-reform, but he shouldn’t forget the past

Senior Congress leader P Chidambram. Agencies

Some of the landmark reforms of last 25 years Chidambaram picked in his speech include 1991 foreign trade policy, doing away with industrial licences, moving away from fixed exchange rate to a market determined rate, direct reforms, private public partnership, capital market reforms, initiating Aadhaar-based direct benefit transfer.

Chidambaram concludes his reform talk saying the aim of many of these reforms was to end poverty. “Given the capital, the technology and the human resources available in the 21st century, if any country is poor, it is because of its own faults and failures,” said Chidambaram is quoted as saying by the Indian Express. Pro-demonetisation economists will cry foul with Chidambaram terming demonetisation as a non-reform. Note ban critics will cheer him.

Strictly going by Chidambaram’s definition, i.e if a reform is measurable by tangible output and efficiency of implementation, then demonetisation may not qualify to be called as an economic reform. Some of the stated gains of this exercise—rejuvenating the economy by recovering black money, ending corruption involving cash exchange, choking terror funding and as an effective trigger to nudge the society to non-cash transactions—can be evaluated only in the long-term. Reports of fresh cases of black money, fake currency seizure and terror attacks even before the demonetisation exercise over casts shadows on the effectiveness of the demonetisation exercise on these fronts.

As this writer had pointed out in an earlier article, it is naïve to imagine that swapping currency alone would kill illegal cash build up in the system, curb corruption and end organized terror. Also, at this stage, any tangible, meaningful gains for the exchequer out of demonetisation look doubtful considering the massive pain it will inflict on the economy in the approaching quarters.

A 1.5-2 percent slowdown in the GDP on account of cash-ban resulting in paralysis will be a major drag on the economy. The impact of job losses, slowdown in manufacturing and services will have cascading impact across the economy. Apart from the quantifiable impacts, the pain on the common man on account of prolonged cash crunch too should be taken into account when one does the final cost-benefit analysis of the demonetisation exercise. Unless positive results are proven in the long-term, not many can dispute Chidambaram if the former FM refuses to call the note ban an economic reform. It is more of a cleansing exercise and an economic experiment. Till hard results are visible, the fate of Modi’s demonetisation gamble, hangs in balance.

But, the problem with Chidambaram’s Tuesday talk arises where he begins to sermonize on the eradication of poverty as the end result of any major reforms and criticise the failure of the state for its failure to end poverty despite having all tools—capital, the technology and the human resources---at disposal. This is where the Harvard educated lawyer-turned-politician should perhaps also introspect the success of the UPA-regime in the last decade or so to achieve this critical end result. Facts should speak rather than political claims and counter claims. One of the major characteristics of that regime was a phase of jobless GDP growth.

According to a 2013 paper -- 'Joblessness and Informalisation: Challenges to Inclusive Growth in India'--by the Institute of Applied Manpower Research (IAMR), a think-tank of the erstwhile Planning Commission, not only has India witnessed jobless growth during the UPA's tenure, it has also seen millions pushed to become casual labour with little social security. One cannot deny the link of unemployment trends to the poverty graph.

Between 2005 and 2010, the manufacturing sector saw the loss of 5 million jobs, it said. Also, the services sector, which witnessed 18 million jobs between 2000-2005, added only 4 million additional jobs in 2005-2010. Though the larger consensus is that poverty reduction has been quicker in the three-years to 2011-12 but going by the C Rangarajan panel, the fact is that one third of India (29.5 percent) remains poor, way above 21.9 percent estimated by Tendulkar committee. While there are no accurate estimates of poverty in the country, various indicators show a good number of Indians still lack access to labour, shelter and formal financial system.

This raises a key question. Despite the critical economic reform steps initiated in last several decades and despite UPA initiatives to increase social spending, provide employment through MGNREGS, how far India has achieved the desired results to end poverty is a matter of larger debate. While Chidambaram’s remarks on demonetisation are indeed valid, a counter question to him, thus, is why a significant chunk of Indians still live in poverty despite a series of economic reforms and having all tools of poverty eradication at disposal for long.

Updated Date: Dec 21, 2016 20:14:36 IST