As we complete a year since demonetisation, I raise a few questions pertinent to the economic policy discourse in India.
Unlike GST, the inputs of several relevant stakeholders were not solicited in demonetisation’s policy design. Most legislators were not privy to this decision until moments before the announcement – understandably so, because the move would fail if any of them were in possession of black money or leaked the news to those possessing it.
Even when the Union Cabinet was informed about the decision moments before announcing it to the public, its members were not allowed to carry their mobile phones into the meeting. The intent was to ensure utmost secrecy so that the corrupt could be caught off-guard.
The very fact that the inputs of those elected to represent the public could not be solicited due to concerns of 'trust', should perturb us – yet, strangely it does not. When elected representatives take oath to office and secrecy but are yet not involved in decision making, it seems to be an acknowledgement of their lack of integrity.
It is even more disturbing that there was hardly any dissent from those kept out of loop that they should have been consulted in the decision making process – because it gives the impression that they acknowledge concerns over corruption to be real.
It is necessary to take measures to address concerns over integrity of those elected to power so that their involvement in critical policy decisions is not affected.
Greater stakeholder involvement would have helped the government be better prepared for the consequences of demonetisation, while also identifying and preventing ways in which black money can be converted to white money.
Perhaps, the government may even have decided not to implement demonetisation and would have looked at other alternatives.
‘DeMon’ will go down as a reminder of how effective a policy could have been, had relevant stakeholders been engaged.
Blind Faith in ‘Intent-Driven Policies’
Once the decision was taken, it seems reasonable that the government would have kept track of it to see if it yielded the intended benefits. Some reports suggest that the RBI was aware at least by April that 98.8 percent of the demonetised notes had returned to the system.
But, an announcement in this regard was not made public until August.
If the central government had to admit that much of the withdrawn currency had returned to the system sooner, it may not have been able to capitalise on the perceived gains of the demonetisation policy in elections in states like Uttar Pradesh.
The intent of the policy is likely to have played a role in helping the ruling party win elections conducted immediately after demonetisation.
At present, there seems to be a blind-faith in effectiveness of policies made with good intent. Once a policy gets through the intent filter and persuades us on its potential benefits, we presume that the intended benefits materialise and do not place enough emphasis on measuring the actual outcome.
Our systems and culture seem to assess and reward the intent of a policy more than its outcome. Consequently, there is little focus on gathering data to gauge whether policies created with good intent such as caste and gender-based reservation or rail travel subsidy are effective as envisioned.
This is evident from the lack of emphasis on a sound evaluation mechanism which provides room for policy makers to get away with poorly designed policies.
It enables policy makers to carry out any experiment by advertising its intent and claim success even in the absence of a good outcome. Some critics argue that demonetisation was intended for political gains and not for any economic benefit as it would enable the ruling government to shed the criticism of being suit-boot ki sarkar.
This argument gained some credibility as the government decided to overrule the RBI’s concern that the costs could be higher compared to the benefits.
A systematic and structured approach to policy design with emphasis on outcome can prevent such exploitation. It is important that policy evaluation is given as much importance as policy formulation.
A shift in this mindset can enable a change to outcome-oriented policies.
A Miscalculation That Could’ve Been Corrected
The initially stated objectives of demonetisation were modified to stay in sync with any positive consequences – intended or unintended – reported to arise from it. As per the initial proclamation by the Prime Minister, its intent was to curb black money and terrorism financing. It later metamorphosed into increasing digitisation, formalisation and widening of tax base.
Raghuram Rajan believes that the loss to the GDP on account of demonetisation is approaching Rs 2.5 lakh crore. He also feels that the decision may have resulted in a situation where the government ended up paying interest to those who deposited black money back into the banks.
Rajan estimates that the RBI will be paying them around Rs 24,000-crore each year as interest. Reports suggest that the cost of printing new currency costs was around Rs 15,000 crore. Thus, the total short-term costs to our economy might be around Rs 3 lakh crore.
Interestingly, the government had anticipated that at least Rs 3 lakh crore of black money would not return to the system so that the incurred costs could be offset. But, it turned out to be a gross miscalculation and just about 0.16 lakh crore is yet to return.
The government probably overestimated its capability to prevent black money being pumped back into the system and (or) underestimated the ability of the corrupt in putting their dodgy cash back into the system. This could have been avoided had inputs of more stakeholders was collected.
These figures seem to indicate that demonetisation has probably failed as far as countering black money is concerned while also contributing to derailing the Indian economy. However, it might still result in net positive gains due to (unintended) long term benefits in formalisation and digitisation of the economy.
Transparency to Combat Black Money
It must also be worrying that even the strongest measure by the government to tackle black money seems to have become futile. If the ingenious minds found a way to counter demonetisation, they may as well be able to circumvent other policies adopted to tackle black money.
While it is clear that concerns over corruption of elected representatives is a pivotal root-cause for some of the disastrous consequences of demonetisation, no measure seems to have been adopted to change the status-quo.
It is important to examine how legislators stand to benefit if they help those holding black money. Initiatives to ensure transparency in election financing and stringent monitoring of wealth accumulated by those in power are few steps that can be taken in this direction.
Nonetheless, the move could be considered as a strong signal by the government that it will not tolerate black money and that it is willing to take strong measures against it. This perception, coupled with stringent law enforcement and greater involvement of stakeholders could help the government successfully combat the menace of black money.
(The author is a founding member of the McGrath Centre for Policy Research, XLRI Jamshedpur. He has previously worked at Indian School of Business, Hyderabad, and Centre for Public Policy Research, Cochin. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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