It has been more than 7 months since that fateful day in November 2016 when Narendra Modi announced his harebrained scheme of withdrawing 86% of the circulating cash in the country overnight and making them worthless as legal tender – a move that was unknown even to his finance minister, according to reports, for the ostensible (and dubious) reason of secrecy.
At that time, many commentators, yours truly included, savaged the government and Mr. Modi (for, in this case, personal responsibility was clearly warranted, as the decision was privy to so few even in the ruling party) for a completely thoughtless, stupid, and ruinous decision.
I wrote in a piece in Frontline, that the move was seriously flawed because the penetration of non-cash means of commerce in rural India was very poor, and rural India would therefore be seriously hit by the demonetization move.
Many supporters of Mr. Modi defended him stoutly, suggesting, rather ludicrously, that a move that would remove 86% of the cash in the country overnight would have no negative consequences at all. Most leading economists the world over said that the move would cause a significant dip in India’s GDP. Former PM and renowned economist, Dr. Manmohan Singh, said in Parliament that the move would lead to a 2% dip in GDP.
When early economic indicators following the demo move did not show the economy in a tailspin, Mr. Modi took the opportunity to declare victory over his detractors by saying that:
He forgot that there is a gap between lightning and thunder.
Well, now the shit has really hit the fan. As Harish Damodaran correctly said in the Indian Express on June 12, 2017,the current crisis in India’s farming sector is directly because of demonetisation, because rural agricultural markets are entirely cash-based, and so when Modi sucked the cash out of the system with his blundering scheme, there was a huge cash shortage. As a result, farmers were paid much less than what their crops were worth, because buyers simply did not have the cash to pay them more. Now, every state is being hit with demands of a loan waiver, because farmers are in severe crisis. The write-offs of these loans is going to further devastate the economy.
The most telling admission of failure is an article by one of the right wing’s most eloquent spokespersons, R. Jagannathan (aka The Jaggi), who is the Editorial Director of the Hindu rightwing mouthpiece, Swarajya. In an article recently, Jaggi has finally admitted that demonetization is a failure. Jaggi has correctly quoted and agreed with Damodaran’s excellent analysis, and further said that the total loss due to farm loan write-offs will be in the range of Rs. 2.57 lakh crores, or 2% of GDP, based on a Bank of America-Merrill Lynch estimate – a figure that reminds us of Dr. Manmohan Singh’s prediction of the loss due to demonetization – except that it now seems that the 2% is an underestimate, because it only talks about the loss due to farm loan writeoffs. It does not consider the loss due to the wholesale destruction of the economy and the farming sector. As Jaggi says,
As Jaggi also says,
Not only that, DeMo has failed to achieve its main stated objective as well – the elimination of black money and counterfeit money. As Jaggi again says,
And this as well, from the same article:
What does all this mean?
It means that India is being ruled by AN INCOMPETENT PRIME MINISTER, at the very least (whether he facilitated corruption is a second question). He has ruined the Indian economy with a stupid, ill-considered move. An overweening belief in himself, to the exclusion of advice from even a close set of real economic/financial experts, is undoubtedly the biggest cause of this debacle. If Modi had even consulted those with some economic/financial knowledge in his own party, he would have realized that demonetization is a blatantly STUPID move. But the desire to block everyone out and reliance only on a small coterie of sycophants has caused this catastrophe. For comparison, consider that the 2G scam was alleged to have cost the exchequer 1.76 lakh crores. The Demonetization SCAM is going to cost the exchequer and the people of India 4 lakh crores. Will we see the same kind of outrage over this?
One thing that Jaggi did not mention is the obvious question: if fake notes were exchanged for good new notes, as he says, who benefited? Also, if all the money supposedly in circulation made it back to the bank, then was money laundered with the connivance of people high up in the banking system? Who benefited? How big is this scam?