Former Reserve Bank governor Raghuram Rajan has finally broken his silence. In his latest book – I do what I do – Rajan confirms that at no point until his term ended on September 3 last year did the RBI conclude a decision on demonetisation.
This revelation, coupled with data released by the government and the RBI over the past week, reaffirms what critics of demonetisation have long argued: That it was not only implemented without adequate preparations but, significantly as well, there was no compelling economic rationale for such a disruptive measure.
The growth of the broader economy has, in fact, slowed sharply from 7 per cent in October-December 2016 to 6.1 per cent in January- March and 5.7 per cent in April-June quarter of 2017. The impacts of the cash squeeze and disruptions following the November 8 shock-and-awe decision to scrap high-value banknotes are far from over. Consumer spending continues to be weak and businesses remain wary of making new investments. A sharp turnaround for the economy is unlikely to happen soon.
My colleague Manas Chakravarty at Mint has illustrated this well, pointing to the declining contribution of private consumption spending to GDP growth: From 66.2 per cent in January- March to 62.3 per cent in April-June of this year. This fall was more than offset in the April-June quarter by a sharp increase in government spending, which is unlikely to sustain. The fiscal deficit in the first four months of FY 2017-18 has already touched 92.4 per cent of the annual target, making the government vulnerable to pressures from international rating agencies and leaving it with little headroom to spend more to boost demand in coming months.
Rajan, as it turns out, was correct in advising the government that the “short-term economic costs” of demonetisation would outweigh any longer term benefits. The RBI under his watch even went to the extent of preparing a note, which listed out in detail the pros and cons of demonetisation, the alternatives available and the preparations that would be needed if the government still chose to go ahead. The central bank also flagged what would happen if the requisite logistics were not in place.
These disclosures by the former governor – we are hearing for the first time – make it clear that Prime Minister Narendra Modi’s government chose to ignore the collective wisdom and numerous cautions advanced by the RBI.
It is also evident that the note-ban decision, billed as India’s biggest ever assault on black money, hasn’t had much impact on either the stock of illegal cash or its flow. Official data, available now, shows 99% of the `15.46 lakh crore held in denominations of `1000 and `500 have returned to the banking system – meaning hoarders of black money found a way to legitimise most of their dodgy cash.
What then were the compulsions that drove the decision for demonetisation? Even as the RBI in its measured judgement remained unconvinced that a shock withdrawal of high-value notes, which were worth 86 per cent of the cash in circulation, would be effective in addressing the stated goals of checking corruption, counterfeit currency and terror funding.
Who advised the government to go for demonetisation? Were the other alternatives suggested by the central bank duly considered? If the decision was made after September 3, as Rajan indicates, what were the reasons to rush it through? The above questions now carry the full weight of being India’s most intriguing political puzzle of recent years. As the economic pain worsens in the coming days, the demand for the answers to the ‘who’ and ‘what’ of demonetisation will only grow louder.
It is in the interest of the government to come clean and transparent on this, at the earliest. Failing which, all the ingredients for a politically and economically damaging scandal are in the air. Governments, as history will tell us, in the absence of facts and truths can be brutally punished by rumour, innuendo and speculation.