Demonetisation – short post

I will not dwell into details as most of us have kept ourselves abreast with the happenings and has impacted our day to day life. A few thoughts I would like to share.

  1. Gutsy – Super gutsy. Mr. Modi clearly posturing as a variant of Lee Kuan Yew without any institutions to support him. His belief from the Gujarat days has been to make things work albeit using a cracked system. He continues this problematic path taking citizens into confidence.
  2. Political victory – Long term political implications yet to be seen as this depends on how long the costs are likely to lasts – impact is not merely on personal disposable income, but microeconomies nationwide. He will lose out on several voting blocs if tax administration goes after the trading class who also like to fashion themselves as middle class like us the IT crowd. He is hoping to gain new constituencies likely from the poor who perceive this as anti-rich at the moment and if this is followed by a few rich behind bars. Coming to other political parties, they are headless chickens right now not able to gauge the mood and the BJP has somewhat successfully again created binaries of us v them, them being black money hoarders.
  3. More state –  Many of us may feel queasy about this new development, especially for the first time, my generation had to move away from private life and stand in long queues because of a policy as opposed to living in the silo of private sector urbanism. This is also the kind of state which does not mind imposing great costs for external gains on political, economic and behavioural front. I have not yet made up my mind if that is a good thing or not especially since things are woefully slow in our country. One thing for sure – there are two groups that come to my mind who should think twice before complaining -Marxists : They have gone into great pains in thought control and cultural revolutions using state power and should not have any pain in standing in queues (remember Venezuela?) and its a tad bit ironical when they are worried about property rights etc at this point in time. Fellow Policy enthusiasts and budding advocates: This is for a few of my friends who are complaining about short term costs, but aren’t policies done looking into the future and that vision. Is it not part of policy process 101? There are other issues with this policy, but this should not be one of them. Every policy instrument has pain and gain like an interest rate change or inflation which has high impact and at times crippling for businesses and the poor likewise. In this context, found Pratap Bhanu Mehta to be absurd and confused.
  4. Is it pro-poor: Depends. How long is economic shock likely to last. It is definitely not Dec 31. I am inclined to believe that the poor can dispose off 500/1000s conservatively in 2-3 queues and time poverty effect is not very high. It is the economic shock and freezing of markets that is a concern. It looks like exceptions after exceptions are coming into fore to protect them. Moreover, it is definitely likely their efforts are going to be compensated by some splurge in public spending before election years which are tangible if estimates of revenue gains that are floating around hold good.
  5. Shoddy Implementation – There is no sugar coating around this. The rusted frames of bureaucracy comes into full glare when we take monumental decisions like this. Day after day new notifications often unclear are coming about. One might say this is the maximum planning possible given the circumstances, but there is lack of coherence in the daily notifications by RBI as well.
  6. Policy Issues – This is the biggest criticism one can lay at this move. There are lot of assumptions about black money which is likely to be incorrect and can prove risky. There is also unclear intent – Was the intention to accrue one time revenue ? Was it to move to less cash society as the PM suggested ? Is it just an income declaration scheme?  If it is black money, then why this sudden fetish for less cash society ? This has to be an extremely costly thing to do for promoting less cash society.
  7. Positive externalities – Policy may not prove to address the problem of black money at all, but there will be significant spillover which will make economy more efficient by bringing into the system. As pointed out, this is an extremely costly way of doing it. But we cannot discard the benefits from such a move.

To conclude, wait and watch. My feeling is its a political victory, a one time wealth tax on black money hoarders, lots of economy wide behavioural change for the good and a windfall revenue for populist schemes in the coming year (Not a big fan of this though). Black money as pointed out umpteen number of times is still very much there and lots more to be done.

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