Demonetisation : Was it worth it ? And how to contain the political fallout

This is my third article in the series since Nov 8. The first ( Modi's surgical strike on black money) was written within a few hours of the announcement when we were struggling to gauge the implications, and the second one (Demonetisation : Beyond the noise) after 10 days of the ensuing chaos. In the first article, remarkably accurate in hindsight, I was totally in favor of the move ; the second one acknowledged the emerging implementation issues and had suggested 9 different steps to combat the ongoing efforts to derail it : in order that the pain is worth the ultimate gain.

This piece is about the moot question if the potential gains will ultimately be commensurate with the pain at all. Dr. Man Mohan Singh, in a recent article in The Hindu,said that "the road to hell is paved with good intentions" in the context of "this mammoth tragedy". I must remind him that though most courageous policy decisions carry the risk of unintended consequences, mere inaction to maintain the status quo is by itself not an option for an honest and determined leadership. The Congress and other minor dispensations in power since independence have been solely responsible for this huge decay in societal values which ultimately reflects in growing levels of corruption at all levels and the consequent generation of black money....it is somewhat hypocritical therefore that Dr. Singh should critique this move now without providing any creative solutions, when this phenomena reached its crescendo during his time as the PM !

Having said that, even supporters of PM Modi are finding it difficult to ignore the three principal shortcomings of this move : the inability to anticipate, and be prepared for, the ingenuity of the corrupt to launder money and thus derail the core intent of this momentous decision, the unpreparedness for the logistical challenges to replace 86% of the existing currency and finally the debilitating impact on 80% of the working, largely unbanked population who derive their income in legitimate cash transactions.

At last count, there were 17 different publicly disclosed means invented to launder old, illegally held currency notes and this was happening in large numbers. The RBI, in its latest policy meeting last week, pegged the currency returned already at Rs.12 lakh crore out of the Rs. 15 lakh crore in circulation with more than 3 weeks to go for the Dec 30 deadline ! The nett impact of this laundering would be that the Rs. 2- 3 lakh crore anticipated windfall benefit to the government from unreturned currency, and available for direct transfer to Jan Dhan accounts or other social benefit schemes for the poor, would now be an insignificant number. Recognizing its fallacy, the Government hurriedly amended the law on Nov 29 to provide another disguised "amnesty" scheme with a tax payable @50% for those who declare black money and @81% for those who are caught later....a great deal for the perpetrators of crime as they will land up paying effectively 3% tax on their unaccounted income ( only 6% is statistically held in form of cash) against 33% paid by honest citizens on their income over the years. This is against the widely publicized 200% penalty and tax on unaccounted income post the announcement which was the cornerstone of the calculations for the currency which was not expected to be returned. By assuring safe passage to those who it intended to punish, the Government is effectively trying its luck to make the best of a bad bargain and encash some benefits by those who choose to declare voluntarily. "If you can't catch them, join them" seems to be the new mantra ! A total somersault from the moral crusade which was meant to be unleashed on black money holders.

Secondly, the logistical challenge to supply cash has been at the core of the public grievance and hardship faced by the masses. The inexplicable change in the size of the notes necessitating re-calibration of all ATMs and the fact that the capacity of the currency printing presses will in itself require 4-6 months to replace the old notes was certainly known....surely some forethought would have provided a solution to have reduced this one specific pain point which has inflicted maximum damage to the Government's credibility.

Thirdly, the GDP loss of between 1% - 2% is colossal : but the impact on the marginal daily worker is simply debilitating. The human cost just cannot be quantified and, whilst there could have been an outside case for justifying it as the cost of engaging in a much needed moral crusade to cleanse the system, with the political narrative now having been turned on its head I am not sure how this entire move will be justified politically or morally.

The elections are on hand. The voters will speak and that will be the first representative and factual denouement from the masses. I fear PM Modi will find that the real casualty would be the erosion of his huge personal political capital : and thus allowing critics to openly question his leadership style. That would be the most serious blow to the India story which had fired the imagination of the entire global system post 2014. It would be a blow to the hope of millions like me and, more importantly, his ability to push through the huge, largely unpopular reforms which were on the anvil.

For the sake of the nation, I hope that will not be the case .... the spectacular display of popular resilience underscores the fact that he still has large popular support primarily because of the deep seated belief amongst the poor that PM Modi will credit their Jan Dhan accounts with money "recovered" from the black money exercise and that the corrupt elite will suffer : this will simply not happen as I explained above and, when this finally dawns on the lower socio economic class which forms the backbone of his support base, the backlash can be severe. Hence, if I were in his advisors' shoes I would honestly provide him the feedback necessary to mitigate the situation today :

1. Given that the anticipated gains did not materialize, acknowledge the fact that demonetization went wrong and punishing many for the sins of the few was, in retrospect, a morally flawed, though totally unintended, decision.
2. Outline the full roadmap to battle corruption and not just the black money held in cash : the people must be taken into confidence to elicit their support in any 'samudra manthan' (churning ) of this nature
3. Our macros are relatively strong....use it to announce measures which will pump prime the economy, introduce social benefits schemes linked to employment generation and reduce taxes
4. Use his office to fast track innovative platforms like the NIIF, which are currently floundering, to attract global capital to fund large ticket infrastructure investments in greenfield,brownfield and stalled projects : this can be the single most structurally important sector to create jobs and kick start the economy particularly in view of the impending downturn in IT sector jobs and the lacklustre response to the flagship schemes like Make in India, Start Up India and Smart Cities amongst others
5. Continue focussing the public discourse on the corrupt opposition parties across the spectrum to nurture his carefully crafted narrative that there is no alternative to the messiah who is destined to deliver us : and is the only beacon of hope amongst the entire current political leadership in the country who commands respect, authority and trust to implement cleaner politics and a purposive development agenda

By these steps I believe he can mitigate some of the damage from this needlessly callous scheme and regain some of his lost political capital......something he desperately needs for the nation to back him in his much bigger endeavors to make India prosperous again. The nation needs his impeccable integrity and courageous,decisive leadership but not his self image of infallibility and penchant for brinkmanship.

This article is part of the LinkedIn Top Voices list, a collection of the must-read writers on the year. For the global list of LinkedIn Top Voices, click here. Check out #BigIdeas2017 here.

PRABAL BASU ROY

Prabal Basu Roy is a Sloan Fellow from the London Business School and a Chartered Accountant: the writer presently manages a PE fund and has formerly been a Director and Group CFO in various companies.

Join me on Twitter.com @PrabalBasuRoy