In March, Prime Minister Narendra Modi had taken a swipe at his critics. Harvard economists were prophets of doom, he suggested, but his hard work was more powerful than Harvard. He was clearly mocking at former Prime Minister Manmohan Singh, who had described demonetisation as “monumental disaster” days after the announcement made by the PM on November 8, last year. And, Prof Amartya Sen who had described the step as ”despotic” which had struck at the root of the economy based on trust.
But the economists are having the last laugh. The Chief Statistician of the Government on Wednesday revealed that the fourth quarter growth in January-March, 2017 was just 6.1%, a full one percentage point lower than what was projected.
Though Finance Minister Arun Jaitley on Thursday defended demonetisation by saying that many other factors were responsible for the decline in GDP growth, the fact remains that even this dismal figure was bolstered by the expenditure on public administration, defence and services sectors; essentially higher wages and arrears disbursed following the Seventh Pay Commission. “Even now this data does not reflect the full story as much of the disaster that the cash-dominated informal sector suffered has not been captured," said M Govinda Rao, a former member of the Prime Minister's Economic Advisory Council to The Telegraph.
Earlier last month, Kaushik Basu, the former chief economist at the World Bank and former Chief Economic Advisor to the Government of India, in a scathing piece in The Indian Express had criticised demonetisation as a disastrous monetary policy which achieved nothing but imposed a huge cost to the poor.
The government, he had pointed out, had justified demonetisation by saying it would put an end to fake currency. The fallacy, Basu wrote, was that the estimated fake currency worth ₹400 crore in the Indian economy were with ordinary citizens who were not even aware that they were holding fake currency. Creation of fake currency, he added, was a crime and harmful but not holding it without any knowledge. In circulation, they are like any other money. And demonetisation has failed to address the concern as seizures of fake new currency show.
Moreover, holders of black money keep it stashed in offshore accounts, in real estate and in various other forms. They were least affected by demonetisation. Finally, demonetisation was justified on the basis that it would prepare the ground for a ‘cashless’ or ‘less cash economy’. But, with even developed countries not achieving the ‘cashless’ status, it was indeed foolish to expect India to leapfrog to that position.
Manmohan Singh, himself a former RBI Governor and Finance Minister, had cautioned in a speech in the Rajya Sabha that the national income or the GDP could well decline by 2% as a result of demonetisation. He had added that this was an underestimation and not an overestimate.
The government would have been in an even sorrier state but for the low price of crude oil in the international market, which has bailed it out.
But, will Narendra Modi concede that he made a monumental mistake? Unlikely, as he clearly believes that he cannot make a mistake. However, that will not prevent economists in world capitals from having a chuckle or two at his cost. Did someone say poetic justice?