Demonetisation update 19 – MMS writes for THE HINDU

Dr. Manmohan Singh has written a op.-ed. for THE HINDU today. A reader of this blog brought it to my attention. I consider this op.-ed. a far more effective intervention than his speech in the Rajya Sabha. He has used two of my favourite expressions that I attach to economic policy-making. Or, rather the perils of policymaking: the law of unintended consequences operates and that the road to hell is paved with good intentions. I agree with both.

We can ignore his last sentence. It is theatre. We can even condemn these sentences as being grossly hypocritical:

It may be tempting and self-fulfilling to believe that one has all the solutions and previous governments were merely lackadaisical in their attempts to curb black money. It is not so. Leaders and governments have to care for their weak and at no point can they abdicate this responsibility. [Link]

His government not only did not try but worsened all the problems – corruption, black money and lack of governance – considerably. India is still paying a price for it and will continue to pay a price for it, for quite some time to come.

The share of High Denomination Notes in ‘Currency in Circulation’ was 26.7% in March 2001 and it jumped to 47.0% in March 2004. By the time, UPA demitted office it had gone up to 84.0%. In March 2016, it stood at 86.4%. The rise in the share of HDN was partly a response to the high inflation that the Indian economy suffered and endured under UPA and it was also a facilitator for storing ill-gotten wealth. So, one should dismiss the previous sentences highlighted above, with the contempt they deserve.

However, this framework of his is correct:

Black money is a menace to our society that we need to eliminate. In doing so, we have to be mindful of the potential impact on hundreds of millions of other honest citizens…It is important to deftly balance these risks with the potential benefits of such decisions.

The ‘withdrawal of specified bank notes’ is a move that can benefit a society for a long time to come. Whether it does so or not is not possible to evaluate today nor even well into the future because, by then, the benefits may not be correctly traceable to this move which happened in November 2016. But, the costs are real, immediate and palpable.

So far, the public has been prepared to pay that price. However, it is a risk – and there is no other way to put it – that this tolerance for pain and inconvenience can fade, wane and disappear. Their assessment of the net balance of benefits and costs might shift. That is the risk that the Prime Minister has taken. That risk could turn out to be a wrong one or a right one. We would not know. A risk, by definition, is one because it can result in gains or losses.

If he underestimated or misjudged the execution challenge, then the risks to him are personal (reputation, standing and image), are to his party’s election prospects and to the economy (short-term growth loss and deterioration in living standards for several (thousands or millions?).

That is why, on occasions, policymaking is entrepreneurship. Just as a gross error by an entrepreneur would be ‘punished’ by the market, a policy error would be punished by the electorate. When the market punishes the entrepreneur, the investors lose.

Of course, the big difference between commercial entrepreneurship and policy entrepreneurship is that the consequences are borne more by the society and the economy than by the policy entrepreneur. So, the care involved in exercising judgement and taking risks must be much higher. There is no way for outsiders to prove that it has not been done so. That can only be inferred in hindsight and after lapse of reasonable period.

As of now, these are still early days and too soon to conclude if events have delivered a judgement or that the developments are such that a judgement can be delivered or that it should be delivered today. No. Not yet.


4 thoughts on “Demonetisation update 19 – MMS writes for THE HINDU

  1. It could be political. People in certain parts of the country see such widespread and rampant corruption along with political violence. This is as much a move to pull the rug under those whose power structures are built on it – Mayawati, Mulayam, Mamata Bannerjee, etc. And of course the Congress. Modi promised action and it was politically due and he could be seen as slipping on his promises regarding black money. Mamata sees the act as a direct attack. Hence her strident opposition to it.

    Modi has taken a huge risk. He will position this act later. Most underestimate him and his ability to think many steps ahead of his fellow politicians. He does act by himself which is a bit frightening I admit. But he seems to have thought through the risks, at least the first order risks.

    I am sorry to see and hear MMS. MMS is worse than Dhritarashtra who at least could be pardoned for a father’s love. Do you really think he is worthy of any respect? This is a man who oversaw 10 years of degeneration. Why is he a sacred cow not to be attacked? There is a simple moral compass within all of us and we have to live by that. Does MMS have one? Where was it when loot and plunder – to use his own phrase – happened in front of him?

    With time and as attitudes change in next 2 decades, I am very sure that all of the information regarding the misgovernance and corruption will be out. History will see him for what he is. This is what Congress is fighting against. Anything goes in their books and the electorate can once again be fooled by strawmen. Their script is now so full of holes that they are reduced to shrill shouting. The wiser ones have been displaced by the chamchas and vainglorious ones.

    None of the English media is open enough to understand why voters are swinging to the BJP. And we all know how holy the media is from N Ram to Barkha to Prannoy Roy.

    There is so much that one cannot even understand the potential directional impact of the exercise. And here we have people who pass of spite as wisdom.


  2. There is nothing ad hominem about my comment. I have not criticised Dr. MMS, the person. My criticism was specifically about the government that he ran and that too because he said that past governments had not been wanting in their seriousness about tackling the issue. The evidence was simply lacking.

    That said, I had addressed the points made by him in that article.

    As for your question as to why the problem needed to be fixed now, that is a question for which I do not think I have an answer. That question actually stumps me. Corruption and informal economies have been cited as problems in surveys after surveys. GST might take care of commercial transactions. It might not take care of asset transactions.

    In any case, I think you have your own answer to the question that you have posed. That is fine.


  3. Without digressing into the ad-hominem attack and ignoring the past, my question was on the last para of the article (lets assume it was written by UNKN Singh) – “Leaders and governments have to care for their weak and at no point can they abdicate this responsibility. Most policy decisions carry risks of unintended consequences. It is important to deftly balance these risks with the potential benefits of such decisions.” So why is it so important to fix the black money problem now. Is it a higher priority fix than solving other econ problems to push up growth, could it not have been better fixed after GST in place since all commercial transactions would have been tracked easier. Or was this the only way to boost growth in future?


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