Money is the lifeblood of any economy. If you have bad blood then go for dialysis, you would not withdraw the stock of blood from the body, lest you die. (Illustration: C R Sasikumar) Money is the lifeblood of any economy. If you have bad blood then go for dialysis, you would not withdraw the stock of blood from the body, lest you die. (Illustration: C R Sasikumar)

“It is crazy, madness”. This was my first reaction after the prime minister’s speech on November 8 last year declaring that Rs 1,000 and Rs 500 notes will be withdrawn as legal tender from midnight.

Many people phoned me to say that I could have waited till daybreak to issue such a condemnation. Next morning, a detailed statement was tabled in the Kerala Legislative Assembly, the thrust of which was that the note ban would not eliminate black money. The same objective could be achieved even with the old notes circulating for two or three months and citizens being given enough time for replacing the old notes. Finally, the sudden note ban is going to disrupt the economy, particularly the unorganised sector accentuating the poor growth of the recent period. Each of these arguments, which are now part of the legislative records, have been borne out by the past year’s experience.

Why is note ban a crazy idea? Money is the lifeblood of any economy. If you have bad blood you would go for dialysis, you would not withdraw the stock of blood from the body, lest you die. The voodoo economics of Narendra Modi sucked out 86 per cent of the currency and it took nearly a year to replenish the same. So much for the clinical precision of the “surgical strike” on black money. For two to three months, serpentine queues in banks, empty ATMs and agony, pain and around 140 deaths stalked the citizens of India.

Any student of economics knows that the level of production in an economy depends on the aggregate demand. The note ban resulted in a collapse of demand severely affecting the unorganised sector. The results are there for everyone to see in the GDP growth statistics put out by the government: Q4 growth fell from 8.7 per cent in 2015-16 to 5.6 per cent in 2016-17; annual growth fell from 7.9 per cent to 6.6 per cent. Add the RBI’s caution to this growth number, “absent the implementation of the 7th Central Pay Commission and one-rank-one-pension (OROP) for defence services embedded in government consumption, real GDP growth would have been lower by 2 percentage points” and 2016-17 growth would have been just 4.6 per cent. A loss of 3.3 percentage point in GDP meant loss of production of over 4.5 lakh crore. Who is responsible for this national loss?

What happened to the black money? I am reminded of the story of the fish and crocodile in a pond. They were bitter enemies. When the pond owner decided to drain the pond to catch the crocodile the fish came out in support of him. The result was all the fish died and the crocodile escaped as it could live in both water and land. In fact, only six per cent of the total black money in India is kept in the form of currency notes. The rest is hoarded in gold or invested in land and other assets or even in legitimate business. Black money is not a stock but a process through which unaccounted wealth is constantly produced.

But the voodoo economists believed that the rich with black money would not dare to deposit it in banks. A figure of Rs 3-4 lakh crore, it was assumed, would not return to the banks and would consequently reduce the liabilities of the RBI resulting in a windfall gain to the RBI and to the Central government. I have heard this personally from the highest levels of the Central government. But what is the outcome after one year? 98.96 per cent of all Specified Bank Notes (SBNs) have already come back and the RBI is still counting.

The believers of Modi-economics have not lost hope. The real hunt for black money is yet to start, they argue. Systematic inquiry into the bank deposits will unearth black money and offenders will be brought to justice. I wish luck to the 5,000 to 6,000 income tax officers set on this historic effort. But I have a simple question, the same question that I raised on that fateful night. Wouldn’t this process be possible without demonetisation?

So now on the anniversary of the greatest stupidity in Indian economic history, the Union finance minister is arguing that though the note ban generated short-term pain, it is going to be a great boon in the long run. Well, one did not have to wait for the long run before the fake notes reappeared. The number of income tax payers might have increased significantly. But this has happened on a more significant scale in the past without the note ban. In the long run, it will be business as usual.

The only way to realise the dream of a vibrant India is through what we have followed in Kerala — social spending for economic growth and a better way of life — and not through such callous acts of torture and intimidation of the common man.

That only fills the bloated egos of some neo-nationalists.

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