Thursday, November 10, 2016

India's "breakout-of-risk-aversion" moment

The decision by the Government of India to withdraw all currency notes with higher denominations from circulation with immediate effect has to be a landmark public policy decision. 

I can see two substantive dimensions to this - curtailing the circulation of black money and shrinking the informal economy. The former may be a subset of the latter. While this is an overwhelming positive on the former, there are several uncertainties on the latter. If this can significantly scale down the stock of black money, and with the measures that have been initiated to address the flow of black money (limiting cash transactions, mandatory PAN card requirements for certain purchases, more vigorous detection and enforcement etc), this move can be a masterstroke in addressing the black money problem. Importantly, more vigorous detection and enforcement will have to be put in place to detect and capture the black money stock that is currently locked up in real estate and gold and which are likely to return once these get unlocked after the new set of higher denomination currency is released. Also necessary would be more vigorous oversight on transactions in occupations like doctors and lawyers, especially at their higher end, where black money is today ubiquitous. 

At the least, with the stock diminished considerably and its future accumulation far attenuated, this is more than could have been possible with any other measure in addressing the limited issue of curtailing black money circulation. 

Maybe, follow-up with an immediate Voluntary Disclosure Scheme (VDS) over the next three weeks? One would think that, at least for a significant proportion, the benefits from such disclosures now far out-weigh the costs (losing a large share of their stock). 

On the challenge of shrinking the informal economy, the judgement may be more nuanced. And I'll address that in another post soon. All the talk about this being a move towards a cashless economy is just baloney, idle and lazy speculation that just sounds hifalutin and sexy to write about. 

Four other observations.

1. The surprise element to this has been stunning. It is a truly impressive achievement to have maintained the level of secrecy before striking. This is a genuine state capacity achievement which not too many countries, even mature democracies, could have pulled off. Teachable moment on one dimension of state capacity.

2. This would count as a true breakout-of-risk-aversion moment for the Prime Minister himself. I cannot remember anything else comparable for this government. Given the numerous uncertainties associated, and there are several of very great significance and be certain would have been repeatedly harped on by the bureaucracy, it was an amazingly bold decision. Very very rare in Indian or democratic politics anywhere in the world in recent years. 

3. Politically very astute move in re-capturing the anti-corruption agenda, whose sheen was fading and which was also moving back from the limelight. This, unlike the VDS and repatriating black money, will be perceived by most Indians, even those in rural areas. Ironically, this may precisely have been the risk mitigation source! The result could be a few electoral gains and the political space for more reforms.

4. Finally, isn't it surprising that we have had two landmark events (admittedly, in different scales) in India and US on the same day. But roles reversed, from the general trend, in terms of aspirational value. So compliments well worth it!

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