Demonetisation: Ignore The Leadership Dividend At Your Own Peril

My friend of nearly four decades shared his thoughts in two emails and permitted me to share them without specific attribution. I am largely sympathetic to his views. In May 2014, when Narendra Modi became the PM, I was invited to speak at a session organised by the Singapore Gujarati Association. I mentioned that the leadership change alone would boost GDP by 1.0 to 1.5% points because of the feeling that someone is in charge, really.

I cannot say that whether the GDP growth improvement happened because of that or because of statistical methodological revisions. But, what I had in mind was something similar to what the PM did on November 8. That shows leadership. A very important component of leadership is decision-making under uncertainty and hence, risk-taking. It is entrepreneurial. His decision fulfilled all these. He has taken enormous risks. That deserves enormous credit and acknowledgement. That is a reason I singled out Monika Halan’s article in MINT in my last blog post.

Who knows? The expected short-term contraction may not happen if the ‘feel-good’, ‘feel-proud’, ‘feel faith’ and ‘feel happy’ factor generated by the decision of the government combined with likely lower cost of capital in the formal economy offsets the squeeze on spending that occurs in the cash economy.

That is what my friend’s emails alluded to:

Dr. Pronab Sen is highly respected economist and I had the opportunity to listen to him recently.

Seemed to be very down to earth person. I can understand his concern for the poor and the marginalised.

But he himself should have bifurcated the good and the bad based on short term and the long term. All of us know there is short-term pain.

But now there is fear instilled in the minds of those who sponsor terror, thrive on black markets and what not. This will have a telling effect on the psyche of the perpetrators of such crimes. Cost of dishonesty has suddenly gone up. This cannot be captured by economic calculations. That is why Modi himself has talked about threat to his life.

The problem with terrorists either economic or otherwise is that they always use Common man as their shield and when there is a surgical strike like this there could be collateral damage. People must accept this for larger good and vast majority have realised this.

Last week I had the opportunity of travelling through 4 states, Delhi, Haryana, Uttarakhand and Telengana immediately after demonetisation. People in general have only welcomed this move despite personal losses and difficulties. Even those CAs who have helped in money laundering for some small businessmen in remote towns like Rudrapur have only said this move will have a salutary effect on those black money peddlers. This rat race among people running after money and amassing wealth by any means has been temporarily stopped or perhaps slowed. அவனை நிறுத்தச் சொல்லு நான் நிறுத்தறேன் stone-age culture has spoiled the mindset of an entire generation. Now at least there is a pause in this.

Obviously, the stunning silence in J&K has revealed how Terror’s pangs have been cut but again this could be temporary. But this breathing time should be effectively utilised for further Confidence Building measures.

Last Friday, Dr. Rangarajan, former RBI Governor, spoke on this as a special invitee to a CII Forum in Chennai. He said it affects only those who have unaccounted cash sitting idle but this could be quite substantial given the size of cash economy in general. But he said that this should be followed up with more measures to encourage cashless transactions. One of the speakers also mentioned that Election funding is a major area generating black money and this should be nationalised as suggested by Rajaji.

At a more personal level I am happy, at least, that those bureaucrats who harassed us and taken money have temporarily been jolted and forced to run helter-skelter.

Even those who put their money in real estate/jewellery will not be able to find buyers with black money at least for some time to come. Perhaps this inner feeling of having taken a revenge through Modi cannot be described in words. At least in the present context many people are, indeed, positive since many feel that they are bearing this burden for the sake of the country. In hierarchy of needs, this should indeed give maximum personal satisfaction because it indirectly gives a vicarious feeling of fighting a war for many. Human behavioural scientists may know better.

One small point, however. Our informal economy may not go down easily. Just rewind and go 25 years back in time. In ration shop queues and bank cashier counters, (before ATMS arrived) we all have spent numerous hours endlessly waiting. Worse, during terror strikes, war times, religious and caste conflicts, partition etc. even life of the common man was always in danger and full of uncertainty. But, has the informal economy collapsed even in those difficult times?

That said, now with so many SHGS and NGOs the life of the downtrodden will not be left uncared for. Of course, it will not be 100% foolproof. What I am saying is it is not as depressing as we tend to imagine. Even my housemaid and driver suffered for two days and human mind always tries to exaggerate misery. After that, they are back to normal routine.

This piece was first published on The Gold Standard and has been reproduced here with permission.