Rajesh Soundararajan (not an economist, a rogue economist at best) | rajeshsound.com
In the annals of history, certain decisions stand out for their monumental impact and the far-reaching implications they have for ordinary citizens. Such was the case with Sultan Mohammed Bin Tughlaq’s dramatic shift of the capital from Delhi to Daulatabad in the 14th century, a decision that caused upheaval and distress amongst his subjects. Drawing a parallel from history, another such policy shift occurred in India on November 8, 2016, under the stewardship of the Indian Prime Minister.
The nation was taken by surprise when the Indian government abruptly announced the withdrawal of ₹500 and ₹1000 notes, effectively sucking out 86% of the cash in circulation overnight. This 2016 demonetisation drive, touted as an effort to cleanse the system of “black money,” instead wreaked havoc in the lives of common citizens and jolted the nation’s economy.
Adding to the paradox of this strategy was the introduction of a new high-value ₹2000 note as part of the remonetisation process. The intended purpose of demonetisation was to curb the flow of black money and corruption – a goal fundamentally at odds with the introduction of even higher-value currency. High denomination notes are typically easier to hoard, thereby potentially facilitating the very corruption and black money the demonetisation drive sought to combat.
Data from the Reserve Bank of India’s 2017 report illustrates the ineffectiveness of this policy. It was revealed that 99.3% of the demonetised notes had returned to the banking system, suggesting the failure of the initiative to extract the targeted unaccounted wealth. Moreover, India’s GDP growth fell to 6.1% in the January-March 2017 period, a sharp drop from 7% in the preceding quarter, underscoring the economic disruption caused by the sudden policy shift.
Fast forward to May 19, 2023, and the ₹2000 note is being withdrawn from circulation. This move, while causing less disruption than the 2016 demonetisation, brought back memories of the hardships endured by ordinary citizens during the previous event.
One cannot help but ponder if there is a pattern or even a hidden agenda behind these monetary policy upheavals. In 2016, ahead of the Uttar Pradesh elections, demonetisation effectively choked the supply of cash, impacting not just ordinary citizens but also potentially crippling the opposition’s campaign machinery. Now in 2023, with multiple state elections on the horizon and after a significant loss in Karnataka, could the withdrawal of the ₹2000 note serve a similar purpose?
Like Tughlaq’s capital relocation, these monetary policy shifts seem to reflect abrupt decisions without adequate appreciation of ground realities or the difficulties they impose on common citizens. Both events – centuries apart – underscore the need for thoughtful, inclusive decision-making that considers the broader impact on society and the economy.
Demonetisation as a policy tool is not inherently flawed, but its execution should be undertaken with due diligence, comprehensive planning, and sensitivity to the realities of those most affected. These episodes serve as poignant reminders that leadership, however well-intentioned, must always ensure that the welfare of its citizens remains paramount in policy decisions.
The lessons of history should not be forgotten. They should guide future policy-making, ensuring that the missteps of the past are not repeated. This cautionary tale, from Tughlaq’s blunder to India’s demonetisation saga, implores leaders to remember that sweeping, impromptu economic changes can cause more harm than good. As Tughlaq’s folly resonates in modern India, it serves as a stark reminder that noble intent cannot be a substitute for wise and considerate policy-making.
The decision to demonetise high denomination notes and then reintroduce an even higher denomination note, only to withdraw it again, leaves many unanswered questions. The correlation with electoral timing stirs further speculation on the true motives behind such decisions. An uncanny pattern emerges that points to a disruption in the fluidity of money supply, just ahead of significant elections.
It is therefore crucial to critically examine the rationale and the impact of such decisions, not merely in their immediate aftermath, but also in the longer run. Economies thrive on predictability and stability. Abrupt shocks like these not only disrupt lives in the short term but can also dent the confidence of both domestic and foreign investors, potentially stunting economic growth and development in the longer term.
Moreover, while it is indeed crucial for a government to take bold steps in curbing corruption and black money, it is equally important to devise strategies that are efficient, minimally disruptive and, above all, effective. The introduction of a higher denomination note during a drive aimed at combating black money seems counterintuitive at best, and at worst, exacerbates the very problem it aims to solve.
In conclusion, the economic decisions of our leaders have far-reaching effects on the common man and the overall health of the economy. Policymakers, therefore, must exercise prudence and foresight. They should take lessons from historical misadventures like Tughlaq’s infamous decision, ensuring that the paths to their noble objectives do not pave the way for unnecessary hardship for their citizens. As history repeats itself, let it be a repetition of wisdom, not of follies.