Book Review: Demonetisation And Black Money

In the early 2000s, when this author was an undergraduate student of economics, discussions on the Indian economy among peers would be centred on the impact of the economic reforms that began in 1991. To be sure, 1991 is still considered the watershed moment in India’s economic policy regime. But back then the issue was much more pertinent. Views were polarized, and material and commentary was in abundance. Neither factor was likely to make things easier for undergraduate students.

I was lucky to be recommended a book called The Intelligent Person’s Guide To Liberalization by one of my teachers in college. The book looked at a multitude of issues, avoiding economic jargon, and gave the interested reader a broad canvas to deep-dive into the issue and debates, thus fully living up to its title.

Prime Minister Narendra Modi’s demonetization exercise of 8 November, which made 86% of the currency under circulation redundant in one go, would clearly be an economic event of similar, if not far greater, interest. Once again, opinions are polarized, and thanks to the Internet, material and commentary are even more abundant. In fact, the running refrain has been that everybody has turned into an economist post-demonetization.

It is in this milieu that Rammanohar Reddy has managed to write Demonetisation And Black Money, even before the Reserve Bank of India has finished counting the scrapped Rs500 and Rs1,000 notes that have been returned to banks. The book will clearly serve as an intelligent person’s guide to demonetization.

Even though it has nothing that is not known already, every relevant issue with respect to demonetization has been covered lucidly. This does not mean that the book is a banal reproduction of facts. Reddy, given his decades of experience in journalism and academics, is able to raise profound questions in the simplest possible manner.

For example, he questions the assumption that a shift from cash to digital payments would deal a body blow to corruption, as white-collar activities might be involved in tax evasion too.While this fact has been known, it did not figure much during the demonetization debate. Similarly, he cites the example of women exchanging their inherited jewellery for new pieces (without proof of exchange) to illustrate how a hawkish tax collection policy post-demonetization might lead to the harassment of innocent taxpayers.

The book is divided into four sections that deal with a general discussion on black money and demonetization, the assessment of the design and implementation of demonetization policy, its impact on the common people and polity, and its impact on India’s banking sector.

Reddy shares the overwhelming opinion among economists that demonetization has inflicted significant costs on the economy, with the poor suffering the most. He also believes that its benefits are not just uncertain, but could also have been realized through other, less hurtful policies.

Although it’s not stated overtly, the book makes a strong case for the argument that the demonetization decision would have been taken on the basis of political calculations, not policy wisdom. The international experience of demonetization, India’s own experiences of previous demonetization exercises, and more recent documents on the issue of black money—which have been cited in the book—clearly suggest that it would have been extremely difficult, if not impossible, to make a policy case for demonetization. The discussion on the banking sector also shows that problems in implementation were inevitable, given the scale of the exercise.

There is limited discussion on the politics around demonetization, which is not surprising given the overwhelmingly peaceful and protest-less three months post-demonetization—despite the immense hardship people were put to. The discussion on the complicity of all political parties in trying to preserve opacity in political funding at the policy level, and the nexus of black money and politics at the grass-root level, suggests that the author believes the opposition did not have the political credibility to counter the schadenfreude narrative Modi was selling to people to justify his decision.

Does the Bharatiya Janata Party’s handsome victory in the Uttar Pradesh election signal the end of the political fallout of demonetization? Far from it, Reddy argues in his concluding paragraph: “If in the end Demonetisation 2016 turns out to have been a failure and if there is no follow-up action on black money, there is likely to be long-term damage. The colossal distress that Demonetisation 2016 caused will make it impossible for any future government to embark on a more serious war on black money. The government will be wary if there is even a small risk of pain being inflicted once again on the entire population. No society will be able to go through this suffering once again. The black economy will then remain in place."