Three lessons from India’s demonetization
It’s the rare monetary-policy change that kills people
India’s sudden move in November to yank 86% of the currency out of circulation led to a few dozen deaths. But there’s another casualty worth considering: its failure to fight “black money” and increase government tax revenues.
Granted, it’s still early days. A developing, cacophonous, nation of 1.3 billion people at vastly different income levels — and one not famed for credible statistics — needs more than eight months to gauge a major financial experiment.
Data, however, suggest that other than the body bags, Soviet-era-like lines at bank counters and lopping nearly two percentage points off first-quarter growth, “demonetization” accomplished little. New Delhi’s tax collection net, it seems, is coming up short.
The rich and motivated, it turns out, are savvier than New Delhi realized about parking their loot in gold, real estate, bank accounts abroad and employing “money mules” to exchange high-denomination notes.
But there are three vital lessons from Prime Minister Narendra Modi’s bold gambit, and not all bad.
Costs of Incompetence: Prime Minister Modi rode to office in May 2014 on a reformist, take-charge platform.
He’d spent the previous 13 years running Gujarat, a western state synonymous with entrepreneurship, sane regulation and growth exceeding the national average. Voters hoped strongman Modi would take his successful “Gujarat model” national.
Many of Modi’s reform wins, though, have been of the low-hanging fruit variety -– opening the insurance and defense sectors a bit, but punting on contentious ones like retail.
Where Modi has been audacious, he’s been surprisingly clumsy.
The Nov. 8 move to pull all 500- and 1,000-rupee notes from circulation caused epic and deadly dislocations, with reports of suicides, and deaths from heat exhaustion among the elderly waiting in long bank lines to try and get money out.
Transactions among farmers, manufacturers, informal-economy lenders and micro-finance outfits ground to a halt. All pain and little gain, ultimately, as investors buzzed about how it’s amateur hour in New Delhi.
A similar pattern played out with the July 1 rollout of a national goods-and-services tax that stands as one of India’s biggest upgrades in many years.
GST implementation was chaotic and confusing enough to halt most commerce initially. The prime minister has ample time to turn things around. There’s not a moment to waste, though, as execution woes dent the Modi-reform narrative.
Boldness matters: For all the criticism about his monetary grab, it was extraordinarily daring. Modi should channel some of that audacity into his “Make in India” push.
That means martialing hundreds of billions of dollars into better roads, ports, bridges, power grids and cleaner air. Modi can’t expect to woo the Toyota’s, Samsung’s and Apple’s to produce jobs without better economic hardware.
That would help create opportunities for the 300 million Indians living below the poverty line. The same goes for a middle class looking to get ahead and overseas investors itching to tap India’s vast potential.
Tweaks won’t do in an economy as complicated and bureaucratic as India’s. It needs blunt-force trauma policies, not scalpels.
Only by getting radical can Modi create a less-intrusive regulatory state, rewrite labor and land laws and upend the tax code.
Doing so means getting 29 state ministers on his side to improve India’s ranking on Transparency International’s consumer perceptions index from 76th, behind Burkina Faso and Brazil.
When you look at the glacial pace of progress under other self-described change agents — China’s Xi Jinping and Japan’s Shinzo Abe –- it’s hard to be bearish on Modi.
He’s already shocked the system in ways neither Xi nor Abe have dared. Modi just needs to gain greater control over the process.
Big bills must go: Modi’s demonetization maneuver coincided with the release of Kenneth Rogoff’s book, “The Curse of Cash.”
The former International Monetary Fund official wants to do away with all paper money to reduce tax evasion, the hiding of unreported wages and the use of off-balance sheet vehicles.
It’s even more important to banish really big bills, says Rogoff and other leading economists, including former US Treasury Secretary Lawrence Summers.
The US$100 bill, for example, keeps North Korean leader Kim Jong-un in circulation, as well as everyone from terrorists to drug dealers to human traffickers to corrupt politicians to gun merchants.
And 500-euro notes aren’t called “Bin Ladens” for nothing. Those smuggling US$1 million in $20 bills must lug 55 pounds around; it’s just 2.2 pounds with the $500 euro.
That bill is being phased out, and both Rogoff and Summers want the US to pull the $100 from use. Here, Modi is on to something as he scraps India’s biggest-denominations.
Besides, the Fintech industry holds great promise for Indian entrepreneurs. Why not catalyze a digital payments Big Bang that pulls more Indians into the formal banking system and creates new jobs?
Let’s just keep the death toll down this time, shall we?