Tales of notebandi the PM can’t hear...

With almost four-fifths of the 50 days gone and with the seriousness of the demonetisation injury apparent, the Panchatantra tale of the devoted monkey who cut off his royal master’s nose to get rid of a pesky fly that threatened the royal slumber comes to mind. “Cutting off the nose to spite the face” is probably the more apt expression.

More to the point is the common warning against a needlessly self-destructive over-reaction to a problem: “Don’t cut off your nose to spite your face”. It’s a warning against acting out of pique, or against pursuing revenge in a way that would damage oneself more than the object of one’s anger.

History is replete with instances when acting out of pique inflicts huge costs on a nation. The Embargo Act of 1807 passed by the United States Congress in protest against British and French interference in US shipping had the side effect of prohibiting nearly all US exports and most imports, greatly disrupting the American economy.

Closer home, the great Ladakh king, Senge Namgyal (1620-70), imposed a punitive tax on the pashm wool trade between Tibet and Kashmir, that largely went by the shortest route through Ladakh, in response to a slight by the Kashmir ruler. The pashm then began to flow to Ludhiana, helping the Punjab city become the great centre for the manufacture of woollens it still is. Ladakh never recovered from the loss of revenue.

Even if not educated in the conventional sense, seeking many options from a deep study of the issue by the knowledgeable is a quality essential for successful leadership. This entails wisdom. But instead of wisdom there is much vaingloriousness in the PM’s style of decision-making that crimps discussion and a study of the possible alternatives.

By all accounts, the decision to “demonetise” was by a small secretive cabal with a larger-than-life figure, that Mr Modi now is, actively part of it. This frequently leads to a psychological malaise which the well-known psychologist Irving Janis called “groupthink”.

In 1961, the newly-elected US President, the brilliantly-educated John Fitzgerald Kennedy, agreed to the disastrous invasion of Cuba at Bay of Pigs. This crisis almost set off a nuclear Armageddon next year. Irving Janis was a part of the Presidential Commission which studied the faulty decision-making that caused so many obvious pitfalls to be ignored.

JFK’s national security team was made up of the best and brightest people. But the brightest of them was Richard Bissell, the CIA deputy director in charge of operations. Bissell had a brilliant track record of toppling regimes from Iran to Guatemala. When he presented his plan to the group, each and every one of the best and brightest, including Kennedy, assumed Bissell would have applied his prodigious intellect and experience and that the plan was foolproof. Other options were not considered.

The greater lesson here was that Kennedy realised he was taken in and was the one responsible. He went public and acknowledged responsibility. He even said in public: “How could I have been so stupid?”

There isn’t even the slightest sign that Narendra Modi has realised the massive goof-up his demonetisation policy has turned out to be. When you abruptly pull out high-denomination currency notes equal to 86 per cent of the value or Rs 14.2 lakh crores, one would expect proper arrangements would have been made to replace what was now excluded. Clearly, the government was unprepared. It had very few Rs 2,000 notes rolling out of its security presses, and no additional small-value notes to pick up the slack somewhat. The cashlessness that this caused has cost the national economy hugely and devastated tens of millions of livelihoods.

The average daily wage in India is Rs 272, which means it is essential to have a good part of that for a typical family to escape starvation daily. Of the vast reservoir of 415 million employed in the unorganised sector, about half are engaged in farming, and another 10 per cent each in construction, small-scale manufacture and retail. These are almost all daily wage-earners. Just visualise the cold hearths in these homes and children going to bed cold and hungry. There are harrowing stories from across the country and the PM’s push for electronic payments and mobile banking has the air of asking starving people to eat cake instead!

The loss due to this unprecedented drop in production and income to the economy this year is expected to be around two per cent of GDP. This is almost Rs 2 lakh crores. The cost of printing replacement notes is likely to be between Rs 40,000 crores to Rs 50,000 crores.

The PM made out that demonetisation was going to mean the extinguishing of “black money” and all that won’t be returned to the banks will be its bonus. None of this is being borne out. The seizures of hundreds of crores in new pink Rs 2,000 notes all across the country by the police and the income-tax authorities is proof of that. It just shows new money too turns as easily into black money as old money, and nothing has changed.

But there’s a larger reality. Of the Rs 14.2 lakh crores in high-denomination notes, Rs 13.2 lakh crores have come back into the system. There are 10 days still to go and it looks that Prime Minister Modi’s bonus may not be too much. The government has just announced that the banks won’t be accepting more than Rs 5,000 per person for the rest of this season of “cashlessness”.

The incidence of counterfeits was hugely exaggerated with the RBI stating that only 0.0006 per cent of the money the banks handle are counterfeit, with a value of Rs 29.64 crores of the Rs 16.4 lakh crores in circulation.

One hopes he will finally realise that only four per cent of “black money” is kept as cash. The rest is abroad or in property or bullion. Last year his government had allowed the import of about 1,000 tons of gold, and Global Financial Integrity estimated the illicit export of $83 billion in 2014. The government was barking at the smallest of the trees.

In recent days the PM changed his avatar from being a corruption fighter to becoming pitchman for electronic payments. One Cabinet minister told me that the PM constantly asks all his ministers if they have Paytm in their mobile phones. His fondness for Paytm is now a subject of some speculation.

But there are costs to this as well. The average life of an Rs 100 note is estimated to be about a year, involving between 500 to 1,000 exchanges. Every credit card or debit card or even Paytm transaction entails charges of about two per cent. The merchant typically passes this on to the customer. So the charges entailed during the average lifespan of an Rs 100 note would be between Rs 1,000-2,000. The mobile telephony charge would be about 20 paise per minute. So think of it as an average of Rs 100-200 per Rs 100 lifespan. And a replacement note with transportation and distribution costs will not be more than Rs 5. How does this economics look to you?

But Mr Modi doesn’t seem to see it. The irony of this in a country where the average daily wage is Rs 272 and where not more than 30 per cent have smartphones just cannot be missed. But then Mr Modi doesn’t have any use for history, understanding of economic costs and awareness about the consequences of policy. He is a go-getter. But where’s he going?