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Shortly after, Rogoff was in India as a guest of the finance ministry at the Delhi Economics Conclave and was amused to find that views on demonetization ranged from a ‘stroke of genius’ to ‘sheer insanity’. He did not stay back to witness the long lines as people tried to access their own savings from banks. They had only 50 days to exchange the discontinued (and illegal) notes for new ones. Except that replacements were not ready. Not in banks, nor in ATMs. Hence, there was cash rationing and untold hardship, especially for informal-sector workers and those critically dependent on the cash economy.
The decision was ostensibly taken for reasons similar to those mentioned in Rogoff’s book; i.e., to curb black money, cut off terror funding and destroy counterfeit currency. None of these objectives seem to have been met, even partly. Did the government use a bazooka to kill an ant? That is, did the executive violate the doctrine of proportionality? Was there a breach of the limit of its executive powers? Should not the legislature have been consulted? Wasn’t the entire decision illegal, or worse, unconstitutional? What about compensating losers, those who suffered hardships brought on by this harsh decision?
All these and many more questions were raised as 58 separate petitions were filed in the Supreme Court challenging the decision. The court took more than six years to take up the matter and has finally disposed of all the petitions by upholding the constitutionality of the decision, having found no flaw in the process. There was one dissenting note, which said that since the Reserve Bank of India had reservations, the matter should have been discussed in Parliament rather than implemented via a gazette notification.
With the court’s imprimatur on the legality of demonetization, it might appear that the debate is over. That is far from it, because the debate on the economic consequences is still unsettled. Did the decision achieve its objective? Was the cost worth paying? India’s economic growth rate declined every year since 2017 until covid dealt its deadly blow. Demonetization was definitely a big negative shock to the economy. Our cash in circulation has in fact doubled since 2016. All the old notes came back into the system, as they were exchanged for new notes in that 50- day window. The bad guys hoarding black money were not caught with their pants down. So where were the benefits? Is it that the costs were front-loaded and the benefits are backloaded? Is better tax compliance or higher UPI usage a consequence of demonetization? Surely, that could have been achieved without the immediate mayhem. Economic justification in terms of the gains of demonetization is just not convincing enough.
But leaving aside the economic case, even the court’s verdict has at least two troubling aspects. One is the notion of “spilt milk" or fait accompli. The dissenting view in the verdict said that the demonetization notification was illegal. But it was now not possible to restore the status quo ante, i.e. we cannot go back to the system with the old notes. Could the court not have acted sooner than six years? Or could it not have taken up the matter suo moto if indeed illegality was suspected? There was a similar fatal delay that affected the Aadhaar judgement. The universal identity number was supposed to have been restricted to only a few government schemes that involved an explicit subsidy or dole. But by the time the court took up the matter, more than a billion Indians had been issued an Aadhaar card and its usage had expanded to hundreds of schemes and applications. So it was now too late to put the genie back into its bottle. Did this adequately serve the cause of justice?
The second aspect in the judgement is the mention of a “noble cause" and that there would always be “martyrs". Demonetization was well intentioned. It seems odd that the court can resort to utilitarianism thinking, weighing the costs and benefits of economic policy. Is that not for the executive to assess? It is the government that must compensate the losers, be it for land acquisition for a public cause or displacement of forest dwellers.
A foundational principle of justice is that not one innocent person should be punished even if thousands of guilty go scot free. The injustice to the aggrieved cannot be weighed against some imagined benefit to society. As it happens, in the case of demonetization, the larger economic benefits of its original “noble" intent are still awaited. Clearly, the legality of the demonetization decision has not stilled the debate on whether it was worth it. Perhaps we will never know, as it slowly fades into Rashomonesque policy territory.
Ajit Ranade is a Pune-based economist.
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