Demonetisation paralysed businesses, says ex-banker Meera Sanyal (Book Extract-Part II)
Sanyal, a former CEO and Chairperson of Royal Bank of Scotland in India and currently a member of the National Executive Committee of the Aam Aadmi Party, in a chapter named "The Economic Shock" of her book, says: "Instead of taking much needed steps to make it easier to do business in India, the government paralysed businesses with the chaotic demonetization."
She also described the decision as a "totally unnecessary step which extracted a very high cost".
Following is the second part of the extract from the book:
The famous Chinese philosopher Lao Tzu is reputed to have said: 'Governing a great nation is like cooking a small fish - too much handling will spoil it.'
The economic impact of demonetization shows the truth of this statement. It was a totally unnecessary step which extracted a very high cost.
Instead of taking much needed steps to make it easier to do business in India, the government paralysed businesses with the chaotic demonetization.
The experience of Malti, my micro-entrepreneur fishmonger friend, was multiplied millions of times across the economy. As cash was sucked out of the system, individuals started losing their jobs, faced losses in their farms, and had to shut down businesses, howsoever tiny. They became increasingly more fearful of the future, and in an attempt to conserve cash and preserve savings, they and their families reduced consumption.
As demand fell and people started to buy less, firms cut back on production, which led to lower capacity utilization. Confronted with falling demand and overcapacity, business people in the private sector postponed or reduced their investment plans.
Unwittingly or otherwise, the architects of India's 2016 demonetization had accelerated the downward spiral in investment in the formal sector, mortally wounded those in the agriculture and informal sectors, caused innumerable job losses, and seriously impacted GDP growth.
As The Economist had pointed out: 'India's "Demonetization" is a cautionary tale of the reckless misuse of one of the most potent of policy tools: control over an economy's money... Managing an economy's money is among the most important tasks of the government. Clumsy use of monetary instruments comes with high risk.'
By not recognizing this risk, the NDA government caused a reasonably well-functioning economy to stop dead in its tracks. By not acknowledging the damage they had caused, and hiding behind a maze of confusing data, the government compounded the demonetization error.
Since they refused to admit the blow that the economy had suffered due to demonetization and remained in complete denial, they also could not take corrective actions to revive the economy. This state of denial, therefore, compounded one error with another, leading to a much slower recovery than would otherwise have been possible.
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