Mumbai: The long-term effects of the demonetisation of Rs. 500 and Rs. 1,000 notes could be felt only next year, Prof. Kaushik Basu, former chief economist of the World Bank, said while delivering the third N.R. Kamath Chair lecture at the Indian Institute of Technology (IIT) Bombay on Friday. Going to the extent of calling for a roll back of the recall of just the 500-rupee currency notes, he said that while people may get angry, “some damage may be curbed”.
Prof. Basu, who was also the chief economic advisor to the Union government in 2012, said demonetisation was done “for the right reasons” and appreciated the fact that there was no corruption at the “absolute top”. However, he feared that the Indian economy may suffer the next year by way of an even higher drop in growth than the estimated 6.9 per cent this year. Already, India’s service sector, which contributes 60 per cent to the country’s GDP, is beginning to feel the heat. In the long run, the snaking queues may seem like a smaller problem, he warned.
Drawing a parallel with Brazil, Prof. Basu said the South American country’s attempts to eliminate corruption had made investors jittery of putting money into any company, as every second firm was going under investigation. “A year later, you realise you are trying to replace a system that is irreplaceable in a top-down method,” he said. India’s worst post-Independence economic growth was in 1979-80, which was attributed to poor rains and other factors, and “maybe some role” was played by the demonetisation of the 1,000-rupee notes by the Morarji Desai government the year before, he said.
Prof. Basu drew attention to the shortfall in currency notes in circulation post-demonetisation. While old notes amounting to Rs. 12 lakh crore have been ploughed back into the system so far, new notes worth only Rs. 6 lakh crore have been generated. This could lead to a drop in demand and lending, among other issues.
At the same time, he urged the government to take up the issue of corruption, suggesting measures such as cleansing the legal system of several archaic laws, imposing stiffer penalty on public servants and representatives as compared to others, and giving the corrupt smaller fish time to clean up their act.
While sceptical of the potential of the move towards a less-cash economy in a country where only 53 per cent adults have bank accounts, Prof. Basu observed that “good or bad, that’s how the world will go”.
Addressing the criticism about the government not tackling black money stashed in foreign accounts and real estate, he said the difficulty of corruption is that one can isolate the tumour in a surgery, but end up taking out some healthy tissue as well.
He dismissed the claim of civil society critics that addressing corruption required determination alone. Arguing that corruption control is not entirely the domain of the government, he said history is replete with examples of poorly functioning businesses wherever people were corrupt in large numbers. Prof. Basu said corruption partly has to do with human mindsets. Sweden, for instance, moved from being an immensely corrupt society in the early 19th century to a clean one in a very short period of time. “What you believe as the norm matters a lot. If you believe everyone minds paying taxes, you will too.” The common thinking then locks in as the norm. An Australian study, which separated subjects into two groups of corruption-prone and non-corruption-prone people, found that the subjects mimicked the behavior of the group they were in.In India, Prof. Basu asserted, “We have to think in terms of changes of this kind.”
He said managingcorruption is often looked upon as the job of the government machinery alone. But, as Scottish philosopher and economist David Hume asked, “Who polices the police?”
Prof. Basu made the distinction between bribery and harassment bribery, where one is forced to bribe even for work you have legitimate right to get done, such as geting a driver’s licence. The Indian Prevention of Corruption Act, 1988, does not make this distinction. It makes the giver and taker of the bribe equally liable for the offence. Prof. Basu hence argued for making the liability of the taker to twice that of the giver to “rupture the joint interest”.
He dismissed the government’s contention that demonetisation would flush out counterfeit currency as a non-argument. Contending that these notes won’t come into the system from terrorists, but from ordinary people, Prof. Basu said they will not get cleared out, but will get replaced. He argued in favour of a gradual withdrawal of high denomination currency notes as the economic jolt to be suffered for a “one-time cleaning up is disproportionate”.
As for the government’s claim that demonetisation would control inflation, Prof. Basu said, “While black money is dreadful at the point of generation, it is no more inflationary than white money once it gets into the system.”
The writer is a freelance journalist
