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-The Hindu Business Line

If the Centre had stuck to its ‘minimum government’ promise, it may have met the note-ban goals – without the pain

In a New Year’s Day interview to a news agency, Prime Minister Narendra Modi revisited his government’s demonetisation move of November 2016. Perhaps this was born of the realisation that the notebandi decision and its impact on the economy would likely define the NDA government’s term in office — but not in the way that he and his advisers had envisaged.

Specifically, Modi addressed the point that the overnight withdrawal from circulation of currency notes of Rs.1,000 and Rs.500 denomination, which cumulatively accounted for 86 per cent of the value of the notes in circulation, had precipitated a slowdown in the economy.

Framing that fact against a broader context, he said: “If any process is changed… take for example, the Railways: if a bogey changes tracks, there is a change in speed.” And noting that when Manmohan Singh was Finance Minister — during the years of economic reforms from 1991 — GDP growth had fallen to less than 2 per cent, Modi suggested that such slowdowns were an inevitable eventuality when the tectonic plates of the economy were shifting.

Such a characterisation of the demonetisation move is more than a little disingenuous. Modi’s larger point — that structural reforms deliver a shock to the system in the short term, which translates into slower economic growth — has at least some validity. In that sense, his invocation of the 1991 parallel is not entirely incorrect. Illustratively, in 1991-92, when the PV Narasimha Rao-headed minority government unleashed ‘big bang’ economic reforms, GDP growth did slide to a lowly 1.3 per cent. Indian corporates initially struggled to adapt to the heightened competition arising from a lowering of protectionist tariffs, and the demand contraction that accompanied the sudden and sharp devaluation of the Indian rupee.

But with the unleashing of the “animal spirits” of the economy, growth bounced back – to 5.1 per cent next year, and further to 7.3 per cent in 1994-95.

But it takes a wholesale suspension of sense and sensibility to believe that the demonetisation move — however well-intentioned it may have been in its avowed earnestness to wipe out the ‘black economy’ — counts as a reform measure in the way that an unshackling of the economy does.

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The Hindu Business Line, 8 January, 2019,

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