Not a tragedy, but a remedy: S Gurumurty

http://www.thehindu.com/opinion/op-ed/Not-a-tragedy-but-the-remedy/article16798081.ece

Not a tragedy, but a remedy

In his own terse language, S Gurumurty analyses the Economics and Politics contained in Former PM Manmohan Singh's article "The making of a mammoth tragedy" (The Hindu, December 9, 2016)

Excerpts:

Unmonitored Rs.500/1,000 notes

Economics says money, growth, prices and jobs are inter-related. Apply this rule to the NDA and UPA periods. During 2004-10, average money supply grew annually 18 per cent (15.3 per cent under the NDA). But asset prices rose by several multiples of it. The moderate rise in money supply over the NDA’s number does not explain the huge asset inflation. The clue hides in the rising unmonitored HDN cash stock with the public which made black money deals easy. In 1999, the cash with the public was 9.4 per cent of nominal GDP. By 2007-08, instead of falling due to rising bank and digital payments, it jumped to 13 per cent of nominal GDP. Later it began hovering around 12 per cent. More critically, the HDNs with the public more than doubled from 34 per cent in 2004 to 79 per cent in 2010. On November 8, 2016, it was 87 per cent. The average annual rise in HDNs was 51 per cent between 2004 and 2010 and the annual rise was 63 per cent by 2013-14. The Reserve Bank of India noted that two-thirds of the Rs.1,000 notes and one-third of the Rs.500 notes — that is over Rs. 6 lakh crore now — never returned to banks after they were issued. The unmonitored HDNs roaming outside banks began driving up the gold and land prices by black cash and the stock prices through Participatory Notes (PNs) — which are largely hawala transfers out of India — that came back pretending as foreign investment in stocks. The PNs rose from Rs.68,000 crore in 2004 to Rs.3.81 lakh crore in 2007.

My VIEW:

Economics and politics of demonetization

S Gurumurthy’s article “Not a tragedy, but the remedy” (The Hindu, December 13) which follows former Prime Minister Manmohan Singh’s piece “Making of a mammoth tragedy” (December 9) and NIT Aayog member Bibek Debroy’s “Asking the right questions”(December 11) is a challenging analysis of the background in which GOI would have come to the painful option to handle high value currency the way in which it did through a surprise announcement withdrawing ‘legal tender status of Rs500 and Rs1000’ on November 8.

Opportunity to govern, like life, comes sans rewind and fast-forward buttons and Prime Minister Modi knows it better than anyone else. MMS opted to keep the ‘pause’ button pressed for long 10 years is a matter for research by future scholars. Manmohan Singh’s indictment of the system in his 6 minutes RS speech was more forthright than the lament about ‘mammoth tragedy’, which he concluded with a terse observation that “It is important to deftly balance these risks with the potential benefits of such decisions. Waging a war on black money may sound enticing. But it cannot entail even a single loss of life of an honest Indian.” does not throw any light on the way forward.

 Conceding Dr Singh’s right to be concerned, let us also remember, all martyrs were honest citizens. The arguments put forth only explains the rationale behind his reluctance to take decisions during the ten year period when Manmohan Singh was Prime Minister. One wishes, the former PM gets one more opportunity to rationalize his thoughts and come back with his views on what is best for the nation in the context of feedback to his RS speech and the article under reference. Maybe at some stage, his past experience as RBI Governor, FM and PM may help him in giving a balanced view, once winter sets in.

M G Warrier, Mumbai