In 430 B.C. Pericles said that “Just because you do not take an interest in politics doesn’t mean politics won’t take an interest in you.” But Indians discovered this the hard way on November 8, 2016 when 86% of the currency in circulation, in the form of existing Rs. 500 and Rs. 1000 notes, was suddenly taken out of circulation by fiat. Not surprisingly, there has been an outpouring of reactions from the so called “argumentative Indians”.

Demonitisation has dominated public discourse in India and quite predictably so given that we are a highly cash dependent economy. And as the popular social media joke goes, the event has led to a virtual explosion in the number of ‘economists’ pontificating on the issue! In fact, this was foreseen by George Bernard Shaw long ago when he said that “if all the economists were laid end to end, they’d never reach a conclusion.”

Disagreement in itself is healthy for society. Transparent, well-organized policy analysis can help to facilitate disagreement and thus good policymaking, thereby turning heat into light. It helps us to move from poor or even good policies to better ones, and it is particularly effective at doing this when disagreements are clear, reasoned, and inclusive. This topic is in fact, ideal to study the framework of public policy as it fulfils three basic criteria; it is of great policy importance, it is rife with disagreement and clarity on its sources of disagreement has the potential to yield significant returns. The basic idea is simple: to lay bare the positive and value choices underlying the analysis. Hence what I endeavour to do is simply provide a framework of analysis to let you decide the merits / demerits of this move for yourself.

One could unwrap the impact and decode the currency-swap by considering various factors, including the time horizon, geography and other implications.

As far as time horizon is concerned, we need to consider near term vs. long-term impact. However, what may constitute short-term impact can easily stretch to medium or long-term. If we take geography into account, we can see that India is a sub-continental geographical entity with huge variations across regions which implies that the impact of demonetisation will also vary from region to region.

We can also decode demonetisation by considering various other angles. Macroeconomic for instance; there is an impact on the business cycle due to a focus on sentiment, liquidity, income and wealth effect. From the political point of view redistribution of wealth or re-election could be the leitmotif. If we view it from a moral standpoint, weeding out of the black economy, fake notes, etc. could be the long-term implications. Finally, if we view Demonetisation through the lens of social behaviour, the long-term hope is that people will adopt changes in technology and rapidly transit to cashless transactions.

However, while the benefits of this move appear numerous, we must also consider its shortcomings. There is, for instance, a danger of being swayed by hyperbole. The move has been called both a ‘surgical strike on black money’ as well as ‘carpet bombing of economic activity’ but reality often lies somewhere in the middle.

We can also fall prey to confirmation bias when we are surrounded by people who echo views similar to ours which can also be amplified on social media. The fact that this is the third instance of Demonetisation in India (the other two being in 1949 and 1978) is not justification enough to repeat the move. The structure and size of the Indian economy has changed exponentially since these past instances and the consequences are hence, very different this time around. Moreover, emulating other countries who may have also implemented a similar move is also not justified as it may not result in the same consequences.

Hence, it is important that we analyse the issue from all angles as we can frame coherent arguments both in favour of and against this move. However, in an economy as diverse and populous as India one can mine reams of data and analyse endless statistics to emerge with a cogent argument.

As they say, if you torture data for long enough, it will confess to anything!

Dr. Sachchidanand Shukla
VP and Chief Economist
Group Strategy Office
Mahindra & Mahindra Ltd.