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Lessons from India’s demonetisation experiment

By Sibin Sabu

Demonetisation is likely to go down as one of the landmark decisions in the history of independent India and serve as a useful guide to countries across the globe in their monetary experiments to counter black money. It also poses few questions pertinent to the Policy discourse of the country.

The Indian government had apparently not taken everyone into confidence while announcing the demonetization policy. The decision was kept under wraps until 8 PM on  November 2016, when Prime Minister Narendra Modi made the announcement public. The intent was to catch the corrupt off-guard. Two lessons pertaining to policy formulation and evaluation can be understood from this experiment.

Stakeholder consultation

The process followed to arrive at the Demonetisation Policy is intriguing. Unlike GST, demonetisation hardly solicited inputs of stakeholders to assess its likely impact. Most legislators were not privy to this decision until moments before the announcement.

At the same time, one of the biggest problems pointed out by critics of demonetisation was the lack of preparedness and foresight of the government. This can be attributed partly to the lack of stakeholder involvement in the decision-making process. This calls for the reason for not involving the elected representatives needing to be examined further.

A friend of mine pointed out that when legislators take the oath to office and secrecy and are yet kept out of the loop, the Prime Minister is openly acknowledging their corruption. Even when the Cabinet was informed about the decision moments before making the announcement public, an additional precaution was taken; members of the Cabinet were specifically instructed not to carry their mobile phones.

Implications of non-consultation

The very fact that the inputs of elected representatives cannot be solicited due to concerns of ‘trust’, should perturb us – yet, strangely it does not. We have grown accustomed to it and we are understanding that the Prime Minister has very few he can trust and involve while making such a momentous decision. It is even more disturbing that there was hardly any dissent from those kept out of the loop that they should have been consulted in the decision-making process. Is it an acknowledgement from their end that they are not trustworthy?

Arguably, such a huge decision would have benefitted from perspectives of diverse stakeholders so that its repercussions could be foreseen to a greater extent and adequate preparation could be made. It may have also helped the government identify and prevent ways in which black money could be converted to white money.

A question arises on how can the trustworthiness of elected representatives be ensured? This calls for examining how they stand to benefit if they help those holding black money. Some elected representatives might have black money or could have close ties with those possessing it which could prompt them to protect their vested interests if they are involved in decision-making process. Measures to ensure transparency in election financing and stringent monitoring of wealth accumulated by those in power are few steps that can be taken to address this issue.

Policy evaluation

The evaluation of the demonetisation policy is another interesting area, given that its intended objectives are modified to stay in sync with any intended or unintended positive consequences reported to arise from it. As per the initial intent as per the announcement of the honourable Prime Minister was to curb black money and terror financing, it has metamorphosed into increasing digitization, formalisation and widening of the tax base. Given its continuously evolving objectives, how would one evaluate such a policy?

The reason why the government is able to play this game is due to a deeper underlying issue in policy formulation – the lack of a systematic and structured approach to policymaking. It should be made mandatory that government initiates mechanisms for evaluating a policy or a law as part of its design. This would compel policymakers to set SMART (Specific, Measurable, Attainable, Realistic and Time-bound) objectives – as management theorists would call it.

Presently, there seems to be a blind-faith in policy-making due to which there is a lack of emphasis on validating the underlying assumptions or its intended impact through data. It is important to gather data to evaluate whether policies created with good intent such as rail travel subsidy, caste-based reservation are effective as envisioned. Evaluation of the success of policies or programs should not be left to one’s beliefs. The outcome matters as much as the intent.

Success or failure?

Lack of a timely policy evaluation mechanism leads to policymakers exploiting the policy intent. While data might have been available with Reserve Bank of India at least by April that 98.8% of the notes had returned to the system by 13 January, it did not make this announcement public until August. It seems reasonable that the government would have kept track of the currency that returns to the system given the intent and magnitude of the decision.

Perhaps, if the ruling government admitted that much of the withdrawn currency had returned to the system sooner, it may not have been able to capitalise on the perceived gains of the demonetisation policy in elections in states like Uttar Pradesh and get elected to power. Also, would the public have voted the ruling government to power had they known that the move did not yield its initial intended objectives? The general public might have considered the demonetisation policy to be successful when they went to vote.

‘DeMon’ will go down as a reminder of how effective a policy could have been, had relevant stakeholders been engaged. It would also serve as a guide on how policymakers can afford to carry out any experiment, but still, claim and exploit its perceived success due to lack of a systematic and structured approach to policymaking. The absence of a sound evaluation mechanism rewards the intent of a policy over its outcome.


Featured Image Source:  Ganesh Dhamodkar via VisualHunt.com / CC BY



This post first appeared on The Indian Economist | For The Curious Mind, please read the originial post: here

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Lessons from India’s demonetisation experiment

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