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Was demonetization placed right in the sequence of strategy roll out?

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Crunching numbers/Re-imagining possibilities/Empowering people/Accelerating growth (aka Business Leader). Insights Architect/Practitioner, led knowledge business across in India & Overseas. Trainer, Speaker, Mentor. Meaning/Purpose Evangelist. Writings aim to decode social & political issues through the lens of human behavior & epistemology.

It has been a fortnight since the “surgical strike on black money” or “demonetization” as it has been termed, was announced by the Government of India. Since then, while the citizen of “Bharat” are lining up at banks to exchange currency, the citizen of “India” have lining up as armchair economists making arguments for and against the move, peppered by limited statistics, only that which supports their case.

The discussion started with grand rhetoric’s like “Surgical strike on Black money”. Surgical by default builds in the concept of precision and completeness but if the target was a billion people and exchange of 86% of the currency in circulation, such a move could hardly ever be that. Further, it does not require one to be an alumnus of London School to figure that all of the informal cash economy is not black and as such, any move that inconveniences the majority to target a minority is questionable, as is also being argued.

The discourse has graduated to examining the executional challenges and gaps around this decision (including the lack of planning). But I dare say, planning or the lack of it is not the central issue.

To get to the central issue, let’s leave the rhetoric’s and rewind to the few facts we know. There are a few clear reasons articulated by the government for this action. To borrow straight from RBI’s press release on the subject – to tackle counterfeiting Indian banknotes, to effectively nullify black money stocked in cash (repeat stocked, not to tackle regeneration) and curb funding of terrorism with fake notes.

Follow up pointers from official sources suggested that this move was a sequential step, as part of larger series of measures, in targeting black money so as to move towards a formal, digital economy. And clarifications were also provided on the “need for the element of surprise”, citing the loss of purpose had it lacked surprise, even at the cost of inconvenience.

That background brings us to the central issue or question – was this particular decision of demonetization placed in the correct sequence and timed correctly in the larger context of the intentions as are being pointed out (to deal with counterfeit and or stock black money)? And equally important, could the surprise element be avoided, which potentially would make the implementation challenges faced currently a non-issue?

What do I think? I think that there is nothing right or wrong about demonetization. But I argue that the element of surprise was unnecessary and it is only because the sequence was out of place, it called for the element of surprise.  And only because it was (unnecessarily) launched as a surprise, the government is left fire-fighting with new sequences of decisions to “manage” the challenge.

To argue this, imagine a tax evader or even a terrorist with hordes of cash sitting with them. Now imagine them being told that certain large denominations will not be legal tenders as of a later date say 1st April, 2017 or even later (you have many more months and no surprises here). Till such time, anyone can still use the old currency but banks and ATM’s will start dispensing new currency with immediate effect, with the idea that over time, through new circulation and exchange, replacement of certain denomination notes would be complete ie Demonetization would happen but at a later date.

Needless to say, such a decision, which allows old currency circulation and provides for a gradual switch, would not have overburdened the exchequer to feed the demand of new currency in such a short time and certainly would not have led to the pains and economic impact being felt (or suggested). The executional challenges that are currently debated would have been a non-issue.

Coming back to our counterfeiters and black money hoarders, who were the real targets; what do you think they would do given the extra notice period provided for? They would do exactly what such people have done after what was announced (even if suddenly) on the night of the 8th November. Convert to bullion, perhaps buy property (including benami), pay advances in cash, use mules to spread money in deposits, clear old dues, report a surge in income for current financial year in cohort with their CA’s and the likes of what Indian media has been reporting. As a result, the government is pushed into a reactive (and threatening) mode to prevent such action at the cost of undermining its own credibility given the everyday changes to policy.

Apart from some unpredictable “jugaad” coming into play, the modus operandi of those that beat and cheat the system is largely predictable (we largely know how cash in black is ‘managed”). In short, if such people did know about a demonetization coming up, they would use the predictable means as they have done post the announcement. Sure, some portion of the black money would be channeled out then as it has also been now. But that’s where it gets interesting. By giving them time, you actually encourage them to resort to those practices of laundering. But by timing policy in the right sequence, you could have used that as bait.

Here is how. If demonetization was among the last pieces of the jigsaw and would come later (it potentially would be still required to deal with the counterfeit challenge), the sequence would first plug gaps and improve reporting and compliance so that there is eagle eye over the standard and predicted routes of laundering cash. Many of these would include the post hoc decisions announced post demonetization but seemingly after as-if being caught unaware. The extra timing could have also used for and resulted in even higher banking penetration and capacity building for better acceptance and use of plastics/digital money.

The role of sequencing and timing is as essential as any strategy itself because of its impact on implementation effectiveness. Sequencing decisions such that one feeds into the next would have potentially identified people that fit a certain questionable profile (not claiming all of them would be guilty). But for sure, that would be a much smaller number to strike on (surgically) rather than inconvenience the majority of the country garbed under the misguided need for surprise. And India could still “demonetize” – do away with larger denomination currency to curtail the regeneration of black money. PM Modi could still be termed “audacious” and so on.

If anyone is to argue that this is easier said than done, my only retort is “isn’t that what the government is doing but only after; then why not before”? Unless we are saying, to catch a thief, you need to think like a thief – perhaps be one, and the current establishment is not? Leave that to the readers.

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Crunching numbers/Re-imagining possibilities/Empowering people/Accelerating growth (aka Business Leader). Insights Architect/Practitioner, led knowledge business across in India & Overseas. Trainer, Speaker, Mentor. Meaning/Purpose Evangelist. Writings aim to decode social & political issues through the lens of human behavior & epistemology.

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