Gurumurthy on Demonetization

S Gurumurthy, Editor Thuglaq, lectured on Demonetization at Chennai International Center, Madras school of Economics, today, September 22, 2017. Here are my notes from that lecture, in his voice.

Jagdish Bhagwati on being asked what he thought of my opinions, quipped, If Gurumurthy is an economist, I am a Bharatha Natyam dancer.

I'm not here to defend the government. I'm here to explain the necessity for demonetization. This cannot be done without explain the history and context of global economics and its changes.

Fundamentally, the world had a single economic model, "one size fits all", after the Second World War. They changed this in 2005, saying one size does not fit all, and each country should develop its own model. Nobody in India discussed this at all.

The world has dramatically changed after the 2008 financial crisis. Most have given up globalization and are adopting economic nationalism, except India, which is still enamored of Globalization.

The USA has eleven trillion dollars of trade deficit. Any other country would be insolvent with this deficit, but USA runs not on economics but on physics. Why physics? Scientists say there is something called dark matter, which holds the universe together, which they cant explain. The dark matter of the USA economy is its military power, its administration, the dollar as the currency of the world, etc.

India has run trade deficits in every year since independence, except 77,78,2002,2004. Deficits didn't use to  matter because of the small size of the Indian economy. But since 1991 the economy has grown significantly.

India had 515 billion dollars of oil imports between 2004-2014, but our capital goods imports was 585 billion dollars in the same period. It's not expensive oil, but this massive trade deficit that was a huge problem. Indian trade deficit with China alone in one of these years was five times Indias defence budget and three times China's defence budget.

Also India became a favorite destination of foreign capital. But big chunks of this was not for products or services, but for financial chicanery. Indian economy grew on average 8%  during those years, but gold and stock markets jumped 300% and real estate between 200% and 2100%. This was mostly phantom growth in the value of these assets because of massive printing of high denomination currency bills. We needed high denomination bills to deal with the explosively growing economy, but the percentage of these bills was nightmarish. It went from 38% to 88% of all currency notes  in the period under the UPA government. Then RBI governor YV Reddy warned against the massive influx of capital inflows, but he was ignored. 

1999 was the highest job growth year in Indian history, we added sixty million jobs that year. But since then, especially under UPA, India has had mostly jobless growth. Even real estate became an asset inflation game, with bulk of buyers being not homeowners but people who bought and sold houses for profit. How can it be otherwise, when most of growth happens not in products or services,  but in phantom asset inflation. Demonetization was required to primarily stop this insanity. No economist would have implemented demonetization. Economists caused this problem. Only a bold non economist, in this case Narendra Modi, would have implemented it.

Income disclosure and demonetization should have been done simultaneously, but this didn't happen. Income disclosure should have been announced first. This was a major problem.

But look at the atmosphere demonetization created. The media, the intellectuals and even the Supreme Court wanted riots. But the Indian people did not riot. This is astounding, a marvelous facet of our civilization. Only the rich were really upset, because of queues, they said. Most Indians stand in queues all the time. The whole debate was framed as about black money alone, while several issues were involved.

Modi can take bold and unpopular decisions. GST is extremely unpopular. Kirana stores and small businesses are suffering. But it was an essential step for the economy. No government is foolish enough to continue long with a highly unpopular move that could cost it the next election, so some of this may change soon.

The poorest of the poor pay 350 to 480 percent interest per annum. No one in government or banks or economists care about them. Or even think about relieving their burden. My washarman came to me lamenting about debt at 360%, and I gave him a few lakhs to get out of his debt hole. The chattering classes have not even bothered about the lack of banking for such people.

Politicians can fix this system, if they muster the will. But civil service and stop anything brought in by parliament or legislatures. Civil service has no inward looking perspective, their education and outlook is entirely foreign.

Inspite of this India still is quite robust. I have traveled to so many cities as part of my job, and understood so many aspects of the Indian economy. The listed corporates of india only contribute 5% to economy of India. It's local businesses that are the bulk of Indian economy, jobs, and  growth. 

Bank managers are just bureaucrats. They know nothing of local economy, which is why Non Performing Assets are such a huge problem. One day a bank officer is transferres from Patna to Vilupuram. He knows or bothers to learn nothing about either community, but uses text book metrics to evaluate anything. Some people now say privatization of banks is the only solution. It's not at all a solution. The managers and staff will be the same people, how will privatization change anything?

RBI and several banks have colluded to convert money for people. Vans have gone from RBI to individuals. Our system is very bad in this aspect. Demonetization has been implemented, now its up to the tax authorities to catch and take action against culprits.

Added note Saturday 23 September, 1pm: Compare and contrast my essay above with the report in the Hindu this morning. In my understanding, the crux of Gurumurthy's speech was that in spite of flaws in the rollout, Demonetization was absolutely necessary. The Hindu's report is that demonetization is a blow to the economy, a gas chamber. Akbar josiyam.

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