Manmohan's missile - Monumental mismanagement, organised loot and legalised plunder: Singh

TV footage shows Prime Minister Narendra Modi in the Rajya Sabha on Thursday. (PTI) 

Devadeep Purohit, TT, Nov. 24: The style and substance of Manmohan Singh's speeches usually do not lend themselves to thumping of desks and repeated rounds of applause.

The rare sights unfolded in the Rajya Sabha today when the former Prime Minister dissected demonetisation. (See Page 4)

For a change, even his opponents on the treasury benches listened in sullen silence as the "quietest" public figure in the country spoke. Among those who were listening in rapt attention was Prime Minister Narendra Modi.

What if a student of economics was in the audience? Here's what he or she would have heard:

Manmohan: My own feeling is that the national income, that is the GDP of the country, can decline by about two percentage points as a result of what has been done. This is an underestimate and not an overestimate.

What we know: Consensus prevails among most economists that the sudden decline in money supply and a simultaneous rise in bank deposits after the demonetisation will adversely impact consumption in the short term, which may lead to a lower GDP growth. (Singh did not use the word "growth" but many feel he meant the GDP growth when he cited the figure of two percentage points.)

Brokerage firm Ambit Capital has reckoned that in the year to March 2017, the cash crunch is expected to pull down economic growth from last year's 7.6 per cent by as much as 4.1 percentage points.

Bank of America-Merrill Lynch has warned that the demonetisation would impact the country's growth in the next two quarters, and estimated a dip by 50 basis points.

Manmohan: I do not disagree with the objectives, but what I do want to point out is that in the process of demonetisation, monumental mismanagement has been undertaken....

It is not good that every day the banking system comes with modification of the rules, the conditions under which people can withdraw money. That reflects very poorly on the Prime Minister's Office, on the finance minister's office and on the Reserve Bank of India. I am very sorry that the Reserve Bank of India has been exposed to this sort of criticism, which, I think, is fully justified.

What we know: Decisions have been modified at such a head-spinning pace that it is tough to keep count. Trinamul leader Derek O'Brien told the House during the day that at the time he was speaking, 24 modifications had already been made to the original notification of November 8. More changes were announced in the evening. (See Your Money chart below)

Manmohan: What has been done can weaken and erode our people's confidence in the currency system and in the banking system.

What we know: Moody's Investors Service has warned that a persistent cash crunch could worsen asset quality at Indian banks, which suffer from the problem of lack of capitalisation and huge burden of non-performing assets.

At the currency front, lower money supply should be positive for the rupee, but given the global backdrop of a strong dollar, the real situation is different. The rupee's slide continued today.

It is true that bond yields in the US have surged, contributing to higher demand for the dollar as the forex market is anticipating an imminent hike in the Federal Reserve's interest rates. But it also cannot be denied that the Indian demonetisation has pushed interest rates down, which has shrunk the interest differential in India and the US.

Manmohan: I want to know from the Prime Minister the name of any country he may think of where people have deposited their money in the bank but they are not allowed to withdraw their money. This alone, I think, is enough to condemn what has been done in the name of greater good of the people.

What we know: During the days of the German banking crisis of 1931 or last year's crisis in Greece, the authorities had imposed restrictions on money withdrawals and banking transactions to keep the financial systems from collapsing because of a run on the banks.

But those situations cannot be compared with what's happening in India. "At times, the authorities do impose restrictions on banking transactions, but such steps are taken only when there is a crisis.... In the Indian context, everything was fine and suddenly the government announced its decision of demonetisation and created a crisis-like situation," said a chief economist of a leading bank.

Opinion is divided on whether the ceilings imposed on withdrawals are legal or not.

Manmohan: The way it is being implemented will hurt agricultural growth in our country; will hurt small industry; will hurt all those people who are in the informal sectors of the economy.

What we know: The cash crunch has set in at a time farmers need money to pay day labourers to carry out harvesting and prepare for the rabi (winter) crop. Already there are reports that the price of paddy, cotton, soya and tea leaves have dipped due to demonetisation, which will add to the indebtedness of farmers.

As agricultural activities after the festive season are dependent on credit and the flow has dried up, the primary sector is in distress.

Manmohan: It is a case of organised loot and legalised plunder.

What we know: Asked what the former Prime Minister meant, Congress leader Jairam Ramesh said: "These expressions describe how bad and thoughtless the decision was. That he (Modi) put 96 per cent innocent citizens in peril because of four per cent corrupt.... He (Singh) also suggested information was leaked to the Prime Minister's friends and there is a possibility the poor man's cash will be used in loan write-offs and political largesse."

But there has been no evidence yet that information had been leaked.

Manmohan: Even those who say that 'this measure will do harm or will cause distress in the short run, but is in the interest of the country in the long run', I am reminded of John Keynes, who once said: 'In the long run, we are all dead.'

What we know: British economist John Maynard Keynes had written this in one of his earlier works, The Tract on Monetary Reform, in 1923.

The context of Keynes's quotation: "The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again."

The BJP government at the Centre has been trying to mobilise support in favour of demonetisation by stressing that a few days' pain will result in future gains.

Using what Keynes wrote long back, Singh reminded the House that the primary responsibility of the government of the day was to ensure smooth running of the country's existing financial system.