Narendra Modi: the fallen hero

I was an unwavering Narendra Modi fan – until 4 September 2016.

Unlike most Indian PMs before him, Modi is a self-made man, going all the way from serving tea on railway stations to sharing tea with Obama in the White house; unmarried, devoted to work; personally non-corrupt, his old mother still lives in a one-room flat; a top class orator with a decent dress sense; possesses a superhuman stamina, jetlag immune and can speak in stadiums without eating anything; has a lengthy experience of managing a major Indian state; is mentally tough and must be lucky to have low oil prices since the start of his tenure.

What changed on 4 September 2016? Modi’s government bid good bye to Raghuram Rajan, the governor of the Reserve Bank of India. There is a misconception that Rajan needed to be replaced as his term had ended.

First of all, there is no prescribed limit anywhere on how long a central bank chief may serve. Alan Greenspan, the name familiar to people my age, was appointed by Reagan in 1987 as the Chairman of the Federal Reserve (RBI Governor’s USA equivalent), and occupied that position for almost twenty years, under Red and Blue presidents. If you have an exceptional guy as a central banker, you keep him for as long as you can.

Secondly, four governors before Rajan- C. Rangranjan (1992-1997), Bimal Jalan (1997-2003), Y.V.Reddy (2003-2008) and D. Subbarao (2008-2013) had all enjoyed five year terms. Why did Rajan not get at least five years?

Raghuram Rajan, in my view, was one of the best RBI governors, competent, articulate, and professional. His most important quality was his independence. PhDs from US Universities can be found by the hundreds, but his independence mattered the most. He worked without fear or favour. To disagree with the boss, to say NO to the boss is a qualification rarer than a PhD. A fair boss retains such people around. Narendra Modi didn’t.

The demonetization that followed two months later was possibly connected to this event. Making 86% of the legal tender illegal in a matter of hours was something Rajan would have never allowed to happen.

When an economist refused to play politics, a politician decided to play economics.

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One fundamental principle of justice was violated in the demonetization plan. We are familiar with the famous saying by Sir William Blackstone, an English judge: "It is better that ten guilty persons escape than that one innocent suffer". This principle known as the Blackstone ratio remains the backbone of criminal justice.

The numbers of black money hoarders, counterfeiters was minuscule in percentage terms. The new Modi ratio said: Let 99% of the population suffer, but I’ll attack the 1% with black money.  Suffering is not measured by deaths alone; it’s about sweating in queues, losing your daily wages, inability to buy seeds before a planting season, non-moveable trucks, reduced consumption, empty shopping malls, cancelled weddings and dysfunctional ATMs. The galloping Indian GDP was made to trot by a single action.

If cashless economy was a goal as was projected subsequently, notes could have been withdrawn with a much longer notice - six months or a year. The sudden note ban is classified as shock therapy in economics. Bolivia in 1985 and Poland in 1989 used it to smother hyperinflation. Both in psychiatry and economics, shock therapy is applied in extreme circumstances: when the patient is not responding to medicines or other treatment.

By his action, Narendra Modi announced to the world that India, the country he was governing, was ill enough to warrant shock therapy. He was like a father with no knowledge of medicine, applying electric shocks to treat the illness of his own child.

Even ill-conceived plans can sometimes be well executed. However, the following weeks showed that planning was haphazard. The RBI and government issuing daily circulars were in a crisis management mode. In case of earthquakes, hurricanes or floods, daily corrective actions are necessary. These are unforeseen natural crises. However, when a daily corrective action and a weekly changing narrative are needed for an action you yourself have initiated, it is evidence of a manufactured crisis. If you didn’t have enough time to plan why did you not postpone the plan? Using 1.3 billion Indians as guinea pigs in a financial experiment was reckless, even dangerous. If a single man, not educated in economics, could impose the decision without any checks or balances, that is immensely worrying.

The figures available till date show the concept was a failure, the inconvenience and suffering continue beyond the promised fifty days, economic growth is likely to be affected. As if this was not enough, Modi’s luck is running out as well. The oil prices are going up.

The Indian tax net is small (agriculture is excluded, income and gains from selling your agricultural land is tax-free). That net needs to be widened instead of dreaming of a cashless India to improve tax revenues. A country that has 17% smart phones, 34% access to (slow) internet, 78% access to (frequently interrupted) electric power, and 67% of population that has not passed the 5^th grade, why and how would you convert it into a cashless society?

In chess, any piece pushed forward can be brought back. However, a pawn that is pushed ahead can never go back. Pawn moves, being irreversible, are the most committing moves. Because of the irreversibility, a flawed pawn move can cost the player a game. Modi has committed two irreversible moves: removal of Rajan and demonetization. They could cost him the game.

Ravi