November 20, 2017: My simpleminded take on the first anniversary of demonetization

I am not an economist. Can't fault you if you disregard this post as the incoherent ravings of an Economics ignoramus. This would be a good time to stop reading this post.

I keep hearing that demonetisation was a major economic reform. This puzzles me.

1. A government embarking on a systematic program of privatisation of PSUs is clearly triggering a process of opening more space for private initiative and private capital. This is a reform that will produce effects and outcomes over an extended period.

2. Reduction or elimination of licenses, permits and other preconditions for establishing a business is again a reform that has enduring impacts.

3. A major tax overhaul in direct or indirect taxation will have impacts over the long haul. If it was well conceived and competently executed, this would be a major reform and yield benefits for decades.

4. The abrogation of privy purses was a populist action that may even have been the right thing to do at the right time but it can't count as a reform. It took an entitlement away from families that had already lost royal privileges a few decades earlier. It had no enduring gifts to offer the economy.

My point is this. Not all acts of government, including grand gestures, no matter how sizeable their immediate impact, constitute reform. To qualify as reform, they must open new opportunities, and continue to open them, for an extended duration. Is that duration 3 years? 5? Even longer? I can't say. But if all the impacts dissipate or if things generally return to status quo ante, what was reformed?

Which brings me to my incomprehension of demonetisation as reform. Yes, it was a grand gesture. Yes, it unsettled hundreds of million Indians for several months. But was it a reform?

The government may realise a few extra income tax or indirect tax filings this year. Revenue department might investigate some accounts loaded with cash last year that may produce more assessees whenever they are able to conclude their inspection/investigation of these deposits. But sooner or later, all this will conclude and all the benefits will have been booked.

A hundred analyses and commentaries have pointed to the success of the decision by pointing at the electoral payoffs that the establishment collected in UP. That still doesn't make it a reform, just a successful grand gesture.

Over to the economists now to set me and my stupid argument to rights.