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Lessons From Demonetisation
The biggest impact of demonetisation has been on the informal sector and agriculture, which account for 80 per cent of employment. This economy is predominantly cash-driven and a reduction in consumption would have a cascading effect on FMCG and other sectors
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Gouverner, c'est prévoir: to govern is to foresee
-Pierre Mendès France, former French prime minister
This first part of the two part article would dwell on the execution of a disruptive event like demonetisation and discuss systems & tools available which could anticipate the consequences and keep ready the mitigating policy interventions and the second part would deal with the response of corporates to such black swan events.
Demonetisation has caused disruption in the lives of a majority of the citizens, corporates and institutions of India. This has led to unimaginable suffering to the most vulnerable of the society such as labour in the unorganized sector, small farmers and small & medium industries which employ millions of people. For past 65 years, policies have been drafted by well-fed, urban leaders and bureaucrats who have not seen much hardship, while a majority of Indians still have difficulty in putting two meals together. Thus, they cannot visualise the consequences of their actions. It is a fault line, which has never been course corrected since independence. This dichotomy in the society has been a major reason of economic disequilibrium, unresolved till date. To most people in the middle class, demonetisation was at worst, an inconvenience but to the poor daily wage earner, it is a borderline between life and death. We may truly never know the effect of long-term consequences of demonetisation on these most vulnerable such as reduced availability of food for small children, especially when the rural poor's safety net MNREGA has been drastically pruned, a double whammy.
Beyond the most vulnerable, demonetisation hit many other sections of the society which are likely to have long-term consequences. Since all-India data is as yet unavailable, some illustrations can aid in extrapolation such as rabi cultivation carried out on 8,902 hectares of land against the normal area of cultivation of 54,827 hectares in Karimnagar district; at least 60% of the workforce in small trader & retail sector laid off, according to ASSOCHAM; near total shutdown of Pilukhwa handloom town near Delhi, which is symptomatic of the entire handloom and handicrafts industry where on a market day, a wholesaler who could sell Rs.40,000 worth of goods, now sells only Rs.2000.
All these stories tell a tale of disruption in the economy which will have long term consequences beyond the 0.5 or 1 percent drop in GDP, as estimated by most economists. 45% of India's economy is in the informal sector which is out of the purview of calculating GDP. Will the daily wage earner return to the building site or small factory where he worked, in a hurry? Yes, if he can put together the fare from his distant home or if the money lender will advance an additional amount beyond what debt which he has already accumulated to feed the family. Ludhiana's bicycle and hosiery (especially woollen) industry, Agra's leather industry, among others, tells identical stories.
As far as farmers are concerned, November is the month when they repay the agricultural loans to district co-op banks (DCB) and take fresh loans for rabi crop. Large number of farmers have not been able to repay the loans they had taken from DCB for Khari crop as they were given their dues by traders mostly in old Rs. 500 and Rs. 1,000 notes and RBI has prohibited these banks from accepting cash in old notes. And unless farmers repay their crop loans for Kharif season they don't become eligible to get fresh loans. In Maharashtra, banks which disburse nearly Rs. 4,400 crore in loans to farmers, but so far they have been able to disburse only Rs. 500 crore.
The biggest impact of this demonetisation policy, however, has been on the informal sector and agriculture, which provides employment to 80 per cent of the workforce. This economy is predominantly cash driven and a reduction in consumption would have a cascading effect on FMCG and other sectors. As a result, the entire supply chain of products like vegetables, fish and other perishable items have been badly hit.
On top of this, the RBI has banned the Cooperative Banks from exchanging old notes, causing liquidity crisis. How much rural indebtedness will increase will be only be known in time when social scientists take stock of the situation.
Medium and Small Enterprises (SME) are 40 million units strong and the largest source of employment in India, employing over 100 million. These businesses have been termed as "cradle" of the government's Make in India mission. Increasing employment is a matter of urgency as 12 million new job seekers enter the market every year. Leave aside creating new jobs, there are reports of the labour force moving back to villages as small and micro enterprises are finding it increasingly difficult to pay wages or get new orders, be it the lock makers of Aligarh, the brass industry in Moradabad, steel utensil makers, rubber goods, garments, textiles, jewellery, leather units, chemicals and so on. There were 36 million contract labourers in the country and 30 per cent of all workers in private sector and around 32 per cent in the public sector are employed through contractors. These are the first to go in any economic downturn.
In VUCA times, one can never tell what new problems will hit them next on top of demonetisation. We can only hope that rain gods are generous this year.
In the export sector, Nov-Apr are the months when maximum shipments take place for fresh fruits and vegetables, which have fallen by 50-60 percent. Many of the processes in the supply chain of export items such as textile, leather and handicrafts production takes place in small units which are totally cash dependent. Any disruption in one part of the supply chain affects the despatch of consignments which adversely affects the importer. This, at a time when exports were showing signs of revival after two years of contraction.
States have also claimed that they have lost 40% in revenue so far due to demonetisation which will definitely affect their welfare activities. Banks' already precarious position has increased and they have not only been hit by slowing credit demand, they have also had to forgo fee income on ATM transactions and card payments. The time taken to restore money supply may reduce the velocity of circulation for an even longer period, thereby resulting in a protracted GDP contraction causing unpredictability.
Assumptions about the future
The decision for demonetisation is fraught with many assumptions about the future. According to government, this move will result in curbing black money and counterfeit currency and secondly, while there will be short run losses, in the long run people will benefit through a move towards a cash-less economy, higher investment through cheap credit, etc. Estimates for 30th December show that approximately 97% of the notes have been deposited in banks, putting a shadow on the fight against black money while the government expected 30 percent of outstanding notes to remain undeclared, which would have extinguished as black money.
Even in the USA, 40 per cent of all transactions of consumers take place through cash, according to Federal Reserve Bank data. In such a scenario to imagine that India can be converted to a cashless society, where only 53 per cent have a bank account, is completely unrealistic. Demonetisation caused an onslaught on the informal sector without giving them proper training and time to adapt with changing technology of money and banking.
With hindsight, looking at a kaleidoscope of economic activity, could the government had foreseen such massive disruption and anticipated some steps to take, to mitigate the suffering. Could the timing of demonetisation be different, not just between the two harvest seasons? The exercise raises a lot of questions on motives and assumptions as well as the method of execution. Since November 8, the government has changed rules related to the currency ban over 20 times and the RBI has released more than 15 sets of frequently asked questions to clarify this change in rules. Is there any lesson for the future of governance, as the business of government is to take big decisions, whether monetary or fiscal under uncertainty and volatile economic conditions?
Recalling the economic downturn of 2008, it exposed the limits of economic thinking especially use of econometric models to visualise the future. We now live in VUCA time, Volatile, Uncertain, Complex and Ambiguous. Looking at past events, which could not be foretold by extrapolating the past, several governments such as U.S., Canada, Finland and Australia started thinking of about alternate means of looking at the future. So, far analysing the past and foretelling the future had mostly been fooled by randomness when uncertainties and unknowns became unknown-unknowns.
The military has a long tradition of developing future scenarios for global and regional challenges. The services' more mature foresight methods provided useful insights for civilian agencies that were just starting such efforts.
At Shell Oil where pioneering work in Scenario planning took place, the exercise has never really been about predicting the future. As Angela Wilkinson, a member of Shell Oil's Scenario Planning function, writes in a 2013 Harvard Business Review article, its value lies in how scenarios have helped break the habit, ingrained in most planners, of assuming that the future will look much like the present. It is based on the human tendency to see familiar patterns and be blind to the unexpected. Scenario planning aids in challenging deeply held assumptions. It exposes and questions the existing and long-held version of the future. The aim is not to predict the future so much as to understand the implications of various scenarios their agencies might reasonably face over a long time. The advantage of using scenario planning is to engage with an uncertain future by developing long-term outlooks in the form of alternative futures and thus understand various trade-offs and make ready possible interventions.
India is confronted by a new range of complex, fast-moving challenges that are outstripping the capacity of national leadership to anticipate and respond quickly and effectively. These unforeseen challenges are cross-cutting: they simultaneously engage not only traditional national security systems, but our social, economic and political fabric. "Legacy" methods of organization and operation cannot meet this kind of challenge, and government is increasingly confined to dealing with full-blown crises, rather than with shaping events. Government needs to organize itself to build an advanced reconnaissance system to improve coordination and promote agility.
In 2011, political scientist Alan Jacobs published a landmark book entitled Governing for the Long Term: Democracy and the Politics of Investment where he argued that three main factors explain the choices of policy makers in democracies i.e. current decisions affect what options become available in the future. First, the degree of electoral safety they enjoy; second, the expected long-term social returns against short-term social costs; and third, the institutional capacity at their disposal, both bureaucratic and party organisation. It is assumed that the proposed policy will deliver long-term social returns and the risks of failure are low. If one or more of these conditions is not met, long-term policy investments are less likely to occur resulting in net losses to society in the future. All these three conditions were apparently favourable to Modi Government at the time of demonetisation.
Demonetisation comes in the category of disruptive but predictable changes for which the government, in spite of secrecy, can plan ahead in great detail. Jacobs' stimulating analysis poses many critical questions. One of the most important is whether our democratic political institutions and the processes of decision-making can be designed in ways that increase the prospects of wise long-term 'policy investments' - that is, policy interventions which help create a better future either by generating long-term social gains or by reducing long-term harm, risk and vulnerability. Demonetisation too, has been heralded by the government as a move which will usher in a corruption free nation, bringing more resources into its kitty to help create a more equitable society. Put differently, are there ways to encourage policy far-sightedness in democratic systems and, if so, what particular strategies, institutional reforms, policy changes or conceptual innovations are most likely to achieve such a goal?
Scenario planning as as foresight tool could have anticipated the consequences of demonetisation in rural economy, wholesale markets and small & medium industries like leather, weaving & printing, handicrafts. The present transactions methods could have been mapped and various scenarios created to intervene as situation develops. For example, in hindsight, the need for a much larger supply of small denomination notes, creating additional printing capacity in reputable foreign security presses, the creation of efficient supply chain of money for rural population where a bank branch could be several miles away from home.
Foresight involves creating knowledge bank of possible futures. This is not to make predictions but rather identifying important trends, emerging issues and potential risks with the hope that such information will influence government to avoid being blindsided by future events.
The key problem in any democracy is to shift the eyes of the political leaders from short-term gains or winning the next election to long-term gains. Scenario Planning makes these choices easier for elected leaders.
It is not that Indian government is unaware of scenario planning. The Twelfth Plan has incorporated 'scenario planning' for the first time, presenting three scenarios of growth. In 2013, the erstwhile Planning Commission undertook an energy scenario building exercise, called the India Energy Security Scenarios, 2047. How far the knowledge & skills of scenario planning has percolated to other parts of the central, state and local governments is a matter of conjecture and since demonetisation is shrouded in a cloak of secrecy, we do not know, at least at present, whether any scenarios building exercise took place.
In a VUCA world it is time for government to move towards Anticipatory Governance. which takes the results of Scenario Planning to its next level. Anticipatory governance, though as yet a conceptual model, is a system of governing that is made up of processes and institutions that rely on foresight and predictions to decrease risk and develop efficient methods to address events in their early conception or prevent them altogether. It is a systems-based approach for enabling governance to cope with accelerating, complex forms of change. Anticipatory Governance is a "systems of systems" comprising a disciplined foresight-policy linkage, networked management and budgeting to mission, and feedback systems to monitor and adjust. Anticipatory Governance would register and track events that are just barely visible at the event-horizon; it would organize to deal with the unexpected and the discontinuous; and it would adjust rapidly to the interactions between our policies and our problems.
Anticipatory Governance is the result of The Project on Forward Engagement which was established in 2001 by Leon Fuerth to explore methods for incorporating systematic foresight into the US federal policy process, and for configuring government systems to deal with challenges that are "complex" (rather than just "complicated"). Professor Fuerth, a former civil servant with 30 years rich experience last served as Vice President Gore's National Security Adviser.
There is need to develop a process of thinking systematically through the longer-range consequences of present-day policy issues and also about the consequences of future contingencies for present-day decision-making. While long-term thinking and planning might seem like a luxury in these days of perpetually changing world, especially populist measures to win frequently occurring elections, we have the contrary view - that thinking rigorously about emerging national needs and requirements is especially important today, with such rapid change, deep uncertainty and complex challenges ahead. Strategic forecast is not futurist forecasting. It is about having the imagination to be prepared for what may come, regardless of which scenario occurs-it's a mind-set, not a process.
The responsibility of researching and developing systems and tools for governance require investment in a strong network of nongovernmental futures-oriented organizations and foresight units in various government agencies. The problems of Non-governmental futures institutes is their total dependence on the government for funding and thus their inability to think, discuss and present solutions in a non-partisan environment.
As the government gets ready to push for a digital cash-less (or as some say less cash) economy and a recently announced radical recast of its rural social assistance programmes, it must learn and embed the lessons of demonetisation in all branches of the government to ensure that future policy initiatives are well thought out with assumptions well debated and has a range of alternatives to consider before taking big steps.
The policy makers cannot rely indefinitely on crisis management, no matter how competent or capable they are. They must get ahead of events or risk being overtaken by them. That will only be possible by upgrading our legacy systems of government management to meet today's unique brand of accelerating and complex challenges. Let us be prepared for Volatility, Uncertainty, Complexity and Ambiguity.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.