View: Narendra Modi takes a great leap backwards. Mao would approve

In 1958, Chairman Mao ordered that that all sparrows over China should be put to death. It was hailed as a necessary step by a strong leader.Farmers were suffering because sparrows tended to eat their grain seeds. Thus began The Great Sparrow Campaign. A countless number of sparrows were indeed wiped out -but there were unintended consequences. Sparrows ate locusts, and once the balance in the ecosystem changed, locusts proliferated and destroyed China's crops. There was famine, hunger, starvation: no less than 45 million people died in the three years following Mao's orders.At the start, Mao exhorted them to bear with the inconvenience. But then the pain piled up. 

Mao's infamous Great Leap Forward included plenty of edicts besides the death warrant to sparrows.They all stemmed from the delusion that the leader of a country could redesign an entire society to conform to a master plan. The 20th century is full of cautionary tales that warn against such delusion, such as the communism of Mao and Stalin, and the fascism of Hitler.Yet, we do not learn. 

Narendra Modi's demonetisation of old 1000 and 500 rupee notes is one such folly, a blunder in every imaginable way. It doesn't achieve its intended purpose. And its unintended consequences could devastate the lives of the poor, and cripple our economy . 

Modi claims that this move is an attack against black money and corruption. This is not true, and here are four reasons why. One, as per a recent estimate, only 6% of black money is kept in the form of cash.Two, new 2000 and 500 rupee notes are on the way , and a black market for conversion from old to new is already thriving. Three, as various economists have pointed out, this attacks the stock and not the flow of black money . To strike at black money and corruption, you need to strike at their root causes. 

Corruption and black money are a consequence of big government, of one set of individuals having discretionary powers over the actions of others. If Modi was serious about tackling black money, he'd bring about institutional changes that would take us towards the minimum government he had promised in his 2014 campaign. Instead, government keeps getting bigger, controlling more and more of our lives. More government = more corruption. 

The fourth and most compelling reason is this: these aren't really high-denomination notes. Modi has probably not bought anything from a store in 15 years, so he imagines that the poor do not use these notes. Well, consider that the last time demonetisation took place in 1978, a 1,000 rupee note, in terms of purchasing power, could buy goods worth Rs 12,000 today . Rich people did hoard their black money with it, but the poor did not use them. A 500 rupee note today , by contrast, is the equivalent of a 50 rupee note in 1978. These notes constitute 85% of the money in circulation, as opposed to 0.6 in 1978. Over 90% of the transactions in India are cash transactions, and more than 90% of the cash in India is not black money . 

This is why the consequences of Modi's move are so severe. According to an RBI note from March this year, only 53% of Indians have bank accounts. How do you think the other 600 million store their savings? Over 300 million people have no government ID, and there are crores of people stuck without a way to convert their hard-earned cash. Even if they did have accounts, there are reports that the government will take six months to print enough replacement notes. Every day the death toll goes up, but rural suffering and anger cannot be captured by bare numbers. 

Apart from all the individual suffering, our economy is being eviscerated. Cash is integral to most of the economy . Farmers are unable to sell perishable produce, to buy grains for the new harvest or to pay labourers. Transporters are unable to transport goods across distances. Commerce has shut down in many places, with small businesses going bust. In some places, the barter system is back, as if we've gone centuries back in time. 

Even if implementation was perfect, this would be a historic blunder because social engineering never works, and carries moral costs because of its unintended consequences. When people have to queue up to withdraw their own money , on which limits are placed, it is an attack on property rights that is more out of the Communist handbook than any right-wing philosophy . Indeed, Burkean conservatives and Hayekian libertarians alike would be aghast at Modi's actions, as he propels India towards the Soviet Union so admired by Nehru, with its state oppression, artificial shortages and infamous queues. But Chairman Mao would approve.