Lessons from yesterday…. applying it for tomorrow

Reported by: |Updated: February 2, 2017

There have been several mishaps pertaining to demonetization. The protests have been even louder. PM, FM and other government representatives have outlined and emphasized the advantages and benefits of demonetization. I am proposing to look at the larger picture.

The undisputable objective is rapid equitable economic growth. In the past, several attempts have been made towards this objective. One of the earliest objectives was the nationalization of banks. These nationalized banks were pressed to extend their services to the rural and the unbanked areas. They did it to a reasonable extent. However, the exercise had a less than desirable level of impact. Other similar approaches were to set up RRBs, to expand the cooperative banking sector, to bring in more private sector banks, etc. Let us call this Attempt No. 1.Another notable attempt was the green revolution, where farmers’ access to fertilizers and seeds was improved. This succeeded to a large extent. Let us call this Attempt No. 2.

Started in 2006, MGNREGA has been a very successful project to generate employment for the poor. Let us call this Attempt No. 3.

In order to provide critical food and non-food items at cheaper rates to the poor, the Public Distribution System (PDS) was set up in 1951. It has a network of about 5 lakh outlets. Its effectiveness was always lower than desired, the key reasons being wastage, pilferage, malpractices, etc. The government is now looking at alternative approaches such as food stamps and direct benefits transfer. Let us call this Attempt No. 4.

A fifth approach was demonetization. Let us call this Attempt No. 5.

There have been several other attempts, but I started analyzing these attempts and their results to see if there are any patterns.

One observation I have is that the lesser the layers between the target people and the government, the more impactful is that system. Thus, PDS and bank nationalization had a much lesser impact in comparison with MNREGA and demonetization, which had a much larger impact.

Another observation is that subsidies tend to be less impactful than upliftment. PDS was far less effective compared to green revolution and MGNREGA.A third observation is that creating new government organizations and infrastructure is less effective than leveraging what exists, as seen from PDS vs MGNREGA and green revolution.

An interesting point is to compare nationalization and demonetization, both pertaining to the banking sector. The first pushed the banks towards the customers and the second pushed the customers towards the banks. The contrast in the results is amazing.

A more detailed comparison would yield even more meaningful insight that would enable policy makers and decision makers to come up with smarter policies and projects for 2017.

The Banking Frontiers team wishes all our readers an exciting and joyful new year.