The Stroke of Midnight

The Stroke of Midnight

K.M. Chandrasekhar

K.M. Chandrasekhar

Prime Minister Modi obviously has a fixation with the stroke of midnight. Probably he is impressed with Nehru’’s classic speech at midnight of 14-15 August when he said, “ At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom.” When India awoke, the world changed. A new breath of freedom swept across the globe, toppling colonial regimes one after the other. The Gandhian philosophy of adherence to non-violence and truth electrified many leaders, ranging from Nelson Mandela to Martin Luther King. Democracy became the political institution of choice. The Constitution became the instrument to secure the rights of people. Equality of all and non-discrimination between sections of society became widely accepted. Leadership became key to creating conditions of stability and steady, inclusive growth and the breakdown of societal barriers. Midnight on that historic date did indeed signify a “tryst with destiny”, which still continues, overcoming numerous speed breakers on the way.

It was on 8th November 2018, that Modi made a midnight strike, that of demonetising 86% of the currency in circulation in India. The Finance Ministry’s Chief Economic Adviser of the day struggled valiantly in those early days, to validate the measure but later called it a “massive, draconian, monetary shock" and hinted he was not consulted. It did not significantly result in the destruction of black money, as Modi fondly anticipated. All the notes eventually came back into the Reserve Bank of India. New methods of corruption were created as the conversion of the demonetised notes itself provided opportunities for underhand business. Worse, it brought trade to a virtual standstill as shopkeepers struggled to run their business with only 14% of currency being available as legal tender.The informal sector in India received a body blow from which it is yet to recover. According to the ILO publication,”Women and Men in the Informal Economy – A Statistical Picture (Third edition),2018”, the informal sector accounted for 81% of the employment in India. The informal sector ran on cash and, in the absence of cash, it crumbled and broke. The journey downhill of the Indian economy is widely acknowledged as having started with that ill-conceived “surgical strike”, a journey that has not yet ended and has been dealt a further devastating blow by Covid 19.

Earlier, Modi had chosen the hour of midnight of June 30, 2017 to declare the commencement of the Goods and Services Tax. The introduction of GST cannot be considered to have been an impulsive act. This was a tax that had been in the works for many years, even decades, evolving from MODVAT and State VAT to CENVAT to VAT and Service Tax and, finally, to GST. Much thinking and much discussion had gone into its making. Above all, the tax was introduced after detailed consultation with State Governments. State Finance Ministers had been meeting in council for years. The new tax would be administered by a GST Council, the most complete and effective form of cooperative federalism that has ever been introduced in India. It involved fundamental changes, taking away the power of States to levy taxes on most commodities, integrating Central excise duties with State sales taxes, creating a new method of taxation on inter-State sales and, above all, making taxation destination based rather than origin based.The implementation was not flawless; the pitfalls were many.

As the Economic Times reported on September 30, 2019, “ Twenty seven months after India’s biggest and boldest tax reform hit the ground, the challenges have spread from the discontentment of small traders to more systemic issues— slow growth of GST collections, the emergence of nation-wide fake invoices racket and the failure to reach a consensus on rationalisation of rates and the inclusion of items such as petroleum products and electricity in the GST’s ambit.” One major issue that troubled everyone was the inability of the digital platform to take and process so many transactions all at once. There were conceptual issues and the GST Council had to meet repeatedly to resolve the problems that arose and those that could not be anticipated. There are some who believe that too much haste was shown in pushing through the reform. There are others who say that India is anyway a “last minute” country and that even if the introduction of GST had been delayed by another couple of years, the country would still have been in the same state of under preparation. At the end of the day, the fact remains that there has never been an act of integration so profound since the formation of the Union of India in the early years after Independence.

The third midnight strike took place earlier this week on March 24, when the Prime Minister announced a total lockdown of the country to arrest the spread of COVID 19 after a dress rehearsal in the form of a Janta Curfew on Sunday, the 22nd. In a way, his hand was forced because, like the WHO and other countries, India has been behind the curve in dealing with this virus. In hindsight, we can say that we should have introduced international travel curbs earlier, reduced social interaction months ago by cancelling international conferences, preventing people from participating in events abroad, reducing social interaction. The fault lies here with the WHO, which should have gone into global control mode much earlier even as the epidemic raged in China. The WHO had burnt its fingers and diminished its capacity to get countries to swing into action when they exaggerated the impact of swine flu, H1N1. This time they erred too much on the side of caution with the result that the world was totally unprepared when the epidemic, now a pandemic, had established its footprint in many countries, growing in intensity by leaps and bounds and taking an immense toll of lives.

The Prime Minister had no choice. He had to play for time to flatten the curve of expansion of the epidemic as best as India could, to enable quick enhancement and strengthening of health care facilities, to pray that a drug already in use and approved by drug control authorities, like hydroxyl chloroquine, would miraculously save the situation and give the country time to build up stocks of this medicine, to hope that rapid testing facilities would be set up in sufficient volumes to take care of our massive population and that medical research would find solutions where none exist at present. The country recognised the gravity of the situation and largely responded positively.

The impact on the economy and the people, particularly the poor, was catastrophic. The Finance Minister announced a slew of measures, called the Prime Minister Garib Kalyan Yojana, to mitigate the sufferings of the power. It would have had a greater impact if it had been announced immediately after the PM’s speech, but it got enmeshed in the deliberations of a multi- layered committee, which she mentioned when she announced certain measures to relax regulatory requirements earlier in the week. Some of the measures announced in the Yojana, like direct benefit transfer, would benefit some sections of the badly hit, like farmers and those who have bank accounts under the Jan Dhan Yojana if they are quickly implemented. Other measures, like raising MNREGA wages marginally or increasing the quantum of loans without collateral, will take effect only in time and after the lockdown period is over. I get the feeling that this is only a first step and that not enough has been done. This does not also give any support to those who most need succour, the migrant labourers who know not where to hide themselves in cities, who are compelled to walk hundreds of miles to their native villages with no food, no money and those without an identity, living in anonymity in cities and towns.This is no time to indulge in Brahmanical parsimony. We have to open our purse strings wide for the benefit of our very poor.

The statement of the RBI Governor this morning was far more impressive. While making no attempt to sugar coat the bitterness of the pill that India has perforce to swallow, the measures announced by him such as a steep cut in repo rates, an even steeper cut in reverse repo rates to encourage banks to lend money rather than resort to parking in the RBI, cut in Cash Reserve Ratio and other measures to expand liquidity means that almost ₹ 4 lakh crore will enter the system. The moratorium on term loans, deferment of interest on working capital loans, and much needed short term changes in asset classification have breathed new life into a flagging banking sector.

The RBI Governor has laid the groundwork. Money will flow but there have to be takers for the money. This requires a strong fiscal stimulus to push up aggregate demand. The need for fiscal action was alluded to more than once by the Governor. The ball, therefore, passes back to the Government’s court. I sincerely hope the Government hears loud and clear the message resounding through all responsible economic circles in India that this is not the time to quibble over fiscal deficit figures, that this is the time for bold action to restore confidence and growth. Fiscal action will not, of course, have an immediate effect since consumption is not likely to grow in a locked down economy. Yet announcement of strong and bold fiscal measures, aimed at stimulating demand, will reassure jittery markets, create the foundation for resolute and adventurous action by business when the economy is open again. It will dispel the pall of gloom that has settled over business sentiment in the last few months, intensified immeasurably by Covid 19.

One last word before I conclude. The Government of India must shed the notion that they can do everything. In this battle against the economic pandemonium created by the virus, the States have to be the front runners. The capacity of the States both to mitigate the travails of the poor and to create new income earning opportunities for the unemployed is much larger and more direct than anything that can be achieved by the Centre. Direct fund transfers to the States by the Centre and substantially raising their borrowing capacity by liberally raising their borrowing limits can enable the States to make a decisive impact. The States, too, must act fast, not get lost in schemes that require a long lead time, not get lost in procedures. The money must reach the beneficiaries fast, it must enter quickly the consumption-production-investment cycle.

Can we overcome the lethargy of the last two years at least now when Covid 19 has made us sit up and take note of our follies and failings?


The facts and views expressed in the article are those of the writer.