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8^th of November last month completed 2^nd anniversary of demonetisation.

The most remarkable aspect about the policy decision of demonetisation was the sheer number of people it directly affected merely hours after the announcement. Based on this parameter only, it is among the biggest policy decisions in recent times taken by any government worldwide. There are few other examples anywhere in the world when a single policy decision taken by a government caused, within few hours of policy announcement, such large scale disruptions in the lives of close to 17% of world population. This fact alone makes demonetisation one of the most important monetary events in recent global history.

During the last two years, demonetisation has been analysed and commented upon continuously by a number of researchers and commentators. Why exactly did this Modi government take the action, whether the reason was economic or political, did it succeed in fulfilling its objective and how, or did it fail and why, how did it affect the economy, what are the after effects, was it a legal action, was it an ethical action, could it have been implemented better, what was the role of Reserve Bank of India – all of these aspects, and some others as well, have been analysed in great details.

This is not much different from other government policies, almost all of which are also analysed, maybe not in such great depth but they are. These types of analyses which take place after the event has occurred are known as ex post analysis. These analyses try to find out if policies are serving their purpose, if there are any weaknesses, can they be improved and how, etc. The usefulness of such ex post analyses lies in the fact that learnings from these can be used to make necessary changes to correct the weakness of a policy or to improve its design or implementation.

Demonetisation, however, was different from other normal government policies in the sense that it was a one-step event, and once the decision was announced, there was very limited scope to do any analysis and use the learning for any course correction. Hence, the results of these analyses, such as was it a success or failure, or why was it a success or failure, etc., have no practical use for any course correction or improvement in the policy of demonetisation.

Because of un-usability of ex post analysis in cases of one step decisions like demonetisation, another type of analysis, known as ex ante analysis, is required. Ex ante analyses refer to those which are carried out before the event has taken place. The basic difference between ex ante and ex post is that the latter is based on some evidence or information generated after the event has taken place; whereas, the former is more about estimation and prediction. Ex ante analysis requires answering the questions such as should this action be taken, what are potential benefits, what are the potential costs, what kinds of preparations are required, are there any unaccounted concerns, and so on. In essence, it is the ex ante analysis which determines whether a particular decision will be taken or not, and if yes, how it will be implemented.

While, ex ante analysis is also required and done in cases of multistep events, in cases of single step decisions, which don’t have possibility any course correction, it becomes absolutely crucial. And in cases like demonetisation, which are relatively untested, which can directly impact the lives of 1.3 billion people and where the potential costs can be enormously high, as evident by the subsequent economic disruption, loss of jobs, and even cases of death, the importance of ex ante analysis cannot be emphasised enough.

However, even after two years, all the analyses of demonetisation that are available publically are only ex post, and there is absolutely no concrete idea as in what kind of ex ante analysis was carried out which convinced the decision makers in the government that the policy of demonetisation should be implemented.

The only information available in this regard is the statement made by former RBI governor Raghu Ram Rajan, who disclosed that in a meeting with government officials he had made the argument verbally why demonetisation should not be done, and RBI has also prepared a note in this regard for the government. However, his verbal argument and the RBI note are the argument against demonetisation, there is no information available publicly that what kind of analysis and evidences supported the move of demonetisation.

Given the fact that government spokespersons have to clarify even after two years what was the objective of demonetisation, the choice of new indicators to prove its success, the unpreparedness to deal with the chaos that followed, and the numerous new notifications on almost daily basis – all these point to the fact that whatever ex ante analysis was done, it was severely inadequate. Even a preliminary analysis should have been able to point out issues like only about 5-6% of black money is in cash and rest is kept in other instruments like real estate, jewellery, etc., changing the size of notes will delay the re-monetisation process, and the corrupts will find ways to replace the money, as it happened.

And in this regard, demonetisation was and still is a remarkable success like few others – in highlighting how governments should NOT make policies.

A good government policy must have at least -

-A clearly spelled out objective

-A technically sound analysis listing pros and cons

-A plan for implementation

-A plan to deal with unaccounted issues

When a government makes policies without incorporating above aspects, such policies are closer to being gambling than policy making. They can succeed but they can also fail. In absence of the ex ante analysis or in case of an inadequate analysis, demonetisation seems more like a gamble than a policy decision of a responsible government.

If governments (centre, states, as well as municipalities and gram panchayats) learn this lesson and start making policy decisions with clear objective, in depth ex ante analysis, detailed plan for implementation, and plan for dealing with unaccounted issues – this will be the most important success of demonetisation.

The views expressed in this piece are those of the author, and do not necessarily reflect the position of CBGA. You can reach Suraj Jaiswal at suraj@cbgaindia.org.