In
recent times, the current Indian PM seems to have become a proxy for the state
for both his supporters and detractors. While such a simplification might be
useful for the rhetoric used by both the sides, it does little to hide the fact
that despite being used often, the concept of the ‘state' remains nebulous in
India. When negotiating compensation for acquired land, PSU officials (even
those from private firms in some instances) are presumed to be state actors.
While on the other hand, our movies have been telling us for years that the
ineffectiveness of our police is down to the ‘system’ (a common pseudonym for
the state) being flawed, implying that the police is somehow separate from the
state.
The
many discussions on what the state is, its constituent elements and the many
forces and counter-forces within it, can at times obfuscate the reality of the
Indian state being very weak. The limitations of state capacity are apparent in
its inability to ensure that teachers turn up at government schools and that
doctors are present at health care centers. The state struggles to provide
basic amenities like roads and electricity despite spending huge amounts of
money on grandiose projects. This sorry state of affairs in the country has far
too often been blamed on the lack of willingness of behalf of the state. But as
I have argued before (refer On
Tolerance: Intention and Verification), assuming mal-intent where
ineptitude is more obvious is more an indulgence for our love of gossip than an
exercise of our logical faculties.
If
the state lacks the capacity to implement, what good are policies, irrespective
of the intent behind them. This creates a conundrum for a government
democratically elected on the promises of better governance and crackdown
against corruption. Corruption is endemic due to poor governance structures and
governance is poor due to corruption. A vicious circle ensues, which
(even if the government has good intentions) is almost impossible to break. In
this vacuum of policy options before the government, enter demonetization.
Fiat
currency works purely on trust. I accept a Rs. 100 note because I am certain
that when I give it to someone else, he/she too will accept and value it at Rs.
100. The problems of counterfeiting aside, this system of trust works because
the state (central bank) provides a guarantee that even if no one else honors a
currency note, the central bank will. Therefore, if the state revokes this
guarantee for some currency denominations, the trust that underpins its
acceptance breaks down. Therefore demonetization offers a the government with a
policy alternative which does not rely on the state’s enforcement capacity. The
act of announcing the strategy (withdrawing the central bank guarantee) ensures
that it will be enforced (at least in the medium run).
Does any of this
imply that demonetization is a good policy initiative? No, it does not, that’s
an empirical question. This article merely offers a view on how this could be
one of the few enforceable/implementable policy decisions that are available to
a weak state. As for whether it will achieve its stated goals, or if it will
cause more harm than good, that is a discussion for another day.
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