8th November 2016 will be remembered in economic History as a day when a 2.6 Trillion Dollar economy, that ranks 6th in the world comprising 4.6 percent of the world economy was churned out. Demonetisation has been one of the twin jerks, the country faced after the Modi govt came to power. The other jerk is of course GST. Now that the RBI has admitted that 99.3% of all demonetised notes came back to the banking system (not counting what remains in Nepal and Bhutan), it is fairly clear that demonetisation was a flop in economic terms.The Economic Survey for 2016-17 estimated the loss in economic output arising from Demonetisation to be nearly 0.25 to 1 percentage of the GDP. GDP growth rate slowed from 8% in 2015-16 to 7.1% in 2016-17 to 6.7% in 2017-18.
There are people who argue that growth lost steam for reasons other than demonetisation, such as introduction of GST in July 2017 and the twin balancesheet problem depressing investment in the economy. Since banks refused to lend, under pressure of their burden of bad debt, and large companies, squashed under unserviceable loans, hardly started any large project. Even though allocation of blame for deceleration to individual factors is not easy, although the Survey made its claim after some statistical exertions. Who is the villain?
1) Demonetisation?
2) Gst implementation?
3) Twin Balance Sheet problem ?
What is not hard to identify is the common thread running through all three — poor economic management.
Since GDP of both 2016-17 and 2017-18 were affected, take the average GDP for these two years. Output loss due to demonetisation is a little over Rs 1 lakh crore. The latest annual report of the RBI, for 2017-18, has two additional statistics that damn demonetisation.
One, household savings held in the form of currency shot up, from an average of 1.12% of Gross National Disposable Income (GNDI) in the pre-DeMo five years to 2.8% of GNDI in 2017-18. In other words, savings in the form of currency multiplied 2.5 times, far away from the less-cash result the government had hoped for.
Second is the increase in financial liabilities.
Small enterprises were the worst hit, and some of them presumably never recovered. It stands to reason that they would have had to borrow to sustain hard times. That would explain the rise in liabilities. The poor and the less well-off would have borne the brunt of it.
Demonetisation would never have hit illicit wealth held as real estate, shares, gold, silver and securities. Women hiding income from their men, to buy gold or in a health emergency were hit. Demonetisation hit such people hard, not the big fish.
What has been the gain from demonetisation? A big jump in the number of tax filers has been attributed to it. GST would have anyways increased the number of tax filers. GST creates multiple audit trails, leading to a big expansion in the base of direct tax. Digital payments rise when data networks become readily available and when the government removes hurdles to digital payments. These should be taken out of demonetisation gains.
What remains is the political impact.
The sudden slump in the stone pelting incidents in Kashmir was attributed to demonetisation. It was argued that the fake currency rackets running at the behest of the neighborhood took a hit due to demonetisation. The same rackets were claimed to be the biggest supplier of the funds for the stone pelters.
The slump in the naxal attacks and discoveries of huge debris of demonetised notes in the naxal belt jungles was an encouragement. But the party was over pretty soon, once these anti nationals were able to recalibrate their fake currency printers.
One biggest achievement of Demonetisation claimed by the government is the identification of the shell companies whose accounts are now under scrutiny by the agencies. But, this credit is more attributable to GST implementation and digital economy promotion.
Initially, demonetisation exercise made the PM a champion of the poor who takes on the filthy rich on their behalf, and invited them to participate in this epic battle of redemption by standing in endless lines in front of banks. The people of India though complained of the hardship they had to suffer on account of demonetisation praised the PM for his courage, in taking on the rich and the powerful, and accepted their suffering as a price worth paying for it. This expanded the BJP’s support base. The poor and the not-so-poor, in whose mind class antagonism can be stirred, turned supporters, even as sections of the petty-trader support base suddenly experienced an unexpected improvement. If demonetisation is seen to not have achieved the goal of slaying the black money demon, even while raising the debt burden of the poor and the middle classes, it would impact the ruling party’s popularity negatively. Hence the upcoming Annual report of the RBI may clear most of the air about demonetisation impacts.
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