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Analysis

Demonetisation’s short-term costs were high, long-term benefit doubtful

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Raghuram Rajan

When Raghuram Rajan, former governor of the Reserve Bank of India (RBI), cautioned the government against demonetisation, saying short-term economic costs would outweigh long-term benefits, he was not trying to be prophetic. But a year after Prime Minister Narendra Modi made that fateful announcement in a nationwide broadcast on the evening of November 8, it would seem Rajan’s words had actually become so.

As economists and analysts, corporate honchos and statisticians struggle to gauge the beneficial impact of demonetisation, many of the objectives claimed by the government have fallen by the wayside. New claims and afterthoughts on the note ban by senior politicians in power have remained unconvincing. Demonetisation has raised more questions than it has answered.

The Prime Minister, in banning 1,000 and 500-rupee notes — or 86 per cent of total currency in circulation — had indicated that the decision would help remove black money from the system, rein in terrorism and take fake currency out of circulation. Have these objectives been met?

“Demonetisation was an utter failure. Theoretically it was known it cannot be successful. It could not remove black money, but in turn it has damaged the white economy and growth,” Arun Kumar, former professor of economics at the Jawaharlal Nehru University (JNU) told IANS.

The benefits of the decision are yet to percolate to the economy, but the disruption as well as pain that it caused to hundreds of millions was very real, whose lingering effects are seen to this day and, which, at that time, had shaken the country to its core, touching nearly every citizen and visitor.

The overnight serpentine queues for weeks in front of banks, the loss of over a hundred lives in the effort to withdraw one’s own money or change it, and the desperate desire to ensure that cash in hand did not turn to ash took its toll across the country. Was it worth it?

“The government made the elementary mistake of believing that black money is kept in cash. Black wealth can be transacted by non-cash means as well,” said Kumar, who is now Chair-Professor with the Institute of Social Sciences. “Only three per cent of Indians generate substantial black money. But for this, the other 97 per cent had to face the consequences of demonetisation.”

After months of vacillating, and being less than honest with citizens, RBI data in August 2017 said that 99 per cent of the banned currency in high denomination notes had returned to the banking system — Rs 15.28 lakh crore out of the Rs 15.44 lakh crore in circulation on November 8, 2016. The calculation does not take into account the money changed by people in Nepal, where it’s legal tender, or old notes held by many non-resident Indians who could not exchange it within the deadline.

“Indian demonetisation was remarkable, because unlike many countries that faced major economic and political problems after even less drastic measures, this passed off peacefully as most Indians accepted the (wrong) argument that this would end corruption,” Jayati Ghosh, Economics Professor at JNU, told IANS.

“The initial reasons the government had advanced for this move, of reducing terrorism and eliminating both black money and corruption, were rapidly abandoned for other supposed goals, which are also yet to be met. There was no planning before unleashing such a big decision,” she added.

The difficulty in making a cost-benefit analysis is that the move was not purely economic, given the fact that the currency issuer — the RBI — had no role in the decision, as testified by Rajan.

Demonetisation comes across more as a measure of political economy which may appear, on the face of it, to have paid immediate political dividend to the Prime Minister and his party in the Uttar Pradesh elections this year. But the medium-to long-term picture would take a while to clear up, though short-term impact has already taken its toll on growth.

At the end of May, the Central Statistics Office announced that the GDP during the fourth quarter ending in March this year, fell sharply to 6.1 per cent from seven per cent in the previous quarter, while growth for the year as a whole was also expected to decline correspondingly. India’s GDP during the past fiscal grew at 7.1 per cent — at a rate lower than the eight per cent achieved in 2015-16. In terms of gross value added, which excludes taxes but includes subsidies, the growth came in even lower at 5.6 percent over 2015-16.

“Demonetisation is a textbook example of what happens when you remove liquidity that is the basis of transactions. The immediate result was that people didn’t have money even for small transactions. This had a strong negative multiplier effect, most evident in the informal sector,” Ghosh said.

“Cash is the means of transaction in the unorganised sector, which contributes 45 per cent to the GDP. The unorganised sector got hit by 60-80 per cent,” Kumar said, adding that the country went through a negative rate of growth in November-December 2016.

In October, the International Monetary Fund said in its latest World Economic Outlook that India’s economic growth for 2017 and 2018 would be slower than earlier projections. The report cited the “lingering impact” of demonetisation and the Goods and Services Tax (GST) for the expected slowdown, projecting a growth of 6.7 per cent in 2017 and 7.4 per cent in 2018 — 0.5 and 0.3 percentage points less, respectively, than earlier projections.

Ghosh said that the steps on demonetisation, taken together, “generated a perfect recipe for slowdown in the economy. In fact the slowdown is likely to be much sharper than estimated because the quick GDP estimates are based on formal economic activity, and the adverse impact on informal activities have not really been taken into account”.

Ranen Banerjee, Partner & Leader, Public Finance and Economics, at PricewaterhouseCoopers (PwC) feels the country was already cooling down when the note ban came in, and it would take some time to evaluate its impact on the macro economy. “About three to four quarters prior to demonetisation growth rates were already on a sliding path. It could well be that the economy was cooling down and the trend has continued. Attributing the slowdown solely on demonetisation is not possible as we do not have sufficient data points,” Banerjee told IANS.

Economist Dipankar Dasgupta, former professor of economics at the Indian Statistical Institute, said that although GDP in India is not calculated in a very comprehensive manner, the trend growth rate continued to be “pretty robust”. However, despite the claim by the government of ending corruption through demonetisation, “day-to-day bribes are still being taken through cash”, Dasgupta told IANS.

The objectives of dealing a blow to militancy and curbing fake money too seems not to have been met, as can be seen in Jammu and Kashmir, where, ironically, more incidents of militancy have been seen after demonetisation. “Logistics like shelter, passage and cash are mostly routed through over-ground workers and sympathisers of militants and those who could arrange high value notes in the previous system are doing so at present as well”, a senior intelligence officer told IANS in Srinagar on condition of anonymity.

Similarly, about fake currency, officials said the notes carried by militants from across the border were sophisticated copies and those who made them earlier could easily make fakes of the new currencies.

Perhaps there has been some beneficial fallout on the digital economy. Industry stakeholders feel that though the note-ban drive gave the necessary impetus to citizens to start adopting online payment platforms, a lot needs to be done by both the government and the industry to make it a success.

But was the country-wide upheaval worth it to make people adopt more digital transactions? No jury would need to deliberate for long on such a question.

 

(Aparajita Gupta can be contacted at [email protected])

(Editors: The above article is the last one in the series on demonetisation leading up to November 8)

Analysis

Blow to BJP ahead of 2019 Lok Sabha polls – News Analysis

In the first instance of a party getting majority on its own in 30 years, BJP won 282 seats in Lok Sabha in 2014. The BJP-led NDA had won 336 seats out of 543.

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Congress workers Karnataka civic polls

The results in the Hindi heartland states of Madhya Pradesh, Chhattisgarh and Rajasthan came as a major shock for the Bharatiya Janata Party (BJP), which has won all the major states barring Delhi, Bihar, Punjab and Karnataka in elections held after the sweeping 2014 Lok Sabha victory.

The BJP was routed in Chhattisgarh and defeated in Rajasthan and Madhya Pradesh in closely-fought contests. The party mostly banked on the image of Chief Ministers Raman Singh, Shivraj Singh Chouhan to lift the party’s fortunes.

In Rajasthan, where opinion polls had written off the BJP, Prime Minister Narendra Modi and party chief Amit Shah put in extra efforts, besides banking on the hardcore Hindutva image of Uttar Pradesh Chief Minister Yogi Adityanath, to take the battle to the Congress, but still lost.

The BJP, however, managed to open its account in Mizoram, where the Mizo National Front (MNF) ousted the ruling Congress partty, but saw its numbers fall from five to one in Telangana, where the Telangana Rashtra Samithi swept the polls.

The results of these five states, which were dubbed the semifinals ahead of the next general elections in April-May 2019, could be a factor in the battle between the BJP-led National Democratic Alliance (NDA) and the Congress-led opposition.

The major issues raked up by Congress, specially the farm loan waiver amid an agrarian crisis across the country, employment and anger among upper caste, seems to have worked in its favour and could haunt the ruling dispensation if remedial measures are not taken.

The BJP is not ready, however, to accept the defeat as a referendum on the Modi government.

Union Finance Minister Arun Jaitley said issues in state elections are entirely different. The BJP won Madhya Pradesh, Rajasthan and Chhattisgarh in 2003 but lost the Lok sabha elections next year, he pointed out.

The general elections in 2019, he added, would be fought around Modi’s performance, with people voting for a tried and tested leadership instead of a non-ideological opposition coalition which is bound to collapse sooner than later.

The Congress, which had a disastrous performance in the 2014 Lok Sabha elections and suffered successive defeats in various Assembly elections, smiled for the first time after defeating the BJP in a direct contest in the three crucial states in north India.

Party president Rahul Gandhi, who campaigned vigorously, said the Assembly election results were a referendum on Prime Minister Narendra Modi’s non-performance on issues of unemployment, agrarian distress, corruption and negating the ill-effects of demonetisation.

Out of total 678 Assembly seats in the five states in the current round of elections, the Congress has won close to 300 seats while the BJP managed to win over 200 seats. In the 2013 Assembly polls, the BJP had won 377 seats in Madhya Pradesh, Rajasthan, Chhattisgarh and Mizoram while the Congress had won only 122 seats in these states.

In the 2014 Lok Sabha polls, the BJP had won 62 out of total 83 Lok Sabha constituencies of Madhya Pradesh, Rajasthan, Chhattisgarh, Telangana and Mizoram. Now the three Hindi heartland states will be ruled by Congress and the its impact would definitely be felt in the 2019 Lok Sabha polls.

In the first instance of a party getting majority on its own in 30 years, BJP won 282 seats in Lok Sabha in 2014. The BJP-led NDA had won 336 seats out of 543.

Its allies include the Shiv Sena, which has been on the war path for a while. Similarly, N. Chandrababu Naidu’s Telugu Desam Party (TDP) and Upendra Kushwaha’s Rashtriya Lok Samata Party (RLSP) have walked out of the NDA.

Since 2014, BJP has managed to retain just six Lok Sabha seats in by-polls. It won Lakhimpur in Assam, Shahdol in Madhya Pradesh, Beed and Palghar in Maharashtra, Vadodara in Gujarat and Shimoga in Karnataka.

In the last four years, the party has lost Lok Sabha by polls in Ratlam in Madhya Pradesh, Gurdaspur in Punjab, Alwar and Ajmer in Rajasthan, Kairana, Phulpur and Gorakhpur in Uttar Pradesh, Bhandara-Gondiya in Maharashtra and Bellary and Mandya constituencies in Karnataka.

The BJP, however, maintained the verdict was a mandate against the state governments and not against the Modi government.

“The results in five states clearly show there is no uniform trend across the country and local factors determined the outcome in each state. This is evident from the fact that even Congress suffered massive defeats in Mizoram and Telangana.

“Despite 15 years of anti-incumbancy in Madhya Pradesh, the BJP has put up a fight in Madhya Pradesh and has a major comeback in Rajasthan. The BJP’s and Congress’ vote share in both the states in Mandhya Pradesh and Rajasthan is almost tied which clearly show that the BJP has the potential to comeback with big victories in 2019 Lok Sabha polls,” BJP Spokeperson G.V. L. Narsimha Rao told IANS.

He also said whenever Congress has tied up with a regional party, it cost them votes.

(Brajendra Nath Singh can be contacted at [email protected])

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Analysis

Election losses in Hindi heartland worry BJP in UP

Is a question that is haunting many in the BJP. For a party that stormed to power after 16 years of political exile, the stunning 2017 Assembly victory is beginning to look like history.

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Modi Shah

Lucknow, Dec 12 : With three major states in the Hindi heartland slipping out of its hands, the Bharatiya Janata Party (BJP) is worried in Uttar Pradesh where even party insiders complain about poor governance and growing lawlessness.

“What if this repeats here too?” is a question that is haunting many in the BJP. For a party that stormed to power after 16 years of political exile, the stunning 2017 Assembly victory is beginning to look like history.

Barely a year-and-a-half later, the popularity ratings of the state government, specially Chief Minister Yogi Adityanath, are worryingly down.

Many of his decisions, like renaming Faizabad to Ayodhya and Allahabad to Prayagraj and his use of acidic language, have soured his appeal, even among BJP supporters. BJP’s allies too are openly speaking against the way the state is run.

“There is a lot of corruption all round. Officials are not even listening to the Chief Minister’s directives,” said Om Prakash Rajbhar, who heads BJP ally Suheldev Bharatiya Samaj Party (SBSP) and is a cabinet Minister.

A perpetual rebel who has often broken ranks with the ruling party, Rajbhar’s disillusionment, unlike that of others, is out in the open.

There are, however, many senior Ministers in the ruling party who complain in private over what they feel is the poor and lacklustre performance of the BJP government.

“The government is directionless and has failed to inspire confidence,” says a party veteran who taunts the party leadership for not meeting the people’s aspirations.

“We are bogged down by a haughty bureaucracy which refuses to fall in line. As a result, our party workers and supporters are disgruntled,” he added.

A BJP General Secretary is accused by a Minister of trying to corner major tenders in irrigation and PWD departments. The Minister moaned that party leaders failed to understand the public mood.

Samajwadi Party spokesperson Abdul Hafiz Gandhi for once agrees with the BJP leaders’ assessment and points out that except for “hatred and rumour mongering”, the BJP government has failed to achieve anything in one-and-a-half years.

Lawlessness, he adds, continues in the state. And despite lofty claims and reckless police “encounters”, in which critics say many innocents have died, criminals continue to have a free run.

An Apple executive was shot dead by a policeman in cold blood. And now a police officer too was shot dead during mob violence in Bulandshahr. Many children have died in poorly-managed state-run hospitals.

“So what has changed?” asks a senior BJP leader, speaking on the condition of anonymity.

Former Minister and Pragatisheel Samajwadi Party (PSP) President Shivpal Yadav says the government was not only anti-farmer but was also fanning communal passions which he says was not in the interest of the state.

The BJP’s defeats in Rajasthan, Madhya Pradesh and Chhattisgarh show that the time for the BJP and Prime Minister Narendra Modi was “fast running out”, he added.

Another Minister, also not wishing to be named, told IANS that after initial bravado Adityanath had failed to control the bureaucracy and was dependent on a small coterie of officers.

He pointed out how while the previous Samajwadi Party regime made giant strides in infrastructure, the present one had not been able to deliver results.

“The 308-km Agra-Lucknow Expressway was built from scratch in 18 months flat. We have not been able to even start the Poorvanchal Expressway,” he rued.

The coming together of bitter rivals Samajwadi Party and the Bahujan Samaj Party (BSP) for the 2019 Lok Sabha polls is also sending the saffron camp into jitters.

(Mohit Dubey can be contacted at [email protected])

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Analysis

Column: “Sadak, bijli, paani”: Basic, yet game-changing – Behind Infra Lines

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wefornews-post-image

Given the varied use of government spending, the question remains on how important it is to focus on the “basic” infrastructure services such as roads, electricity and water — the classic troika of “sadak-bijli-paani”.

Essentially, “basic” infrastructure such as roads, water and electricity are critical drivers of economic growth. Creating the “basic” backbone infrastructure not only delivers value through the usage of the asset or service but, inter alia, offers even greater value through the ecosystem that can be built around the core assets.

A recent tweet by Vinayak Chatterjee, Chairman, Feedback Infra Group, illustrates an example of the value-creation through building “basic” infrastructure: “As per Power Ministry, 15 states now have 100% household electrification. Likely consequences are also emerging like increased sales of electrical appliances.” It drives home the point that electrification infrastructure has a critical impact on creating value through multiplier effects on the economy, boosting demand for goods and services down the consumption chain.

For all the talk of FMCG companies accessing rural markets, consumer durable companies would do well to pay more attention to the infrastructure creation trends in the economy. For example, increased electrification creates entirely new markets for electronic goods-focused consumer durables companies.

However, the creation of a new market is not limited only to the product being sold. Given the relatively higher ticket-value nature of consumer durables, there is a new market for lending businesses as well. This opportunity in the lending space is to finance some part of the consumption trend. This opportunity is applicable mainly to well-entrenched incumbent lending institutions looking for the next phase of growth.

For instance, there might be a Non-Banking Financial Company (NBFC) with a significant business in financing the two-wheeler market in and around the areas seeing increased electrification. The increased electrification trend allows the NBFC to now access a substantial component of existing customers for a new product line of consumer durables. Thereby, the NBFC can deliver value to its stakeholders by building on an existing distribution network and credit information repository.

Additionally, there is a business opportunity for the logistics sector as well. A new market in consumer durables creates the need for transportation, storage and distribution of products in new areas. The above is an example of how “basic” infrastructure creation creates positive multiplier effects throughout the economy. Most importantly, new industries are established, and existing industries can expand into new areas thereby creating jobs and facilitating investments.

For investors focused on India, both in the private and public markets, current trends such as increased electrification create investment opportunities. For example, more electrification begs an important question: Which segment of the supply chain does the investor want to invest in to generate investment returns?

Do investors want to invest in consumer durable companies that can tap into new markets? Do they want to invest in financial firms that can benefit through funding of the consumption? Or do they want to invest in the logistics needed to create the new supply chain? Regarding direct versus non-direct investments, investors have a choice of directly investing in logistics real estate versus investing in publicly-listed companies that have significant exposure to the new markets. The single biggest takeaway is that the creation of “basic” infrastructure creates investment opportunities for all types of investors across the spectrum.

It is also important to note that besides the creation of new infrastructure, significant value creation is possible through improving the quality and maintenance of existing “basic” infrastructure. While new projects tend to grab most of the headlines, gradual quality improvements and effective maintenance of infrastructure is value-additive as well.

In summary, the creation of “basic” infrastructure delivers value on many fronts. Crowding in private capital, job creation, a higher standard of living, access to basic amenities and expansion of business opportunities are some of the obvious advantages that come to mind. Going forward, both central and state governments would do well to build and improve the “backbone” infrastructure.

(Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. Views expressed are personal. He can be contacted at [email protected] or @Taponeel on Twitter)

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