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Damage done by demonetisation cannot be undone in hurry
By K R Sudhaman. Dated: 11/16/2017 11:12:30 PM
A year down the line, the economic growth has slipped by over two percentage points from 7.9 per cent growth in the first quarter of 2016-17 to 5.7 per cent in 2017-18. This has only proved that what former Prime Minister Manmohan Singh said in Parliamant about demonetisation that it was a "monumental mistake".
A year after demonetisation, economic pundits have spoken for and against the measure. Economists toeing the line of the ruling BJP have spoken in favour of it saying the measure was needed to cleanse the economy of black money and the ensuing digitisation will help in the long run to root out corruption, a major factor in generation of black money. But economists particularly those airing the opposition parties view say that it has only pushed down the economy and virtually crippled the informal sector that account for majority of economic activity largely dependent on cash economy.
But facts speak for itself. A year down the line, the economic growth has slipped by over two percentage points from 7.9 per cent growth in the first quarter of 2016-17 to 5.7 per cent in 2017-18. This has only proved that what former Prime Minister Manmohan Singh said in Parliamant about demonetisation that it was a "monumental mistake".
Be that as it may, demonetisation in economic theory is a good measure to curb black money as it is supposed to suck out the ill-gotten money stashed as cash. But in reality it never works as there are several imponderables. Any theory is based on certain assumptions and in reality those assumptions never hold good thereby such theories fail in practice. Also demonetisation could have dealt with only stock of black money held in the form of cash and certainly not those held in other forms. Also it could never tackled the flow for which several other measures are needed for political will was needed.
No smart black money hoarders will hold in cash knowing very well there is a greater risk of being detected. One of the most important factor for generation of black money is the Indian political system and political funding. This, no party wants to tackle. This also requires electoral, political, judicial and administrative reforms, which again will not be done as it would do away with vested interests.
The fact that 0.1 per cent of the 1.25 billion population hold 50 per cent of the wealth in the country goes to show that vested interests are deep-rooted and hence it is not going to be all that easy to eradicate black money by one ill conceived measure like demonetisation.
Politically this might have been a good move as Prime Minister Narendra Modi made the common man believe that the hardships one had to undergo was worth in the larger interest of the nation in rooting out black money. In reality the story is totally different. Janardhan Reddy of Bellary, the iron ore mining mafia, was able to resort to ostentatious spending and splurging of Rs 500 crore on wedding of his daughter just a few days after demonetisation in November last year when millions of commoners were standing in serpentine queues for days to get hold just one Rs 2000 currency note, goes to show what a farce of a measure it was.
Subramanian Swamy of BJP, who himself an economist of repute, now admits that the move by itself was good but the implementation was faulty and hence demonetisation was a failure. But others in the BJP said after the growth figures for the first quarter of this year was announced, that any such drastic economic measure will impact growth in the short run but in the long run it will benefit the economy immensely as it would bring about transformational changes resulting in big push in economic growth on a sustained basis. Without demonetisaiton the economy would have been worse off.
The reality is far from it. It is not that demonetisation was not contemplated by previous governments including UPA. But after careful consideration, the government of the day at that time decided against it as the damage to the economy was far greater than the benefits. Also to curb black money and end terror funding, the measures required are different and certainly not demonetisation, which is neither necessary nor sufficient.
There are already statistics and pointers to the fact that demonetisation has broken the backbone of the economy, that is small scale industries and agriculture,which are largely in the informal sector. There are over six crore small scale units in the country and a majority of them are in the micro sector. Small scale industries formed 40 per cent of India's exporrs and 45 per cent of the manufacturing in the country. Nearly 50 per cent of the population are dependent on agriculture and a large number of them are marginal farmers. The reason why demonetisation has hit them hard is because their funding is largely from non-formal banking like money lenders and chit funds. Funding from banks are there but that is for large farmers and big fellows in small scale sector. Others largely depended on money lenders and chit funds, which are run by influential persons with political clout.
This informal funding got hit badly as demonetisation curbed cash flow resulting in massive unemployment, compression of demand and closure of lakhs of small scale units. In spite of Jan Dhan Yojana and the like have not helped large section of small scale industries and farmers get significant funding for them from the formal banking sector. This is the reason why the economy has been badly hit and statistics do not capture this aspect. So damage done by demonetisation is not temporary and it will take a long time to recover and employment is going to remain as a major problem even in medium term. Also if government was serious about curbing black money, it should have banned P-notes (participatory notes) in stock markets. This is nothing but round tripping of black money generated in India. The black money gets stashed abroad in tas havens through hawala transactions and comes back as investments in India through Mauritius or Singapore route. No political party has the will to ban P notes. As experience shows demonetisation has only led to harassment of common man and no significant black money has been unearthed.
The economic growth may still recover because of low global commodity prices, big push to infrastructure development and increasing foreign investment as India is the only growing market in a difficult global economic situation. But the damage it had done to the livelihood of several millions of families particularly in rural areas will take a long time to heal. The worst thing that has happened to the farming community is that demonetisation came at a time when the country had witnessed good monsoon after two successive years of drought and that too when it was Kharif harvesting and Rabi sowing were happening. The data clearly reflected it. Farm growth was a mere 2.4 per cent despite a low base due to drought in the previous year. In years of good monsoon farm growth is usually 5-6 per cent or more. For Small Scale Industries it came at a time when the economy was beginning to look up after a couple of years of recession due to difficult global economic situation.
So overall demonetisation was a bad economic move and all excepting BJP seems to feel that it has had a disastrous effect. BJP still seems to be a popular political party despite this economic blunder because the alternative seems to be worse. This is amplified by the fact that several small scale industrialists in Uttar Pradesh were upset over demonetisation but they said they will still vote for BJP in the UP elections as the alternative was goonda raj of Samajwadi Party, which they did not want for another five years.
( (K R Sudhaman has been Editor in Press Trust of India and Economics Editor in TickeNews and Financial Chronicle)
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