Demonetisation: A Body Blow to the Indian Economy and People

Two months after the Government of India’s massive currency demonetisation exercise, Economist and Former Member of the Planning Commission of India, Professor Abhijit Sen speaks about its failed attempt at curtailing black money. Sen further elaborates on its body blow to Indian agriculture and employment- both in the informal and formal sectors. With challenges looming on the domestic and international economic front, 2017 does indeed look bleak for the Modi Government. Thumbnail Image Courtesy: Bharatabharati.wordpress

Rough Transcript:

Benny Kuruvilla (Benny): Hello and welcome to the Real News Network and Newsclick. It's been two months since the government of India's demonetization policy, which is a good enough period to assess its efficacy, its impacts on economy but also makes projections into 2017. Today, to speak with us on this topic we are joined by a well known economist Prof. Abhijit Sen, former member of the planning commission of India. Prof. Sen, welcome to Newsclick. If you look at the evidence now that's coming in, some 97% of the demonetized currency is back in the banks. How would you evaluate Prime Minister Modi's strategy to demobelize black money through this massive demonetization exercise?

Abhijit Sen (Abhijit): Well, the first is that yes, two months are up but on various numbers which one would have expected to have been clearly available, there is still a fair amount of doubt because for example, the important one which you just mentioned that 97% of the old currency has already come back. These are projections privately, the Reserve Bank of India is yet to actually come out with a firm number, even though it's now almost two weeks since the whole process of taking it back at least from domestic residence is over. However I think that the number of around 97% coming back is possibly fairly close to the truth. Although again, let me remind you that there are people still, yesterday or day before yesterday, Bibek Debroy from the NITI Ayog said that you know 10% will not come back. I think, it is a bit unfortunate that we are getting such a data limitations on something which should already be available to us and that's something which I think is not simply limited to the money statistics which should be very quick. It should be available within about a week, utmost a fortnight. It simply shows that there are procedural or systemic problems still going on in terms of how to count things which should be counted. In other words it is not demonetization as such, it is really the ability of the income tax people which will determine whatever government might be able to get in terms of black money. If they do a tremendous job and are actually able to filter through a larger number of unaccounted money coming, they might be able to get something. If not, they won't have got much.

Benny: But you also see evidence mounting in the last two months on the economy. The government's own estimate cites that we are contraction to 7.1% this fiscal. They are more pessimistic estimates that look at that 6.3%. What is your own sense that the slow down in GDP and is it linked to demonetization so much?

Abhijit: The government's figures that they have given in the advance estimates are really figures that are projections from before the demonetization and do not really take demonetization into account at all. The only place demonetization may be coming into those figures is a few numbers of November. Now, in contrast to that, which actually shows some slow down as you said, the Finance Minister is on record saying that the taxes are going up and because taxes are going up, the economy must be be doing well. That's the spin he has put. I will come back to that later. But what is it that the CSO figures show. The CSO figures suggest that even without a demonetization, there would be a slight decline in the GDP growth rate from somewhere in the neighbourhood of 7.6% to around 7.1% and that was happening even without the demonetization. Now if we look at the first half of this year, there is a period before the demonetization, really the only growth which was happening at anything like 7%, was happening in government expenditure.

The next one was private consumption expenditure which was growing at slightly less than that amount, but still reasonably so. The other numbers which is mainly investment and exports were doing terribly badly on the demand side. So here was an economy which was growing at 7%, much of it was on autopilot and what was driving that growth was consumption demand. Now what's happened after demonetization? Now everything would suggest that a number of these things, in particular the private consumption demand, would have actually either gone down absolutely or at least the rate of growth would have been substantially lowered compared to what it was doing before the demonetization. That's simply because people had less cash in hand, people in any case felt that they should postpone large item consumption in some cases, investment - this was a tremendous amount of uncertainty introduced in it and people cut back on investments under those circumstances. So investment which was already going down, should have gone down more. Unfortunately, the advanced estimates assumes actually that the investment would be going up. So to that extent, the advanced estimate is clearly optimistic. The advanced estimates do assume that consumption demand would go down, they are projecting from the past. But probably they underestimate the extent to which it would decelerate. My own sense taking in account these numbers, is that really what has happened is that an expectation that the economy would do relatively well in the second half of this financial year has turned into a reality of second half will be substantially worse that the first half.

Benny: Can you clarify some of these GDP numbers in terms of job losses, specially in the micro, small and the medium enterprises and also if you can speak a bit about agriculture which is something which you raise concerns in your earlier analysis of demonetization.

Abhijit: Well, agriculture is again one of those stories on which the spin being given currently is somewhat different from the view that a lot of private economists had and many still have. The view was that demonetization came at, I mean my view and I think a lot of people hold that view, that demonetization came at a very bad time for agriculture. The Kharif crop was coming in and those who had already not been able to sell it, found that the market simply had collapsed and prices were very low. The next crop was coming in very soon after that, so you had to do the sowing for Rabi and if you either hadn't been able to sell your old crop or if you had sold it but actually you had put it back onto the bank and were not getting cash. Agriculture being mainly a cash economy there was the expectation that Rabi sowing would decline. Now, the official view is that yes, there has been some drop in prices but on the main crops where the government has it's MSP system, there has not been a drop in prices the MSP system has done well. So the government has actually worked. But, they won't rule out that for a whole set of crops and most of your output doesn't have an MSP. There has been a drop in prices. On the Kharif story I think there has been some agreement. On the Rabi story, the big evidence that the government is bringing to bolster its view point is that the Rabi sowing is higher than the last year and saying that it is much higher than last year. It is about 6% higher than the last year. Then again, it is not entirely a surprise because as I said the last year was second consecutive year of drought. But government would say that it is even a higher than what would be a normal year. Now, in some respect obviously therefore, one has to temper down the pessimistic view that we had that Rabi sowing would be affected. It has not been affected to the extent that I think a lot of us thought. On the other hand, it is clearly the case is that the Rabi sowing was delayed. It is also the case that whatever was sown, may not have been sown with the best seed and with the best quality of inputs that go in. So much depends on how much you get in terms of yield per acre on the area sown and I think the doubts on Rabi will persist till we actually see the yield figures which are not going to come out till about April. But it is fairly correct, I was expecting a 6% to 8% growth in agriculture GDP this year. I think we would be lucky to see about 4% growth. But 4% would be a huge increase over the last 2 years which averaged only around 1%. That is the way that government will look at it. But in any case, it was going to be a good agriculture year, it will still be an good agricultural year, but won't be a good agricultural year from the output point of view as it should have been given there had been two bad years on top which there was a good monsoon.

As far as farmer is concerned, things are much worse because the price situation, except as the government points out for the crops with MSP, the price situation is bad for the farmers and related to this is a question that you asked. The all India association of manufacturers is claiming that there has been about a 35% drop in output and about a much larger, almost 60% drop in employment in those sectors. Now, how good those figures are we don't really know. But if those figures are anything like the truth or even if half that figure is true then you have a major employment contraction being indicated. This employment contraction is substantiated to some extent for example, the Delhi government is saying that something like 60% or more of migrant labour which was working in Delhi has actually gone back to their villages. In other words, people have lost their jobs in the informal sector. Most people were in the informal sector in any case and they have gone back. Now, the employment story is going to be much worse than the output story for a very simple reason and that reason is that more than 90% of workers are in the informal sector which produces only about 45% to 50% of output.

Benny: Now, to conclude you have the budget being presented next month and there is this assumption that you will try and sort of push the economy by increased outlays on infrastructure. What do you see a possible alternative in terms of brining back growth with the budget for the next fiscal?

Abhijit: It's a complicated thing. Now for many many reasons, I think government will try to push up expenditure but, a number of these variables are still extremely unclear and it is very unlikely they are going to be clear at the moment, the government intends to put forward budget which is on the first of February. A, they might use the fact that the tax collection was fairly good in November to say that they are going to be good so that somehow demonetization has made the tax collection better. But that would be unwise because you don't take one up to be a continuous I think, even if there is some idea that you know since more people are going to report to the income tax, tax collection might go up. But they might actually use those numbers to project high tax figures. But that would be at this moment not a very wise thing to do. It would be a bit of fudge. That's one way in which you can justify higher expenditure. They might say that the economy will actually rebound much faster than it did because of certain assumptions. In other words, again use something in the numbers to justify a large taxation growth. But for the same reason again, it would be premature to say because none of these figures are still there. Certainly, your 7.1 from the CSO figures now wouldn't justify that sort of projection of taxes unless in additional you assume a much larger increase in tax GDP numbers. The third thing it might try to do is to say, no we will not have a 3% fiscal deficit but we will have a higher fiscal deficit. Now that’s a point of view I would actually support. I think it is a time in which government should actually run a higher fiscal deficit. On the other hands, government so far has been a bit constrained on the fiscal deficit thing because they look at rating agency and rating agencies are going to be much more eagle eyed on the Indian economy after demonetization than they have ever been. Now, for various reasons, therefore, government is in a bit of a bind, if it has to have the budget just then under these, there is an information shortage, a huge information shortage and the world economy doesn't look too great and the domestic economy desperately needs that the government actually go out and spend on infrastructure but on top of infrastructure, the government has to spend on something else and that's something else is that you got to make some effort at meeting the distress caused especially to those who have lost jobs, gone back to rural areas. Now that is required in a welfare sense, but for the government that is required even more politically.

Now, to sum it all up, I think really what you have got is a huge shock to the economy. At the moment, it is adding more to uncertainty than to anything else. Clearly, that uncertainty is with a fairly large short run shock but we are still not clear about how large that shock is. Possible long term gains still seem to be very very distant, if there are any. All of this digital business and things you know, they can have effect some time later, but they are only going to have effect pretty late and in any case I think what it shows is that there was a major flaw in the way the demonetization thing was done and that is that with almost all of the thousand, five hundred rupee notes back you didn't gain by saying that from tomorrow this is not legal tender. All you needed to do on the day the Prime Minister made his announcement on the 8th of November to say that we are not going to issue any more thousand, five hundred rupee notes and to stick to the time-line, that all thousand five hundred note will have to be deposited at the end of December. But in between, you need not have made that funny announcement of that it ceases to be a legal tender. The net effect would have been exactly the same what you have got.

Benny: Thank you very much Professor and specially in terms of laying out the challenges, both domestic and external into 2017 with the budget being presented in February and we hope to come back to you for your assessment of the budget as well. Thank you very much.

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