Demonetisation will hurt in the long run

The severe economic disruption clouds the prospects of rolling out the goods and services tax by April

Roughly a month has passed since the Narendra Modi-led NDA government demonetised high value notes to flush out black money held in cash. Among other objectives, this move sought to weaken the political opposition ahead of elections in Uttar Pradesh and Punjab and bolster the ruling party’s chances in the national elections in 2019. But this process entails significant collateral damage to India’s economic growth. This is no short-term disruption holding out the promise of potential gain. The prospect is of the world’s fastest growing emerging economy faltering in its stride.

What is the likely impact on India’s output of goods and services or GDP growth? Economists often head where angels fear to tread to quantify the unquantifiable and put out a precise number that a 1-2 percentage points decline is likely due to demonetisation. In other words, if the economy has been expanding by 7.1%, the prospect is for it to slow down to 6.1% or worse to 5.1%. “Economists are talking nonsense on GDP decline”, thundered the MD of HDFC Bank!

Many economists, however, are sensible enough in stating that the data are not fully in to estimate the third quarter’s GDP growth or make an informed assessment.

India’s economic fundamentals, however, remain weak. The stock markets are tanking on adverse global and domestic cues. After registering a pace of 7.1% in April-June, growth in the nation’s GDP edged up marginally to 7.3% in July-September 2016. The shock to the cash economy is bound to be felt in the subsequent quarters as consumer spending is subdued and footfalls fade in shopping malls. Brick and mortar retail trade is seriously stressed. Trucks are idling. The farmers need to be paid for the crops that have been harvested. Cash is urgently needed for seeds and fertilisers for the next season.

As if all of this weren’t bad enough, investment of the private sector continues to be extremely sluggish. Spending on plant and machinery in GDP is in fact declining.

According to Pronab Sen, former chief statistician, the ongoing cash crunch has perhaps permanently damaged the informal sector that accounts for 45% of GDP and 80% of employment. With a sharp decline in manufacturing, North Block itself has suggested that overall growth in the September-December 2016 quarter will be lower by two percentage points to 5.5% from 7.3% in SeptemberDecember 2015.

If this scenario comes to pass, demonetisation would hit this year’s growth target of 7 to 7.75 % for starters. Economic growth in the January to March 2017 quarter would have to be much faster by 8.1% or 11.1% to attain that objective, both of which are most unlikely. There is no doubt a lot of uncertainty when the cash economy gets going again.

Printing an equivalent amount of notes that were taken out of circulation is likely to take at least six months or more even assuming the printing presses work to capacity. In this period, the shortage of cash casts a baleful shadow over the Indian economy’s growth. N Chandra Mohan is an economic and business commentator The views expressed are personal