Note ban: Will the economy recover?

After the ruling NDA’s euphoria over its recent track record in elections to State assemblies, there have been some rude shocks that should awaken the Narendra Modi government to changing realities .

The biggest dampener has been the persistent lifting of the veil on the performance of demonetisation of high-value notes. Another has been the poor performance on the jobs front.

While the narrative on demonetisation results has been overwhelmingly negative, the government has failed to convince people at large that it had a brighter side to it too. Government spokespersons may have been more effective in political TV debates but on the economic plane there has a glaring lack of thrust in the narrative.

Take for instance, the fact that 99 per cent of the demonetised currency has made its way into bank accounts. The fact of the matter is that this in fact partially reflects the success of the Pradhan Mantri Garib Kalyan Yojana where cash could be declared, deposited, and a hefty penalty paid.

For any individual, it would make sense to retain some of his wealth rather than destroy it all.

There is a segment of people who would have deposited their illicit wealth without disclosure. For them the cash has not become white. It will be scrutinised by the tax authorities and penalties will be levied.

Finance Minister Arun Jaitley has said that between November 8 (when demonetisation was effected) and December 31, 2016, deposits between Rs 2 lakh and Rs 80 lakh were made in about 1.09 crore accounts with an average deposit size of Rs 5.03 lakh. Further, deposits of more than Rs 80 lakh were made in 1.48 lakh accounts with an average deposit size of Rs 3.31 crore. This amounts to some two-thirds of the value of the demonetised currency.

It is nobody’s case that all this was all black money, but a fair proportion of it could well be so and the holders of these suspicious accounts will now be in the tax net for perpetuity, so the gain is not just one-off. Then there is the move towards digitisation. In the long run, a move away from the use of cash is the surest way to curb black economy. In 2015-16, the value of transactions for debit and credit cards was Rs 1.6 lakh crore and Rs2.4 lakh crore, respectively; in 2016-17, it was Rs3.3 lakh crore for each, a substantial jump indeed. Also, in 2016, the National Electronic Funds’ Transfer handled 160 crore transactions valued at Rs120 lakh crore, up from around 130 crore transactions worth Rs83 lakh crore in the previous year.

This is not to say that it’s all hunky dory on the demonetisation front.

The big failure of demonetisation is that it was carried out without preparation and caused big losses to the unorganised sector. Critics of demonetisation cite the deceleration of growth. But some measure of deceleration was predicted. Will the economy now recover in the next quarter? Only time will tell. That would be a crucial test of demonetisation. The Goods and Services Tax (GST) is also being viewed with scepticism. While some sectors have been hit hard in the initial phase, the success or failure of GST must be seen in the longer run when it is expected to bring growth dividends. The move is intrinsically good if quick lessons are learnt from the initial hiccups.

Inflation has mercifully been contained but capital formation continues to be sluggish and inadequate generation of jobs continues to be a major worry for the Modi government. High petroleum product prices despite a sharp dip in prices in the international market are hitting the middle class hard and the people are understandably questioning the government.

Is it fair to pass on the burden of huge loan waivers in the rural sector to the urban consumer or to correct the balance sheets of the oil companies at the cost of the urban consumer? Despite loan waivers, is the populist measure acting to appease the distressed farmer who has higher input prices to worry him and is as much a creature of high expectations as in the urban sector?

Politically, the BJP high command’s obstinacy in not changing Haryana Chief Minister Manohar Lal Khattar despite the abject failure of his administration in containing the incidents of violence on the day Godman Gurmeet Ram Rahim Singh was found guilty of rape by a special court and the manner in which the campus of his ashram was found with symbols of lust, depravity and an arsenal of arms which had been stockpiled with the State government apparently looking the other way for years, has soiled the image of the Modi government too.

It is no consolation for the BJP that the Congress continues to be poorly-led and is woefully lacking in direction. Past elections have shown that if public disenchantment goes beyond limits, the electorate has a tendency to vote out governments regardless of how disorganised or lacklustre the opposition is. It may not yet have reached a stage of no return but it is important for the Modi government to strive to recover lost ground by shedding all complacency.

Congress heir-apparent Rahul Gandhi may appear a pygmy in front of Modi but he could well gain some traction if disenchantment with the Modi government grows. That he is speaking to select gatherings in the US and making some impact with expectations from him being low cannot be lost sight of. While beating the Modi phenomenon at the hustings may seem too far-fetched, he could well improve Congress’ position from the depths to which it had fallen in 2014. All said and done, there are a few imperatives that the Modi government cannot ignore. The foremost is jobs which are in short supply. Unless the performance in the manufacturing sector improves appreciably, the Modi government cannot lean back with supreme satisfaction.

THE BIG FAILURE of demonetisation is that it was carried out without preparation and caused big losses to the unorganised sector. Critics cite the deceleration of growth. But some measure of deceleration was predicted. Only time will tell. That would be a crucial test of demonetisation