DeMo: Suc­cess or fail­ure?

The Sunday Guardian - - & Comment Analysis -

Fi­nance Min­is­ter Arun Jait­ley is a brave man, for it calls for a great deal of courage to de­fend as tena­ciously as he has the de­mon­eti­sa­tion of high-de­nom­i­na­tion cur­rency notes on 8 Novem­ber 2016. A good lawyer that he is, he de­fends a move that hit sev­eral ecosys­tems in the econ­omy, took away in­nu­mer­able jobs, and af­fected the im­age of the eco­nomic ad­min­is­tra­tors of the coun­try.

The Re­serve Bank of In­dia’s an­nual re­port for 2017-18 in Au­gust un­der­lined a hith­erto un­known ef­fect per­pe­trated by the in­val­i­da­tion of the high-de­nom­i­na­tion cur­rency. The RBI re­port car­ried a box, “The Cu­ri­ous Case of Re­verse Im­port Sub­sti­tu­tion: The In­dian Ex­pe­ri­ence”, high­light­ing the havoc wreaked by de­mon­eti­sa­tion. “Dur­ing 2017-18, there was a surge in im­ports, es­pe­cially in the cat­e­gory of non-oil non- gold items, which broke out of the tra­di­tional co-move­ment with ex­port be­hav­ior but co­in­cided with a pe­riod of slug­gish man­u­fac­tur­ing ac­tiv­ity,” the RBI re­port said. “This has given rise to con­cerns that dis­rup­tions in the pro­duc­tion/sup­ply chain dur­ing post-de­mon­eti­sa­tion have forced do­mes­tic de­mand to spill over into im­ports in or­der to over­come do­mes­tic sup­ply con­straints. This phe­nom­e­non of re­verse im­port sub­sti­tu­tion could re­duce GDP in In­dia through leak­ages of do­mes­tic de­mand into ex­ter­nal mar­kets.”

Ev­i­dently, the Cen­tral bank was too politic—at that point of time— to men­tion that de­mon­eti­sa­tion hit sev­eral ecosys­tems in the econ­omy in the name of for­mal­i­sa­tion. The RBI, how­ever, stoutly said that the ill-ef­fect in terms of growth was “tran­sient”. Ac­cord­ing to the Cen­tral bank, “from Novem­ber 2016 up to Septem­ber 2017… re­verse im­port sub­sti­tu­tion ef­fects was (sic) at best tran­sient and ebbed grad­u­ally as in­dus­trial ac­tiv­ity in In­dia emerged out of its slug­gish phase and re­gained its mo­men­tum.”

Ob­vi­ously, mil­lions of jobs were lost, most of them in the in­for­mal sec­tor. Against this back­drop, the claim of de­mon­eti­sa­tion hav­ing helped the “weaker sec­tions” sounds hol­low. The Fi­nance Min­is­ter as­serted in a Face­book com­ment on the sec­ond an­niver­sary of de­mon­eti­sa­tion, “Fi­nan­cial in­clu­sion was an­other im­por­tant step to en­sure that even weaker sec­tions be­came part of the for­mal econ­omy. Jan Dhan Ac­counts have re­sulted in most peo­ple be­ing con­nected to the bank­ing sys­tem. The Aad­haar law has en­sured that di­rect ben­e­fit trans­fer of gov­ern­ment sup­port sys­tem reached di­rectly into the bank ac­counts.”

But what do the poor do with fi­nan­cial in­clu­sion if they lose their liveli­hood and reg­u­lar in­come? How does get­ting “con­nected to the bank­ing sys­tem” help them if they don’t have any­thing to de­posit? Can di­rect ben­e­fit trans­fer or doles from gov­ern­ment sub­sti­tute for jobs?

While the gov­ern­ment con­tin­ues to de­fend de­mon­eti­sa­tion, the Op­po­si­tion is un­able even to high­light the dam­age. Both ex­hibit an in­fat­u­a­tion with growth rate. Jait­ley and other apol­o­gists for the rul­ing dis­pen­sa­tion con­tinue to harp upon the fact that the econ­omy is back on track, that the rate of ex­pan­sion has re­cov­ered, that we are mov­ing to­wards 8% growth. The Op­po­si­tion keeps deny­ing th­ese claims.

Con­sider for­mer Prime Min­is­ter Man­mo­han Singh’s re­cent com­ment: “Be­yond the steep drop in head­line GDP growth num­bers af­ter de­mon­eti­sa­tion, the deeper ram­i­fi­ca­tions of note­bandi are still un­rav­el­ling. Small and medium busi­nesses that are the cor­ner­stone of In­dia’s econ­omy are yet to re­cover from the de­mon­eti­sa­tion shock.” Singh, who is an em­i­nent econ­o­mist, did men­tion “a di­rect im­pact on em­ploy­ment,” but his em­pha­sis, as also of other Op­po­si­tion lead­ers’, seems to be on growth rate.

But what is the point in hav­ing a high growth rate if no em­ploy­ment is gen­er­ated, as was the case when Singh was the Prime Min­is­ter? It needs to be men­tioned here that the over­all growth rate dur­ing five years (1999-2004) of the Atal Bi­hari Va­j­payee regime was be­low 6%, but in that pe­riod 60 mil­lion jobs were cre­ated. In the 10 sub­se­quent years un­der Singh, the GDP grew at an av­er­age of about 8%, and yet about 15 mil­lion jobs were added.

In­dus­try has also hinted at re­verse im­port sub­sti­tu­tion. “While there is no al­ter­na­tive to crude oil and gold im­ports, do­mes­tic sup­ply con­straints have led to an in­crease in im­ports by well over the dou­ble digit in as many as 22 (other than crude and gold) out of 30 top im­port items,” an anal­y­sis by the busi­ness cham­ber As­socham said in Au­gust.

Be­tween July 2017 and July 2018, As­socham said, im­ports of leather and leather prod­ucts saw a rise of over 22% from $79.66 mil­lion to $97.54 mil­lion, while elec­tri­cal and non-elec­tri­cal ma­chin­ery wit­nessed a 30.59% jump in im­ports from $2.4 bil­lion to $3.15 bil­lion.

In other words, di­rect and in­di­rect ef­fects of de­mon­eti­sa­tion are not lim­ited to job cre­ation; they ex­tend to the cur­rent ac­count deficit and the ru­pee. But gov­ern­ment func­tionar­ies seem to be­lieve the mythol­ogy about de­mon­eti­sa­tion that they them­selves have cre­ated.

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