DEMONETISATION SINKS INDIAN ECONOMY, FOR NOW

Well, the numbers tell the story. The government data has demonized the demonetization, which was touted as the panacea for all the ills, affecting the economy as was the country’s internal security. The country’s economic growth slipped to a three-year low in the last quarter. The 5.7 per cent Gross Domestic Product (GDP) growth in the last quarter (April-June), the slowest since the January-March quarter 2014, is a matter of serious concern.  What is most shocking is that the economy grew at a healthy 7 per cent in the fiscal third quarter last year despite Prime Minister Narendra Modi’s out-of-the-blue decree to withdraw high denomination bank notes.

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The Central Statistics Office (CSO) figures came as a double whammy for the government as a day earlier the Reserve Bank of India said in its annual report that all but one per cent of the estimated 15.4 trillion rupees of demonetized bank notes had returned to the banking system. This was a big setback as the government had sniffed windfall gains expecting that between 2 to 3 lakh crore rupees would never return to the banking system. To the contrary, the so-called black money, on which the government had planned surgical strike, became legit. This raises a serious question on the intent of the government.

Why I say so? The government invalidated 500 and 1000 rupee notes on the surmise that the large denomination currency notes were being used to stockpile black money and evade tax. If one buys the government theory, then it defies all logic when it introduced even a bigger currency note of Rs 2,000. Which is the larger denomination currency – a 1,000 rupee currency note or a 2,000 rupee currency note? Won’t it be easier to stash black money in the form of 2,000 rupee notes than the 1,000 rupee notes? Therefore, the government’s reasoning is far from the truth. This is no way one can stop generating black money. One can draw only two plausible conclusions behind this exercise. Either the government was ill-advised or it was a deliberate attempt to convert the alleged black money into white.

The jury is still out whether the economy has bottomed out. No one knows for sure where the economy will gather steam from here onwards. For, the first quarter of the current fiscal presents dismal picture. The private consumption has seen a dip of 0.6 percent at 6.7 per cent. The continuing woes of cash crunch and massive job loss are seen as main villains behind the falling consumption. Almost all sectors, with the exception of services, have shown deceleration.  The agriculture sector, which was showing signs of revival in the last quarter of 2016-17 with 5.2 per cent growth, slumped to 2.3 per cent. So is the industry sector which registered a decline of 1.5 per cent in the same period.  Sentiment remains depressed in mining, manufacturing and construction sectors even nine months after Mr. Modi declared the high currency value notes as illegal accounting for 86 per cent of the currency in circulation. The manufacturing sector took the maximum hit which slowed to 1.2 percent in the June quarter from a 10.7 percent growth last year. The only silver lining is Services which registered a growth of 1.5 per cent compared to the last quarter of 2016-17.

It now becomes clear that demonetization is proving to be “monumental mismanagement” as the former Prime Minister and eminent economist Dr Manmohan Singh had predicted during his speech in parliament. He had termed the move “organized loot and legalized plunder” drawing sharp opposition from the treasury benches. One hopes his warning that "For those saying this is good in the long run, it reminds me of John Keynes' words, 'In the long run we are all dead” does not turn out to be true.

With economy in complete mess, let’s now focus on other key areas which Prime Minister Modi cited during his famous November 8 address to the nation. While comparing demonetization to a “mahayagna”, Mr. Modi said it would purify the country from corruption, black money, fake notes and terrorism.  The latest Transparency International report released on September 1 has dubbed India as the most corrupt Asian country. With a bribery rate of 69 per cent, India leads the dubious list. In fact, our neighbor Pakistan fares better than us. As far as black money is concerned, how much of it is left in the hands of individuals, the RBI report has wisened us. The fake new currency notes continue to be printed across the border and smuggled into India as several government agencies have seized them from time to time. With regard to terrorism, the less said the better. The terrorism related incidents have only spiked in Kashmir since then. In fact, the new 2,000 currency notes were recovered from one of the slain militants in Kashmir within a week of their introduction.

In a nutshell, the move to demonetize higher currency notes does not seem to have the desired results as the government had tom-tommed. The country is still struggling to come out of the shock which has caused more pain than gain.