As the overall figures for the last quarter’s Gross Domestic Product (GDP) were released on Thursday, there was a clear indication that the BJP spokespersons that usually are out aggressively to defend the government every night on media, were not seen on national news TV at all. Instead, some bureaucrats were seen arguing how this slowdown had nothing to do with the demonetisation announced by the Prime Minister in last year’s November.
Whether this drop in the GDP (which former Prime Minister Manmohan Singh accurately predicted in advance) was a result of demonetisation or not is being argued. That may become a political debate with both sides of the political divide presenting their contrary sides but from an economist’s point of view, the pure fact and reality based on the data coming out is that the economy is doing badly and there is no doubt over that because even the finance minister said that he feels concerned about the GDP figures.
There is no doubt that the economy has slowed down considerably. There are no new jobs being created and the general recessionary trend is hitting every sector from Information Technology to real estate very badly. Prime Minister Narendra Modi’s intentions when he declared demonetisation (as he himself announced) was to attack the black money and create incentive for the honest tax payers and promote the use of digital payment methods in the country. However 10 months after demonetisation, the side-effects of this policy (and the way it was implemented) are now seen widely to be derailing India’s economic growth completely.
Without getting into the political debate and without making this a political issue we need to look at the problem from an economist’s point of view. Most senior economists now agree that the problem of the economy currently is that the demand has slowed down. As a result of this, manufacturing is happening at ‘below capacity’ levels and that has resulted in a massive investment slowdown. Private investment in manufacturing and other sectors has virtually come to a standstill in India because of this situation.
Former finance minister P Chidambaram says that in any economy where you have close to 60% of the population legally and legitimately being kept outside the direct tax net; it is virtually impossible to fully scuttle the generation of black money. So in other words what Chidambaram is saying is that since India’s vast agriculture sector is in any case kept out of the tax net, it is almost impossible to stop the urban tax evaders from at least to some extent using agriculture sector to launder money. And this is what exactly has happened after demonetisation and that is how 99% of the cancelled money has returned to the RBI. Dishonest people have simply used the rural financial institutions or routes such as Jan Dhan accounts to launder money. In these accounts over 90 lakh transactions have to be now monitored to catch the culprits and that’s going to be a long process. In the mean time because cash was sucked out of the economy, consumer spending went down drastically and that slowed down the demand. The government has to now think about why private investors in India are not investing here but prefer to invest abroad. Why hundreds of high net worth individuals (according to a report of a national business publication) are moving base out of the country and in this scenario where will the job creation come from?
The other target of demonetisation which was digitisation of the transactions seems to also have been a temporary achievement because the lasted trend after remonetisation indicates that now people are in a major way returning to cash and not using digital payment methods as they did for about four months after November 8.
What was achieved or not achieved through demonetisation may be an endless debate and it will have political overtones but the fact remains that the economy is slowing down, the consumer confidence is dropping and the government must instil it back to the original position as soon as possible.
Most senior economists in India now agree that the problem with India’s economy currently is that overall demand has slowed down in the last 8-10 months and as a result of this, manufacturing is happening at ‘below capacity’ levels. This has resulted in a massive investment slowdown which is directly reflecting in the numbers. Private investment in manufacturing and other sectors has come down in a major way in India because of this situation.
†Credit offtake slowing.
†Private investment in manufacturing down.
†Demand not growing.
†Capacity utilisation in manufacturing low.
†Digital transactions falling.