There is a good reason to listen to what Dr Manmohan Singh had to say about the negative impact of demonetisation on the GDP. His words as an economist were too important to be allowed to be submerged in the general din of politics. He also had a lot to say that was political. But we can leave that aside while weighing only his words as an eminent economist who was also the nation’s architect of market reforms in the ‘90s as the Finance Minister in the Narasimha Rao government.
He is not an economist to let his words slip lightly. It is after considerable thought that the former prime Minister used to speak or write on economics. He had a chilling message that India’s GDP could go down by up to 2% in the wake of demonetisation. And he said that 2% was an underestimated projection. Several economists concurred, even if not all of them went by his figure of 2%. One famously said that demonetisation in a booming economy was akin to shooting the tyres of a racing car, and India’s was the fastest growing in the world last year.
“The way the scheme has been implemented will hurt agricultural growth in our country, will hurt small industry, will hurt all those people who are in the informal sector of the economy. And my own feeling is that the national income, that is the GDP, can decline by about 2 percent as a result of what has been done,” Singh said. And you don’t need to be an expert in economics to know it could be disastrous if the economy contracts. We knew this already.
The consequences if the forecast proves accurate are going to be really hard to take. The first will be the hit on jobs. The greatest fear is if employment levels plunge in our society, which already sees a large amount of underemployment and even greater unemployment, social unrest could build up. The population dynamic now seen in a young India will receive a huge setback if there are no jobs. It may take more than a couple of quarters for the dust to settle and the notes to fly off the presses for the economy to revive to old levels. But imagine the chaos and the pain before that happens.
‘’Monumental mismanagement’’, the former PM said. Hard to argue against that as we see the cash crunch chaos continuing beyond two weeks since the dramatic announcement. When he went on to say, “organised loot” and “legalised plunder,” it was Singh, the Congress MP speaking. We should ignore that, putting it down to sheer politics. Coming from him, even if he was a model of personal probity, it sounded a bit discordant because as PM he did nothing while the biggest scams of modern India took place under his very nose as it were. 2G, coal, CWG… the list is long. However, we have to be all ears for economics on which his views are widely respected, with the world’s most powerful like Obama always curious to know what he thought about the world’s economic outlook.
The slowdown in retail consumption should be a worry for everyone even as the real estate market prepares for a painful transition period into the new economy of fully accounted money. The exporters are a very worried lot as they have money in the bank - which is being rationed out - orders aplenty and willing workers provided they would continue to receive wages in cash with which to live. There is the catch-22. Where does the new cash come from when currently banks are filling barely a quarter of the needs even at the reduced rates at which they are supposed to fork them out to those whose money it is?
A full market recovery would depend on how quickly official India can act to ease the cash crunch. Given our infrastructure constraints, let us just say it would be a miracle if India can sustain its GDP levels of 2015 in 2017. To harp on the politics as the government has done instead of listening to the criticism and trying to find solutions to the crunch might be its biggest failing.
Only time will tell if the demonetisation is a master stroke or a monumental blunder. Any lay person could tell them that the move will do nothing to curb corruption as the corrupt will store future money more easily in Rs 2,000 notes.
The rich may have lost in discounting their old notes in conversion, but then who knows better than the rich to preserve their wealth. Meanwhile, it is the honest people who have to bear the pain.
