Black Money Aftershock: Modiji, You Knew How Govt Machinery Works

Political adventurism in the form of demonetisation may cost the Indian economy dearly, writes Sanjay Pugalia.

4 min read
Hindi Female
Political adventurism in the form of demonetisation may cost the Indian economy dearly, writes Sanjay Pugalia.

The way the note ban story is unfolding across the country presents a very grim picture. One may be tempted to conclude that it was a radical idea, just poorly executed, or that it is an unprecedented step to cleanse the system and as patriots we ought to show some patience.

These would be grossly incorrect conclusions. Who in India does not know that we have poor state capacity and inefficient government machinery that is bound to fail us in execution of even ordinary tasks? This is common sense. But when it comes to executing such a massive exercise of sucking Rs 15 lakh crore from circulation and then distributing new notes, the government should have been more aware of the capacity to execute.

Also Read: Govt’s Biggest Blunder: Not Exempting Pvt Healthcare From Note Ban

Political adventurism in the form of demonetisation may cost the Indian economy dearly, writes Sanjay Pugalia.
People collecting money from a mobile ATM at Pragati Maidan in New Delhi, 14 November 2016. (Photo: PTI)

Mismanagement by the Govt

The failure is on display in the kind of excuses and afterthoughts the administrators are coming up with. Cash withdrawal limits are being changed daily, new exemptions to accept old big notes are being added to the list. And now indelible ink! This shows the level of unpreparedness and knee-jerk reactions. Tax administrators ought to know that people would find ways to launder the money – it should have been anticipated well in advance.

Now the officials are lamenting that the Jan Dhan accounts are being misused, tax-free farm income route is being misused, and people are lending names and identities to convert, deposit and withdraw money on large scales.

This fancy idea of using indelible ink means that the clever guys have to find more “money mules” to convert cash – not a difficult task in the country of unemployed and under-employed. The real reason seems to be curbing the immediate demand for cash, as the printing and supplying of new notes is severely limited. Another difficulty is how much time will it take to ensure that the ink reaches all bank branches in the remotest parts of the country.

Also Read: RBI Clears District Banks’ Dirty Underbelly, But Is It Too Late?


New Look Not Well Thought Out?

How does one explain the cleverness in changing the size of the new notes and making all ATM non-functional for weeks? The government and RBI could have added a new security feature. We are now told that there are no new security features. What is this obsession with new Indian currency looking slim like the US Dollar? A little more careful consideration about new notes fitting into the existing ATMs could have reduced the hardship to some extent.

Also Read: Arrogance of the Rich Is Pushing Rural India to Embrace Note Ban


Economy Badly Hit

Was a cost-benefit analysis done by those who made this decision?

The bigger damage is to the economy at large. Reports are pouring in that there is serious disruption to businesses, especially those at the bottom of the pyramid in the market economy.

Small shops, retailers and restaurants are witnessing revenue falls of 50 percent. Flour mills are not paying farmers for their grains. Consumer durable sales have taken a hit.

Agriculture Produce Marketing Committees (APMCs) are reporting 40-50 percent declines, and this is more damaging for perishables as farmers are desperate to sell. The credit supply chain has broken. In informal lending market, the situation is worse as many borrowers are failing to repay. This credit squeeze has resulted in higher interest rates. The micro finance market too is badly hit. FMCG channel is de-stocking.

Also Read: Arbitrary? Unconstitutional? Is Demonetisation Legal?

Political adventurism in the form of demonetisation may cost the Indian economy dearly, writes Sanjay Pugalia.
People wait outside banks to exchange currency notes in Kolkata on 10 November, 2016. (Photo: IANS)

Setback to GDP

There are 6 crore registered business outlets. Unregistered small sellers are not counted here, but that number could be in the range of 2-3 crore. A conservative estimate suggests that at least FIVE crore people engaged meaningfully in economic activity in the country are facing a sudden and severe jolt. Ajay Shah of NIPFP (National Institute of Public Finance and Policy) says in a newspaper article that this disruption could result in a loss of at least 3 percent loss to GDP at a time when the economy was just picking up after good monsoon. Shah says:

A period of 3.65 days makes 1 percent of the GDP of one year, which is Rs 1,20,000 crore. If production is disrupted by one-fourth then each 3.65 days of disruption is a reduced output in the economy of Rs 30,000 crore. If this scale of disruption (of 25 percent) lasts for 15 days, this adds up to a cost of Rs 1,20,000 crore of foregone output.

Ajay Shah thinks that this setback could result in an economic recession. The broken market chain will take a long time to repair itself. The entire approach to the black money issue is driven by political considerations and not economic rationale.

So, if this “radical” surgical strike nets Rs 3.5 lakh crore of so-called black money, do not celebrate. The cost of this is a loss of 3 percent GDP (Rs 3.6 lakh crore), which outweighs the gain. Add the process of GST implementation with four rates going to play out in quite a shabby manner. Brace for an extremely uncertain economic environment.

Last but not the least, there is a fashion to dismiss stock market signals but they are hardcore pragmatic folks. Their assessment is that the coming days are going to be painful so the key index has corrected by 10 percent and it may fall further still.

(Sanjay Pugalia is the Editorial Director of Quintillion Media and can be reached at @sanjaypugalia)

Also Read: PM Modi, Demonetisation ‘Brahmastra’ Could’ve Avoided Hurting Poor

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Topics:  Black Money   Demonetisation   Rs 1000 note 

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