India: 4 years after Demonetization

Tuesday,8th November 2016; The fateful day when our Prime Minister announced the bold decision that the government had taken. At that time the narrative around it was curbing black money. However, within a month, 80% of the banned currency notes had been returned to the RBI. This shifted the narrative of the government from black money to an issue of honesty, completely turning it around. More than four years after Demonetization, this is what Dr. Manmohan Singh has to say: “The reason that there is a looming credit crisis and the Informal sector is in shambles is the ill-considered decision of demonetization”.
When demonetization was put into effect four years ago, this former Prime Minister of India did warn us against an ominous threat, that of the GDP decreasing by at least 2%, and that is exactly what happened. He went as far as to call it an “organized loot and a legalized plunder”. Now in no way am I implying that Manmohan Singh did wonders during his tenure but the fact that he is one of the best economists that India has had in the past few decades, still remains. Not only him, but many brilliant economists of the country were wary of demonetization and the way it was implemented. The year following the demonetization, many of these economists resigned from their posts. Wasn’t a mere coincidence that they decided to resign one after the other. Starting with Raghuram Rajan’s resignation, followed by Arvind Subramaniam, Urjit Patel, and all the independent members of the National Statistical Commission.
This is a look at India after 4 years of demonetization.
The plight of the poor and the lower middle class due to this irrational decision by the government has been spoken about by many at length. The decision-makers might deny it. Therefore, let’s deal with facts and numbers, hoping that logic won’t be opposed by ideology.
Revised data from the National Statistical Office shows that the GDP growth declined from 8.3% in Fiscal Year 2016-17 to 7% in FY 2017-18. Despite many economists warning that the GDP will fall sharply, the growth rate fell only by 0.7%. The reason for that was because the formal sector was not as hard hit as the informal sector was. One very important detail in GDP calculation is that it is mostly represented by the formal sector. Hence, the hard blow that the informal sector took was not reflected in the following year’s GDP.
It was the informal sector that was hit the most. According to reports, nearly 90% of the country’s workforce is in the informal sector. This is the section that deals in cash and hence were the ones who lost in the battle of demonetization. Due to this, the supply of goods reduced but the demand remained the same, benefitting the formal sector.
After a certain period of time, the income of small businesses decreased and hence demand fell. This resulted in a steep decline in the growth rate.
Rural wage growth which was at 14.6% in the fiscal year 2014, fell to 1.1% in the fiscal year 2019.
Corporate investments declined by 60%. Investor sentiments are in the doldrums. The ill-planned reforms are repelling the investors away from India. The unemployment rate is at a 45-year high.
The growth of the manufacturing, agriculture, and construction sectors has been steadily declining.
Savings in households went from 23.2% to 17.6%, whereas income saw a similar decline. Consumer spending declined for the first time in four decades.
The argument that the inflation rate was low in the years after demonetization comes at a cost- that of the farmers. Farmers were robbed of their right to MSP.
Demonetization which was marketed as a war against black money and fraud does not seem to have achieved even that. In 2018-19, 21,800 fake currency notes of Rs.500 were confiscated. Moreover, bank fraud increased by 74% that year.
There is tax terrorism going about in the country. At a time like this, the resilience of the RBI is tested. Merging a profit-making bank and a loss-making bank is only a temporary solution to the looming credit crisis in the country.
It proves an important detail, one that economists like Raghuram Rajan warned the government about. Demonetization will prove detrimental to India’s economy in the long run. It has brought India to a state of prolonged slow-down. These figures are before the virus struck the nation and hence, the slow-down cannot be attributed to it. However, there was one other reason for this slowdown given by the government. It was- the economic slow-down that the world was facing. The statement made by the International Monetary Fund- “80% of the World’s economic slowdown is because of India” – was enough to counter that.
When countries like Bangladesh benefitted from the U.S- China trade war, India with such great potential, failed to do that too,
India has fallen by two places in the World Corruption Index; 10 places in the world democracy index; and ten places in the Global competitiveness Index too.
What should be done?
There is a five-point plan to revive the economy of the country, proposed by Manmohan Singh . It might not be quite explanatory in nature, but it contains the crux of the solution that is needed.
i)Rationalize Goods and Services Tax: GST was the next shock to the economy after demonetization. Although it was a good step, it was implemented in a complicated manner.
ii) Increase Consumer demand and revive the agriculture
iii)To infuse liquidity into the system
iv) Revitalize labor-intensive sectors by providing easy loans especially to MSMEs
v) Harness the export opportunities because of the ongoing tariff war between U.S and China.
Among these, the point about focussing on consumption has been highlighted by other renowned economists too.
In the long run, long-term investments must be made to achieve sustainable GDP growth. There is a lack of skilled workers in the country. The few skilled workers are not able to reach their true potential. This calls for a shift in the relationship between academia and industry in the country.
Decision-making in the country is in shambles. Better economists who have the ability to think independently are needed. Some economists also call for more power to be provided to the ones who deal with economic troubles in the country.
According to Raghuram Rajan (Former Chief Economic Advisor), “In India, the budget is an aspiration. The government needs to be mindful of the fact that growth may not happen as we expect it to.”