On March 30, two pieces on demonetisation appeared in Indian press (websites). Professors Jagdish Bhagwati, Pravin Krishna and Vivek Dehejia wrote a piece for ET and Times of India that all concerns of the critics of demonetisation have been proven wrong. There is no palpable impact on growth, the economy has been smoothly re-monetised and the political outcome of the UP elections has been in favour of the government.
India’s economic growth statistics are still unconvincing. With more than 90% of all the enterprises being informal and with a large portion of the formal enterprises being small, the uncertainty and unreliability band around India’s economic data are so wide that any estimate can pass. That is why the Central Statistical Organisation (CSO) uses base year calculations and use lots of extrapolations assumptions based on base year ratios.
Further, after the base year was reset to 2011-12, the CSO had revised growth estimates for 2012-13 and for 2013-14 too. That was utterly inconsistent with other pieces of real economy data such as mobile phone sales, vehicle sales, air passenger and cargo traffic, etc. That is why, with its prints of 7+% real economic growth in India, the CSO may be doing a big disservice to Indian policymakers and the public. It weakens the resolve to do the right things, even if temporarily unpopular, unpalatable and painful.
As for remonetisation, that is a bit like a kid wanting to be praised for fixing something it broke. As for the political outcome, had the outcome been different, clearly, everyone would have linked it to demonetisation. But, a successful election outcome does not mean that demonetisation, per se, has been vindicated. It is one of those ‘asymmetric’ things. But, even if we accept the argument that the election outcome vindicates the government on demonetisation, the real vindication will have to be in the economics sphere.
On that score, it is still too early to say. But, early indications are not encouraging. There is a war on cash. But, digitisation is not the panacea and second, concentration of information with the taxman is not a guarantor of a corruption-mukt India.
The 2000-Rupee Note stays. The 500-Rupee note has been replaced. How exactly does this help? With the 2000-Rupee note replacing the 1000-Rupee note, the appeal of cash as a store of value in India has only become stronger and not weaker.
The government has not yet disclosed the amount of cash that did not come back. Nor does the government’s Pradhan Mantri Gharib Kalyan Yojana (PMGKY) appear to have mobilised some revenues. On the same day, their article appeared, a former Income-Tax commissioner has written an article in MoneyControl.com on why the PMGKY has failed to mobilise the kind of revenues that the government has expected. It is worth a read.
Labour, taxes and inspector-raj have to go for informality to make way for formality. India has a long, long way to go and the budget has missed an opportunity.
Much as I would like to join the three distinguished academics, I am unable to get myself to do so.