Demonetisation update 36- loss of sense of humour and more

Manish Sabharwal wrote:

I’d like to make the case that demonetisation made India a better habitat for formal job creation for five reasons: Rs 18 lakh crore new lending capacity, 7.9 crore new monthly digital transactions, 3 lakh crore new financial savings, 2 per cent lower interest rates, and permanent damage to our sense of humour about the rule of law (1.5 lakh people deposited Rs 5 lakh crore, that is, 0.00011 per cent of India’s population deposited 33 per cent of total cash demonetised). Let’s look at each in more detail.

Rs 18 lakh crore new lending capacity

Without equity capital for banks and better governance in banks and demand for loans, it is a problem and not the answer.

7.9 crore new monthly digital transactions

So what? What does it mean? More revenues for the government and capricious taxmen? Again, without tax governance changes, is it good or bad? May be, even bad.

See this for example. Mohandas Pai had tweeted it.

3 lakh crore new financial savings

What exactly is it? People now put money in banks? Will some of it not be withdrawn for consumption purposes? Further, it is a duplication. He has already mentioned new lending capacity.

In any case, the overall household financial savings rate has been declining.​ We have to wait for 2016-17 data to see the overall stock and ratio of financial savings.​

2% lower interest rates

One, banks are yet to lower rates meaningfully for borrowers.  But, two, they have been lowered for savers and depositors. That is actually a negative. Three, loan demand is a function of investment demand which is only peripherally linked to lower interest rates.

The last one is probably the best – loss of sense of humour.

But, has it also come with a permanent damage to our logical  analytical capabilities?

I fail to understand the oft-repeated assertion that India has a ‘wages’ problem and not ‘jobs’ problem. Well, it has a ‘wages’ problem (they are too low and with too little worker protection, health and job security benefits) because its economy creates such low-quality and low-wage jobs.

As Manish writes,

But if our problem is wages then India needs the higher productivity that comes from structural change: Formalisation, industrialisation, urbanisation, skilling and deep financial markets.

He is partially or mostly right here. India needs to create more jobs in the formal sectors with worker protection provisions. But, were such follow-up measures thought of or did demonetisation trigger thinking along those lines?

Gulzar Natarajan and I argued for the need for such thinking. We wrote that demonetisation could be such a ‘breakout’ moment. But, the evidence that the Government is thinking along those lines is missing.

TJS George channels Kaushik Basu here and it is a worth thinking about:

A bigger worry than the demonetisation itself is the failure to recognise that it was a mistake. That is what is getting investors and businessmen worried about future policy decisions.

One thought on “Demonetisation update 36- loss of sense of humour and more

  1. “3 lakh crore new financial savings”
    I thought that this was the most +ve effect of demonetisation, not the tackling of corruption (which anyone should have guessed would not happen). The main gain is mobilization of idle money lying around in mattresses.

    However, I think we missed an opportunity to direct those funds into investments. Sure, one can say it led to more lending by banks (although I think fractional reserve lending is not how credit actually works, but never mind that). Although, as you said, they can just withdraw it again, leading to the same situation. It would have been better if the govt or preferably private players could have offered investment schemes which could have solved some of the private investment problems that we have. It would have also helped with the lines in the banks. Furthermore, the govt should have implemented reforms to actually improve the economic picture beforehand so that there would indeed be good investment opportunities and people would be incentivized to take advantage.

    And, mobilization of cash did not need to occur via demonetisation. So, claiming it as a benefit is not entirely fair. Why weren’t various incentives offered to encourage voluntary investment? In a supposedly growing economy people would be willing to invest even with a haircut in good projects. People are paying 10-20% premium to buy bitcoin in India.


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