Reproduced below is a very interesting take on the impact of demonetisation, which is considered as a multidimensional project by the legendary economist and Chartered Accountant who writes regularly for various news publications. This one was published in the Indian Express.
De-mon — a multidimensional project
By S Gurumurthy | Published: 05th September 2017 05:00 AM |
Last Updated: 07th September 2017 07:28 AM
That 99 per cent of the de-legalised Rs 500/1,000 denomination notes was returned back to the Reserve Bank of India (RBI) has been cited by opposition parties, experts and the media alike as the sole test of failure of demonetisation (which, for brevity, I shall henceforth refer to as de-mon). But it is a less than fair assessment of what was essentially a multipurpose project. The one-line conclusion certifying it as a failure judges a multidimensional corrective venture on the basis of one single parameter: the quantum of notes returned. This conclusion has become popular due to the tempestuous and irrational political debate we witnessed at the end of 2016. The media epilogue that Narendra Modi’s de-mon is a rout, based on superficial logic, is a bluff. But to call the bluff, we need a surgical analysis of de-mon, which was missing in the debate then and is missing even now.
The background to de-mon
A flashback to November 2016 when demonetisation was announced. The background to de-mon was the unprecedented rise in the circulation of high-value notes (500/1000) from Rs 1.5 lakh crore in 2004 to almost Rs 15.5 lakh crore when de-mon was announced — with their share in the total currency in circulation going up from 34 per cent to over 88 per cent. The Reserve Bank of India had told the government that a third of the high-value notes which moved out of the banking system, some Rs 6 lakh crore, never returned. They circulate outside the system — the inference being that this huge unmonitored cash was financing and building a massive black economy.
This was manifest in the steep rise in gold, stock and land prices by almost ten times in the six years from 2004 to 2010 as compared the previous five years, 1999-2004. That asset price rise was not stoked by any matching real growth. It was the other way round. The spurious rise in asset values generated the mirage of high growth in India like it happened in the USA prior to 2008. This was evident from the fact that despite the high growth of 8.6 per cent recorded in the six years [2004-2010], jobs rose by just 2.7 million as compared to the job growth of 60 million in the earlier five-year period (1999-2004) on the strength of a medium growth rate of 5.4 per cent.
And moreover, while the latter high-growth period witnessed an annual inflation rate of 6.5 per cent, the earlier five-year average growth period recorded an inflation rate of just 4.6 per cent. And further, the external sector did well in the medium-growth period with the closing years posting a current account surplus of $20 billion after 25 years of relentless current account deficit. But the latter six-year high-growth period accounted for a current account deficit of hundreds of billions of dollars.
It did not need a seer to say that the hyper GDP growth in the latter six years was just wealth-led growth — a mirage that yielded neither jobs nor gave external or internal comfort to the economy. The reason for this spurious growth clearly was the high asset prices, which were fuelled only by an unprecedented rise in high-denomination notes. No economist or commentator has disputed either the figures or the conclusions based on them. And yet none of these critical facts was noticed in the politically and ideologically surcharged debate on de-mon which was reduced to a single-point issue to the exclusion of its other critical dimensions.
Politics reduced de-mon to a single test
The debate on de-mon became utterly political, casting economics aside. Economists and camera-holding journos looked at people queuing up at banks to exchange or deposit the old notes and turned populist in opposing de-mon like politicians and media. De-mon was such an India-specific issue that it had no parallel elsewhere in the world. Foreign experts, who had no knowledge of India-specific issues, lambasted de-mon as a disaster. Local experts led by Dr Manmohan Singh said Narendra Modi has destroyed the economy. With the powerful national and global guild of economists, media and the opposition launching a war on him, Modi singlehandedly led the de-mon politics from the front, withstood the assault and went through the ordeal by fire.
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