Wednesday, August 2, 2017

A NOTE ON THE IMPACT OF DEMONETISATION IN INDIA. Prof. Joseph K Alexander, Chairman, KRB. IIPA Kerala. 2017

A NOTE ON THE IMPACT OF DEMONETISATION IN INDIA.
Prof. Joseph K Alexander, Chairman, KRB. IIPA Kerala. 2017  

The economy of India is the seventh-largest in the world measured by nominal GDP and the third-largest by purchasing power parity(PPP). India is a newly industrialised country, and one of the G-20 major economies, Despite a higher growth during Liberalisation, Globalisation and Privatisation of the economy in the 1990s and very low growth of 3.5 % during our economic planning period up to 1991. India had an average growth rate of approximately 7% over the last two decades,
Two major domestic policy developments of 2016-’17 is the passage of the Constitutional amendment, paving way for implementing the Goods and Services Tax (GST), {including its  implementation in July 2017} and the demonetisation of the two highest denomination notes with profound implications for the economy.
The background facts of demonetisation are impressive.
1.     India’s parallel economy created by black money; counterfeited Indian currency printed outside in enemy countries and smuggled in bulk consignments into India, hawala money brought by smugglers of contraband goods: gold and drugs
2.     Corruption wilfully encouraged by election- campaign fund seeking politicians and their agents, aiding bureaucrats, police, quotation mafia, and under links. Transparency International in their 2016 Report ranks India as the 130th worst corrupted of the 160 countries examined by them. Scandinavian countries -first and second- are the least corrupt among them.
3.     Prevalence of black money created through tax evasion by not reporting whole income or a part. Income is of two kinds. Well earned white money and ill-earned under the table income not reported to the Income Tax authorities.
4.     Un-earned income in all purchases by the Government authorities assisted by the bureaucrats in the different Ministries.
On November 8, 2016, the government “demonetized” two largest denomination notes, Rs 500 and Rs 1000, with immediate effect as part of . country’s  Swachh Bharat Abhiyan (Clean India Campaign). “While the supply of notes of all denominations had increased by 40% between 2011 and 2016, the Rs.500 and Rs. 1000 banknotes increased by 76% and 109% respectively in this period owing to forgery. This forged cash was being used to fund terrorist activities against India. Govt. deprived their legal tender status, At one stroke; 86 percent of the cash in circulation (of Rs. 16, 63,600 crores in Oct. 2016) , ie; Rs.14,30 696 was thereby rendered invalid.
There were two previous instances of demonetisation, in 1946 and 1978, the latter not having any significant effect on cash. India’s demonetisation in 2016 is unprecedented in international economic history, in that it combined secrecy and suddenness amidst normal economic and political conditions (no war, internal uprising or excessive issue of currency)
It has been a radical, unprecedented step with short term costs and long term benefits. The liquidity squeeze was so severe that the common man and daily wage earners suffered the most. India has given a new expression of unconventional monetary policy, with the difference that whereas advanced economies have focused on expanding the money supply, India’s demonetisation has reduced it; a “reverse helicopter drop”: suddenly lifting away 86 % of cash in circulation.
In conventional Keynesian economics monetary policy is to increase money supply to augment consumption and investment or reduce money supply, through the central bank and the banking system, to get the reverse effect to curb inflation or heating up of the economy. This Indian experiment is thoroughly unconventional:  blow or burn away 86% of the currency.
The benefits of Demonetisation itemised are:1. Curbing Black Money 2. Controlling Corruption 3. Creating a cashless transparent economy 4. Rise in Tax Receipts 5. Reduce artificial Investments in Real estate transactions 6. Inflow of more white money into banks. Rise in cash reserves (C R.around 6%) of  banks  enabling them to lend 16 times more of that amount.7. Reduction in rates of interest, rise in Investments and consequent growth of employment, consumption and GDP.
The cost or defects of demonetisation of 2016 raised by the public are:1. The long queues before all banks to file details and surrender illegalised money 2. “    “To withdraw the allowed paltry amount Rs. 2000/- from one’s own SB or current Account 3. Lack of cash to pay daily wages to workers. Even corporate offices found difficulty in convincing workers with cheque payments.4. Sudden decrease in consumption demand of the people shattered the traders and distributers of wares and services of all kinds. Even Out- Patient-departments of most of the hospitals remained idle or closed. 5. Decrease of production in agriculture and allied activities in primary sector, industrial sector and service sector causing a sudden drop in GDP and its growth rate. Farm income suddenly decreased. 6. Fear and anxiety of the public of the repetition of the 1998 international crash of economies. 7. Decrease in employment of immigrant labour and their return to home states of Orissa, M.P. Bengal, Etc; disrupting local economics.8. Cash intensive parts of the economy suffered the most. 9. Remonetisation was so slow and highlighted incompetence of planning the demonetisation project.
 By industry, the most important and the fastest growing sector of Indian economy are 1. services with more than 60 percent of GDP:  Trade, hotels, transport and communication, financing, insurance, real estate and business services and community, social and personal services. 2. Agriculture, forestry and fishing constitute around 12 percent of the output, but employs more than 50 percent of the labour force. 3. Manufacturing accounts for 15 percent of GDP, 4. construction, another 8 percent and 5. mining, quarrying, electricity, gas and water supply for the remaining 5 percent. We may examine the detailed effects of demonetisation on these sectors and people engaged in them.
Sudden stopping of cash payment made demanders and suppliers of goods and services equally stunned causing a decrease in their contribution to the GDP. Agriculture and crops languished for want of agro-care. Many of the farmers failed to repay banks and were declared bankrupt resulting in farmer suicides. In short, GDP from the five sectors dipped.
Eight months passed since the demonetisation. Despite remedial actions the defects still persist and refuse to vanish. Forged Money is yet imported and printed in India. Black money is still being created despite the increased intervention of the income tax authorities  to curb tax evasion.Total amount of black money has been estimated to be only 6% of the currency in circulation. So such a sudden demonetisation with so great sufferings of the society was unwarraented. Corruption is rampant, and the unearned income is still being extracted from all major suppliers of goods and services to the Govt. Dept.s and PSUs.
The public debate on demonetisation raised three sets of questions:
 First. Its management. Broader aspects of management, as reflected in the design and implementation of the initiative. Govt. was unprepared for the heavy demand for legal currency. Lack of enough planning in the supply of new currency caused untold misery and suffering of the public. Second, its economic impact in the short and medium run was not very positive. The colossal and massive sufferings of the people   and its negative impact on the GDP and personal income of the people warrant quantification. It will be gigantic. Third, its implications for the broader vision underlying the future conduct of economic policy and the expected benefits highlighted above This deserve detailed analysis of Fiscal- Monetary Policies and Administrative strategies.
Apart from forged currency or hawala money, Cash can be understood along two dimensions: its function and its nature. In terms of function, cash is a medium of exchange (for transactions) or as a store of value (Milton Freidman and the Chicago School of Economists) like other forms of wealth such as gold and real estate. In terms of nature, cash can be illicit or not. Function and nature are quite distinct. For example, cash used as a store of value could be white (the savings that all households keep for an emergency), while cash used for transactions could be black (if it was earned through tax evasion and / or corruption).
 Most black money is earned through perfectly legal activities. In most cases, this income becomes black solely because it has not been declared to the tax authorities. The higher the amount of cash in circulation, greater the amount of corruption, is the measurement result conducted by Transparency International.
Remedy is to reduce cash payments and encourage financial intermediation through cheques and other innumerable financial instruments. Transparency and automatic entry of all transactions in the Income tax returns can curb many of these evils. A number of similar follow-up actions including fast, demand-driven, remonetisation would minimize the costs and maximise the benefits of demonetisation..
END





No comments: