Demonetisation: Modi must act soon or historic move will become ‘historic blunder’ - Firstpost
Firstpost
You are here:

Demonetisation: Modi must act soon or historic move will become ‘historic blunder’


Just like the important role he played in building political and economic consensus among warring parties for the Goods and Services Tax (GST) roll out, Finance Minister, Arun Jaitley is doing his best to allay concerns of the aam aadmi during the demonetisation exercise. The FM did this again on Tuesday when he said the government will focus on rural areas in the next few weeks to make new currency available and ease the pain of farmers in the upcoming Rabi season.

Prime minister Narendra Modi. PTI

Prime minister Narendra Modi. PTI

Demonetisation is a ‘historic step’ taken by the Prime Minister Modi to bring a ‘new normal’ to the Indian economy, the FM said. True, the Modi-government’s move will, once the short-term pain is over, contribute to transforming the economy in long-term, though demonetisation itself isn’t enough to achieve this objective. This needs to be followed up with a series of steps including bringing awareness to the citizen about cashless payments, addressing corruption at grassroot level, generating jobs and bringing in private investments. PM Modi too made an emotional speech on two occasions defending his government’s decision.

But, what the government shouldn’t miss here is the point that there is a large economic consequence of the current cash crunch, if it prolongs beyond this point. Unless the government urgently address certain areas of economy besides the agriculture, the ‘historic step’ could very well turn out to be a historic ‘blunder’ for PM Modi by impeding the economic growth momentum and taking the economy back to few notches below.

To be sure, Jaitley is right in identifying agriculture as a priority area for making currency available. The Rabi season is approaching and the farmer on the field needs cash, not just to buy seeds and farming equipment but also to take care of his family’s basic needs. The small farmer doesn’t earn a monthly salary, nor has any major savings. The Kisan credit cards offered to him enables him draw money, but only if bank or ATM dispenses cash.

But so are urban workers in the construction sector. The shortage of cash has impacted thousands of labourers who draw wages in cash on daily basis. If these labourers stop work, the construction activities can suffer which will have an immediate drag on broader economy. All other related segments—cement production and electricity will feel the heat. Hence the government should think of ways to make cash available to the urban worker too.

This argument holds for our vegetable vendors, meat sellers, small food stall owners, taxiwallas, hundreds of cooperative banks across the country and thousands of small and medium enterprises and start-ups. These segments too are key contributors to the economy by way of spending and contributing to the production chain. Much of these segments operate in cash economy and the sudden withdrawal of currencies and withdrawal restrictions have hit them hard. Even the spending by the salaried segment would have likely come down on account of cash shortage. To add to the problems, even people with cash in their hands will be hesitant or reduce spending thinking of cash shortage ahead. All this suggests that the economy on the ground will suffer if the problem persists.

International agencies have already begun warning on the likely slowdown to the economy post demonetisation. “While leading indicators point to a stabilisation in the first quarter of 2017, demonetisation is likely to exacerbate the near-term slowdown due to temporary cash shortage. Pre-demonetisation data suggest activity is likely to stabilise in the first quarter," Japanese brokerage Nomura said in a note today, adding that consumption is the "brightest spot" for the economy. Due to a temporary cash shortage, we see a risk that GDP growth could slow to 6.5 percent in the fourth quarter,” Japanese brokerage, Nomura, said in its research report on Monday.

The cascading impact of slow-spending slow-production can actually cause a drag in the economic recovery process. In an interview given to Economic Times, development economist Jean Drèze said demonetisation is "Demonetisation in a booming economy is like shooting at the tyres of a racing car."

“Demonetisation on this scale is a huge gamble with the economy. The full consequences are difficult to predict. The best-case scenario is that the economy will stay the course, after the initial disruption, and that significant sums of black money will be neutralised. The worst-case scenario is a prolonged economic slowdown, with very little result in terms of preventing illegal activity,” Drèze said.

Even the intended result of the demonetisation exercise is disputed by the likes of globally renowned economist, Larry Summers, a former chief economist of the World Bank and ex-economic advisor to the US President, who said the move is unlikely to have any lasting benefits to the economy.

What should be done to ease the cash crunch in the system? As Shankkar Aiyar suggests in this new Indian Express column, the government can think of innovative ways to ease the cash crunch, such as asking retailers to use their vast network of outlets for cash disbursements, promote online Payments and incentivise point of sales machines. If printing notes domestically is beyond the capacity of government mints in short time, the government can also plan outsourcing printing like in 1997-98, Aiyar writes.

The bottomline is this: If the current cash crunch translates to a prolonged subdued spending and production slowdown, the ripple-effects in the economy will have a serious bearing on the growth momentum. If the government manages to find ways to tackle the printing and supply issues of currency and make things normal at the earliest, it can regain the lost glory of this bold reform move. Else, one shouldn’t be surprised if the historic step is termed by some as a ‘historic blunder’.

First Published On : Nov 22, 2016 15:14 IST

Comment using Disqus

Show Comments