Demonetisation: Why Arun Jaitley’s reading of economic activity is a bit baffling

Union Finance Minister Arun Jaitley has yet again questioned the demonetisation critics, outright dismissing concerns of an economic slowdown in the aftermath of the note ban resulted cash crunch.

The FM’s optimism gives one hopes of an economic rebound after the 8 November move by Prime Minister Narendra Modi to scrap Rs 500 and Rs 1,000 notes, to kill black money and fake currency, hit multiple layers of Asia’s third largest economy.

But, for an observer, Jaitley’s reading of the economy is a bit baffling mainly for two reasons.

 Demonetisation: Why Arun Jaitley’s reading of economic activity is a bit baffling

Finance Minister Arun Jaitley. PTI

One, there isn’t actually an increase in the monthly tax collection figures pre and post demonetisation and two, even if one argues that tax collection numbers have improved and hence things are looking up in the economy, this reading is at odds with a slew of other key macroeconomic numbers that should corroborate any such claim.

Let’s look at the tax figures Jaitley spoke about first.

This is what the FM said: The government’s direct tax collection increased by 12.01 percent at R 5.53 lakh crore in April-December of 2016 compared with the year-ago period, while indirect tax collections soared by 25 percent to Rs 6.3 lakh crore. In December 2016, indirect tax collections grew 14.2 percent on a year-on-year basis and 12.8 percent over November 2016, the FM said.

Jaitely used these numbers to support his argument that demonetisation hasn’t done any major harm to the economy that is projected to grow 7.1 percent (by RBI and government estimates) in the current fiscal.

The numbers

Now, take a closer look. These numbers need to be seen on a monthly basis to get a more an accurate comparison of pre and post demonetisation periods.

According to the government’s own data, growth in net indirect tax collection (with additional revenue measures) slowed to 14.2 percent in December from 23.1 percent in November. Similarly, the excise collection growth fell to 31.6 percent in December from 33.7 percent in November.

Growth in direct tax collection slowed to 12.01 percent in April-December, compared to 15.2 percent growth posted in April-November.

The point is indirect and direct collections have actually slowed in the post demonetisation period. This shouldn’t be the case in a normal scenario since tax collections tend to improve during festival season. If economic activity is picking up, the collections should have been higher.

But the bigger point here is that even if there is a rise in tax collections, this may not indicate an uptick in economy since some part of it can be seasonal and incidental, although directionally a positive trend.

To understand what is happening on the ground, one need to look at multiple macroeconomic indicators, which do not support Jaitley’s optimistic views so far.

Key indicators show a deceleration in November core sector growth numbers to 4.9 percent as compared with 6.6 percent increase in October and 5.01 percent in September, decline in PMI to 49.6 in December as against 52.3 in November--the slowest recorded growth in the manufacturing sector seen in this year—and the fall in bank credit. The RBI data on bank credit shows that growth in non-food credit growth in December has slowed to the slowest in at least 19 years.

That apart, most two-wheeler makers have reported a drop in the sales post the demonetisation. These numbers tell that there is a slow-down in growth at least in the short-term.

Employment figures

Also, it is highly critical to look at unemployment figures and performance of small firms to see how these indicators have reacted to the post demonetisation pain. Jobs in the informal sector are hit hard on account of cash squeeze. According to a study by All India Manufacturers’ Organisation (AIMO), In the first 34 days since demonetisation, micro-small scale industries suffered 35 percent jobs losses and a 50 percent dip in revenue.

The organization, which claims membership of over three lakh micro, small scale, and medium and large scale companies operating in manufacturing and export segments, said (read here), nearly all industrial activities came to a standstill post note ban, with the Small and Medium-sized Enterprises (SMEs).

Another study by rating agency Crisil showed small firms have seen a 41 percent rise in non-cash transactions but projects the overall, growth estimates for FY 2017, which was expected at 15-20 percent before demonetisation, to fall to 6-8 percent. “Those affected the most are from the traditional sectors with high reliance on cash transactions such as textiles, agricultural products, steel, consumer durables, construction and automobiles. Unorganised players (less than 10 employees) are expected to struggle more than their organised counterparts, with 37 percent of them likely to report negative revenue growth in the second half compared with a quarter of organized players,” Crisil said.

Post demonetisation, job demand under National Rural Employment Guarantee Act (NREGA) has shown a sharp spike that typically happens only in drought conditions when farmers opt to the assured job guarantee scheme to earn some money. The number of people opting to the assured 100 days income has more than doubled to 83.60 lakh from 38.52 lakh earlier. The rise in NREGA numbers shows that more number of people are losing factory jobs, including those skilled laborers. People getting minimum wages is good, but the trend of skilled laborers moving from factory jobs to non-skilled jobs should be worrying for an aspiring economy.

One hope that Jaitley’s optimism on economy proves to be correct going ahead. Till the time the numbers tally, the government’s claim that economy has escaped unhurt from demonetisation blues will be seen with an element of skepticism. But, at this stage, his reading of the economy is quite baffling.

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Updated Date: Jan 10, 2017 16:20:11 IST