West Bengal Chief Minister Mamata Banerjee's stance on demonetisation is well-known. She is one of the ferocious critics of the currency swap and was the first among Opposition leaders to voice her protest. She has also gone out of her way to stitch Opposition unity against Prime Minister Narendra Modi's move.
There is little doubt that she sees a gift-wrapped political opportunity in the decision, that has caused much political and economic disruption. But, by announcing cash doles in the state budget for those 'affected' by demonetisation, Mamata has precipitated Bengal's financial crisis. In trying to score a goal against Narendra Modi, she has put the ball in her own net and set a dangerous precedent of recklessness.
Before we focus on her step, it must be pointed out that the full ramifications of demonetisation are yet to surface, in terms of the political and economic fallout. The 2017 Economic Survey prepared by Chief Economic Adviser Arvind Subramanian gives us some clues. Union Finance Minister Arun Jaitley offers some more through his budget. These are further bolstered by RBI's recent monetary policy review. The central bank has played down the effect of demonetisation, while revising the growth forecast to 7.1 percent from the earlier 7.6 percent.
There finally seems to be some sort of equanimity and consensus among the government, RBI and economists that the pain of demonetisation, while intense, would be transitory and nowhere near the doomsday figures predicted by the likes of former Prime Minister Manmohan Singh. A contraction, for sure, but not an irreversible catastrophe. Economic Survey reckons that the economy may shrink by half a percentage point and then witness a sharp recovery, as the fundamentals are strong.
This prediction is in consonance with the estimates put forward by independent research agencies like Nomura and bankers like IndusInd Bank chief executive Ramesh Sobti or HDFC Bank CEO and MD Aditya Puri who expects a fast V-shaped recovery.
While the economic fallout of demonetisation 'as a short-term pain and long-term gain' should become clearer in a quarter or two, the political impact is likely to take longer to emerge. We should get some definitive indicators on 11 March, when the Assembly election results are out, but the full import could drag on till the 2019 Lok Sabha polls and could be far-reaching and transformative.
Mamata, however, is not one for patience. She has always been a very intuitive politician. Her decisions are based less on considered judgement and more on an innate ability to quickly arrive at a decision. It might appear fickle but this is her shtick. For instance, while the Congress was still undecided about demonetisation and had backed it in the initial stages, Mamata had been opposed to it even before Modi could finish his speech on 8 November.
In line with this practice, Mamata has arrived at a few conclusions. She reckons that demonetisation would be Modi's political Waterloo and she wants to milk it in every way she can. Part of her anti-Modi paranoia stems from the fear that BJP is fast occupying the Opposition space in Bengal.
Accordingly, she instructed state finance minister Amit Mitra to make a provision for Rs 250 crore in the General Budget. This money would be disbursed among 50,000 individuals "affected by demonetisation" at a rate of Rs 50,000 each.
"Demonetisation has forced thousands of skilled workers from different parts of the country to come back to the state. They are now living in pitiable conditions. We would give these workers a one-time grant of Rs 50,000 so that they can start an alternative business. An allocation of Rs 250 crore has been set aside for this in the budget," Mitra told reporters after tabling the budget on 10 February.
Mamata's intentions are clear. The cash crunch has hit the informal sector hard and she is keen to appear as a messiah for this segment of Indian economy.
As economists Saurabh Mukherjea and Ritika Mankar Mukherjee of Ambit Capital pointed out in their piece for Firstpost, the Centre's "increased focus on tax compliance is likely to mean that the non-tax paying informal sector will shrink at a rapid pace. This, in turn, will entail a degree of demand destruction as the informal sector accounts for more than 40 percent of India’s GDP and provides employment to close to 75 percent of the labour force."
The political calculation behind the motive is clear. But some serious questions emerge. One, how will the state identify those affected by demonetisation? Two, what would be the metric for identification? Three, can she really afford such largesse?
The chief minister has talked of a "data bank" for collating the numbers and may approach district magistrates for help, but identification of such workers in the informal sector (such as zari artisans, leather industry workers or construction hands who are always in a state of flux) might be extremely difficult. Chances of such a cash dole scheme falling prey to nepotism are quite high. There is every possibility that the money will be siphoned off somewhere in the middle, with very little reaching the intended recipients.
Even if we are to assume that some 'victims of demonetisation' are identified, going by Mamata's claim that "lakhs of unorganised workers in small and micro businesses" have been affected, the dole can at best reach 50,000, leaving others high and dry. How will she ensure social justice while implementing such a scheme?
Second, will her dole be restricted to only workers from Bengal who have returned to the state? What about the state's non-Bengali labour workforce, who may be equally affected due to the contraction in the informal economy? Will she include some and exclude others on the basis of their place of birth?
These are, however, academic assumptions because the real question lies in the state of Bengal's economy. How bad is it?
According to Mitra, the economist-turned-finance minister, Bengal's fiscal deficit is projected at Rs 19,351 crore. About 81 percent of the state's tax revenue is used for debt financing. The state is neck deep in debt. Its financial health is worse than precarious. Whenever this topic is raised, Mamata and her finance minister are quick to blame the previous regime, who were voted out in 2011.
"Debt of Rs 12,400 crore was incurred in the previous financial year. This is a direct legacy of the debt circle we have been trapped in since the Left Front regime began huge unregulated central borrowings since 2006. The total debt may touch Rs 3.66 lakh crore," Mitra said on Friday.
Let's just take a moment to soak it in.
After a 34-year uninterrupted rule, the Left Front left behind a total debt figure of Rs 1.93 crore while remitting office. In just about eight years, the Trinamool Congress (TMC) government is on course to double that figure. A Hindustan Times report has mapped the TMC regime's debt burden: "Rs 2.75 lakh crore in 2014-15, Rs 2.99 lakh crore in 2015-16, Rs 3.33 lakh crore in 2016-17 and Rs 3.66 lakh crore in 2017-18." The report further points out that Mamata must shell out Rs 45,339 crore for debt repayment next year — a whopping 30 percent more than this year's Rs 36,869 crore — due to the maturing of 10-year loans in 2017-18.
Unperturbed by the hazardous condition of state finances, Mamata has no qualms in belting out one populist measure after another, often for ill-reasoned schemes.
"Our farmers were affected as they could not procure fertilisers, seeds etc. The operative credit, on which a large section of our farmers are dependent, was completely paralysed due to demonetisation. A special assistance fund of Rs 100 crore will be created to mitigate the sufferings of these farmers," Mitra said during his budget speech.
And yet data from agriculture ministry shows a considerable rise in rabi crop acreage. Winter crops, according to a 3 December report in the Economic Times, were planted on 415.53 lakh hectares, compared to 327.62 lakh hectares a week earlier. A year ago, the acreage was 382.84 lakh hectares, says the newspaper, quoting data from the agriculture ministry. This is a 27 percent week-on-week rise and a nine percent jump from a corresponding period last year. And this came bang in the middle of demonetisation.
According to Union Agriculture Minister Radha Mohan Singh, "The sowing of seeds is nearly seven percent higher... much higher than last year, from 8 November till 31 December 31, 2016."
And yet, Mamata feels no qualms about pushing the state towards further fiscal disaster, as long as her profligacy brings political benefits. The chief minister is working on an assumption that governments can't fail. But this dangerous tendency of straying further and further from fiscal prudence will ultimately end at a point of no return. Her politics may then fall victim to her understanding of economics.
Updated Date: Feb 15, 2017 11:22 AM