T N Ninan: 'The opposite is also true'

The quarterly numbers on gross domestic product (GDP) have added fuel and revived the debate on notebandi.

The reasons should be obvious: we do not as yet have some of the key numbers. On the numbers that we do have, there is room for puzzlement: consumption is supposed to have grown smartly last quarter while companies like Godrej and Dabur were reporting a slump in sales. On the other hand, while the headline growth number for the year may be unchanged, the detailed numbers do show some real cost. Net of agriculture (which is on the rebound) and the government sector (which is proving to be anything but “minimum”), economic growth has actually dropped in the third quarter to as low as 5.8 per cent and is forecast for the fourth quarter to be only 6 per cent. That is a clear step down from 6.9 per cent in the first half of the financial year. To this cost must be added the human consequences of the operational failures: general inconvenience, dislocation and worse in the initial weeks.

As for the benefits of demonetisation, little is known. No numbers have been disclosed on how much of the demonetised currency notes have come back to the Reserve Bank. Bear in mind that the government’s assessment, conveyed to the Supreme Court, was that between a quarter and a third of the demonetised currency notes would not surface. That assessment was almost certainly wrong. The explanation for silence on the actual numbers is that counting is still going on; more than two months after the last day for handing in old notes, this is hard to swallow. Nevertheless, one positive outcome is already clear: only about 60 per cent of the demonetised notes have been replaced, yet there is no currency shortage being experienced any more. In other words, the system is making do with much less cash than previously, and the cash-to-GDP ratio (which had been climbing quite rapidly) has seen a significant drop. If this means that the role of cash in the system has reduced, that must count as a benefit.

Second, we do not know how much black money has been unearthed, how much counterfeit currency (remember that one of the stated goals was to disrupt funding of terrorists with bogus notes shipped from across the border), and how much the quick conversion of a demonetisation scheme into a voluntary disclosure scheme will yield as additional tax revenue. We do know that roughly two-thirds of the 1.8 million people/entities who handed in cash of at least Rs 5 lakh each have not responded to tax enquiries, but it will be a while yet before even a preliminary assessment can be made about the tax intake flowing from notebandi. If, say, Rs 1,50,000 crore of previously undisclosed income is eventually paid as tax, and the cash-to-GDP ratio drops by 20-30 per cent, I would say that demonetisation has delivered.

That said, the numbers as they emerge do make one thing obvious: beware of simplistic conclusions about the economy, because the data are so often contradictory. If there was a slowdown, why were tax revenues up? If many people in the unorganised sector had lost their jobs and gone home to villages, why did the survey numbers put together by the Centre for Monitoring Indian Economy report contrary numbers on unemployment? The old Joan Robinson wisecrack comes to mind: whatever you may say of India, the opposite is also true.

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