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Modi’s Demonetization: List of its terrible out-turns

‘Two consecutive droughts did not do as much damage to the farmers as the Demonestization’

 New Delhi: Much was said before 8th Nov 2016, but now it seems the Govt. have got stroked by a snakebit specially when talked about gross domestic product (GDP).

Seven months after Modi’s announcement about  withdrawing the legal tender status of Rs 500 and Rs 1,000 notes, all we see is it’s terrible impact on GDP growth and devastating effect on farm loan waivers.

Potatoes in Farrukhabad, Uttar Pradesh, fetched below Rs 350 per quintal this February, compared to Rs 600 or more last year.

Rabi onions in Lasalgaon, Maharahtra and tomatoes at Kolar, Karnataka, also gets included in the list. When was the last time we saw all three – potatoes, onions and tomatoes – wholesaling at less than Rs 5/kg, and even retail prices within Rs 20/kg? And this, in peak summer!

Garlic and Methi (fenugreek) seed prices at Mandsaur – the district in Madhya Pradesh’s Malwa region averaged Rs 3,400 and Rs 3,100-3,200 per quintal in April, whereas these ruled at over Rs 4,100 and Rs 4,700-4,800 respectively during the same time last year. Farmers in Nashik, Western Maharashtra, had to dump Sonaka grapes at about Rs 12/kg in March, having sold the same green seedless variety for Rs 45 or so last year.

The unstoppable juggernaut of farm loan waivers: UP (Rs 36,000 crore-plus), Maharashtra (Rs 30,000 crore-plus), and Chhattisgarh (Rs 3,200 crore of interest waivers) have already taken the loss to state exchequers close to Rs 70,000 crore, and we haven’t even begun.

Bank of America-Merrill Lynch estimates that the total size of loan waivers could hit Rs 2.57 lakh crore by 2019.

They note in a research report: “We grow more confident of our call that farm loan waivers will spread across states after Maharashtra followed Uttar Pradesh in waiving farm loans on Saturday (10 June). This begs the question, how much of farm loans will eventually get waived? $40 billion, or 2 per cent of GDP, in our view, in the run-up to the 2019 general elections. This covers bank loans to farmers with up to five acres of land.”

Since the wildest estimate of gains from black money not coming back to the banking system do not exceed this latest ballpark estimate of loss, it is clear why DeMo has failed its cost-benefits test.

It can also now be clearly said that DeMo was the last straw that broke the farmer’s back, leading to a cascade of farmer protests and political demands for loan waivers. DeMo will damage the fisc like nothing else before this. Two consecutive droughts did not do as much damage as DeMo. All the fiscal prudence shown by the Modi government in the last three years will be washed away now in one huge burst of state government populism.

  • The fact that even five-and-a-half months after the demonetisation window for old notes closed on 31 December we don’t know how much money has come back to the system tells its own story. The total value of Rs 500 and Rs 1,000 notes outstanding on 8 November was Rs 15.44 lakh crore. If the deposits have hit this number or even exceeded it, it would mean not only a major embarrassment for the government, but also the RBI. It would imply that fake notes got exchanged for new notes.

DeMo may also have validated some fake notes, possibly with the connivance of bankers.

  • There is not much evidence that tax collections have spikeddue to DeMo. The poor collections under the Pradhan Mantri Garib Kalyan Yojana indicate that no big disclosure of black money was witnessed, and even if we assume that a large chunk of the deposits made during November and December may have been unaccounted money, the government will have to unleash a tsunami of tax terrorism that will surely be counter-productive.

The need of the hour is to bring normality to economic activity. The last thing we need, as we stand on the threshold of the implementation of the goods and services tax (GST)

  • It is clear that nationalised banks played a key role in implementingnotebandi. But the fall in interest rates following large inflows into the banking system will constitute only a pyrrhic victory unless credit demand picks up – of which there is little sign. While rates can be cut, credit growth is muted. And with loads of bad loans to resolve, banks have had more costs piled onto them due to DeMo. This can hardly be good for them.
  • Perhaps the one big gain from DeMo is the still rising trend in digital payments.But this gain in intangible, and benefits will come only over the long term. Moreover, while DeMo made non-cash modes of payment necessary and vital, the popularization of digital payment modes could have been done even without the disruption of notebandi. DeMo at best provided the government an opportunity to make necessity the normal mode of payment.
  • Even the implementation of DeMo could have been better thought out. With hindsight, one can say that the best way to demonetise would have been to limit it to the Rs 1,000 note, and then withdrawing the old Rs 500 notes in stages – by not returning those notes that came back to banks as part of normal cash deposit operations. The disruption was maximised precisely because this two-stage approach was not adopted.

The lessons the Modi government needs to learn from this costly experiment gone wrong are the following:

#1: Don’t rely on economic charlatans and a small group of babus in the Prime Minister’s Office (PMO) and the advisers brought over from Gujarat when taking big decisions like DeMo or even GST. Modi needs to widen the circle of experts in his government, even if he chooses not to finally listen to their advice. This is one redeeming feature of Indira Gandhi, who too had a strong PMO, that Modi could now seek to rectify.

#2: Empower more ministers, and make it a point to regularly listen to your own chief ministers who may have ears closer to the ground than the PMO. Shivraj Singh Chauhan and Vasundhara Raje could well have told Modi what may be a problem with DeMo, but this kind of political feedback loop does not seem to exist in the Modi government.

#3: A white paper on the larger effects of DeMo and the lessons learnt is important. While it may not show the government in good light, it will at least demonstrate that it is learning lessons from the misadventure. To brazen it out – pretending DeMo was not a failure – is the worst thing that can happen to a leader who is clearly one of the best India has produced in a long time.

#4: The damage on loan waivers has been done, but nothing stops Modi from holding a special parliament session and creating a multi-state group of chief ministers to recommend how to fix farming without waivers in future, and also to agree on a code that no politician or state government will henceforth demand a waiver except in exceptional circumstances, and that too on a selective basis.

Leadership is most needed when the country is down. Right now, banks, farmers, small and big businesses are all down – though not out. The economy will not recover easily without great economic and political leadership. Modi’s second term depends on him getting the economics right, and not just the politics.