Former Prime Minister Manmohan Singh told Parliament during the winter session that the cost of demonetisation would be ruinous to the Indian economy. He said GDP growth in 2016-17 would plunge by 2 per cent.
Former Finance Minister P. Chidambaram has been even more pessimistic. He said cash liquidity in banks would take “seven months” to normalise and that the Reserve Bank of India’s independence had been irreparably damaged as a consequence of the 60-plus “flip-flops” during the remonetisation exercise.
Chidambaram has already been proved wrong on his grim “seven-month” prophecy. Bankers estimate that currency operations are fast normalising and full normalcy will be restored by end-January. That’s within two-and-a-half months of demonetisation – a far cry from Chidambaram’s dystopian prophecy.
The government has meanwhile announced that GDP will grow by 7.1 per cent in 2016-17. This, however, does not factor in the effect of demonetisation. A guestimate of GDP growth this fiscal could therefore be around 6.5 per cent after taking into account the post-demonetisation slowdown in especially the small, medium and unorganised sectors. Much of the economy, including automotive and manufacturing, is already bouncing back though retail and FMCG continue to flounder.
Overall, the average estimate of a 1 per cent drop in GDP growth in 2016-17 due to demonetisation, predicted by global and Indian financial institutions like Citi, Morgan Stanley, Asian Development Bank (ABD), Crisil and CARE, seems about right. Dr. Manmohan Singh’s projection of a 2 per cent slowdown was clearly a political, not an economic, estimate.
On January 9, the government announced that indirect tax revenue for April-December 2016 had risen by 25 per cent over the same period last year. For December 2016 alone, which bore the brunt of the cash economy slowdown, indirect tax revenue rose by 14 per cent over December 2015. The large amounts of cash deposited in cooperative banks and Jan Dhan accounts reveal the extent of black money that was slushing around the system.
As the picture clears, two major benefits seem set to emerge from demonetisation. First, a significant portion of the old notes surrendered to banks represent undisclosed black income. Audit trail established, they will now yield tax revenue on a recurring basis.
Second, the shock administered to the system by demonetisation has turbo-charged the move to a digital economy. As digital transactions rise, the economy will become more transparent and efficient. A digital ecosystem that could have taken a decade to develop can now be a reality within a year.
Digital transactions through online payments and e-wallets have already multiplied several-fold in the past two months, albeit from a low base. The launch of BHIM on Android phones (and shortly on IoS Apple phones) will take the cashless economy to small towns, especially once Aadhaar-enabled money transfers are made possible without the use of even a phone. A thumbprint will in effect be your bank account. The transformative effect of this on the rural economy can hardly be overstated.
The forthcoming Union Budget is obviously crucial. Personal income-tax slabs need to be raised. Fears of a tax inspector raj must be allayed. Public spending needs to be increased in infrastructure, education and healthcare.
Demonetisation has been a qualified success. The Budget is an opportunity to build on this success and make it an unqualified one. If Finance Minister Arun Jaitley delivers another lacklustre Budget, the enormous political and economic risk Prime Minister Narendra Modi took to wrench India from a cash-heavy to a cash-light economy will be put in jeopardy.
Columnist
Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is founder of Sterling Newspapers Pvt. Ltd. which was acquired by the Indian Express group
