Is India Back In Business?

In the days and weeks following Prime Minister Narendra Modi’s announcement withdrawing Rs. 500 and Rs. 1,000 bank notes, prophets of doom rose in chorus: the end, they said, is nigh.

Former Prime Minister Manmohan Singh declared in parliament that India’s GDP in fiscal 2017 would plunge by 2 per cent. He added darkly that the implementation of demonetisation reflected “monumental mismanagement ”.

Former Finance Minister P. Chidambaram was even more scathing. He appeared on a series of television shows to warn that bank liquidity would take “seven months” to normalise.

Dr. Manmohan Singh and P. Chidambaram have, for the better part of two decades, run the Indian economy in one capacity or the other. How accurate has their assessment of the impact of demonetisation proved?

Not very. To be fair, both Dr. Singh and Chidambaram were right to describe the implementation of demonetisation and remonetisation as deeply flawed. But their assessment of the economic impact of withdrawal of high denomination bank notes was wrong.

Here’s why. Aditya Puri, Managing Director and CEO of HDFC Bank, is the epitome of rectitude. He runs one of the most successful and professional banks in the country. His views on the after-effects of demonetisation are thoughtful and precise:

“The transitory and long-term effect should be viewed separately. The transitory pain is largely behind us. Increase in deposits has brought down interest rates. The process of digitisation has been speeded up by three to five years. This will increase transparency, reduce rent seeking, improve financial inclusion and reduce costs. Now, we have 4 lakh point of sales (PoS) terminals, compared with 2.9 lakh pre-demonitisation. Card swipes have gone up by 300 per cent. We feel excessive pessimism is not warranted. We spoke to top executives across industry from Reliance and Mahindra Finance to Birla Finance, ITC, HUL, Pidilife, Marico and even Jaguar. The response was the same – recovery has been far more V-shaped than they expected. Activity is close to normal and there is general expectation of recovery in this quarter.”

Other CEOs are equally sanguine. True, they say, the implementation was botched. The flip-flops could have been avoided with better planning. But now that we are in a post-remonetisation phase, the digital thrust will begin to pay rich dividends.

As Mint wrote on January 30, 2017: “The impact of demonetisation on corporate earnings may have been overestimated, December quarter earnings data shows. More than 58 per cent of the top firms that have reported their financial results for the three months ended 31 December exceeded or met analysts’ estimates. A Mint analysis of 94 of the BSE 500 companies shows that 55 have reported earnings that met or beat estimates.”

Parliamentary committees – and especially the Public Accounts Committee (PAC) –have interrogated RBI Governor Urjit Patel numerous times in the past few weeks. Three key points have emerged from the RBI governor’s verbal and written statements:

One, discussions between the government and the RBI on demonetisation began in early 2016 when Raghuram Rajan was still governor (and seeking a second term);

Two, work on the design of the new 500 rupee note began in January 2016, again when Rajan was in charge.

Three, around 75 per cent (in value) of demonetised notes are expected to be replaced by new notes by end-February. The slack of about 25 per cent would be taken up by the surge in digital transactions. It would be unnecessary to replace the full value of bank notes withdrawn so as to achieve a “less-cash” economy.

With the Budget session set to be stormy, what two Rajya Sabha MPs in particular, Dr. Manmohan Singh and P. Chidambaram, have to say in parliament about the post-demonetised economy and their predictions two months ago will prove interesting.