Ashwani Mahajan
Opposition parties are not able to digest the decision of the Modi government to demonetise rupees 500 and 1000 currency notes, which is being seen as offensive against black money, terror and naxalism. Though some opposition parties have welcomed this decision, however many of them are fervently opposing the same in and outside the parliament. Generally, people’s opinion is more or less divided on controversial decisions, and in such cases opposition is able to take the fight to the streets. However, in this case despite a call of ‘Bharat Band’, opposition could not garner public support and majority seems to be in favour of demonetisation as revealed from various opinion polls.
Apart from raising issue of inconvenience caused to the public, opposition parties are raising concerns about possible slowing down of economic growth due to demonetisation. Although majority opines that with this, good amount of black money in the form of currency would go out of the operation. General feeling is that a big amount of black money is kept in the form of high value currency notes. However, this is also a fact that a significant amount of black wealth also exists in the form of real estate and gold.
Manmohan’s argument of slowing GDP growth
Ex-Prime Minister Dr. Manmohan Singh while speaking on this issue in the parliament said that, due to the problems in the implementation of demonetisation, economic activities have been affected adversely. He said that since cooperative banking system which serves large number of people in the rural areas is non-functional and has been prevented from handling cash, farmers have been facing numerous difficulties. Similarly small and big industries and other businesses are facing disruption. He says that because of these disruptions, GDP growth may get reduced by at least 2 percent post demonetisation.
Should we look at short run or long run?
All critiques of demonetisation have been over emphasising the immediate problems. Though there is a need to expedite the process of converting old notes into new; and lack of preparedness is clearly depicted in this case. Prime Minister himself has asked for 50 days time, which means in these 50 days a significant portion of old currency notes would be converted into new notes. However, it may take some time to come out of the problems arising out of disruption in the businesses. This may affect GDP growth in the immediate future. We should remember that our GDP growth has been accelerating in the last 3 years. Before that it had reached 4.5 percent into 2012-13 (before reaching 7.3 percent in 2014-15), from 8.6 percent achieved in 2010-11. However, impact on economic activities due to lack of liquidity in the market is not expected to last long. People clearly see bright future after demonetisation, and perhaps that is the reason for their support of demonetisation despite difficulties and disruptions.
What are the long term benefits?
In the past many decades India has been passing through the problem of terrorism and naxalism. Our army, in Kashmir has been facing stone palters, finance by terrorist organisation. This is no coincidence that since November 8, 2016 stone-pelting has stopped in Kashmir. There is a significant fall in terrorist activities. Demonetisation has broken the backbone of naxalism as well. We must understand that due to terror and naxalism, causing disruption in public life, not only GDP goes down; huge sum of government money also goes into tackling these problems. So, evidently after demonetisation this kind of disruption will reduce, improving GDP and saving public money. According to newspaper reports since demonetisatoin ‘Hawala’ activities have almost stopped, this has led to reduction in organised criminal activities such as ‘Matka’, murders, extortions and smuggling. This is an open secret that these organised crimes cause huge disruption in economic activities and GDP.
Due to excessive expansion of black money, unproductive and conspicuous consumption is encouraged, which not only causes diversion of scarce national resources for the production of luxury goods, poor man on the street feels cheated. Because of excessive and unequal distribution of currency, poor is the worst hit of inflation. Today we have total Rs. 14.5 lakh crore worth of high value currency notes. It is expected that currency of nearly 2 to 3 lakh crore will not return; therefore significant fall in prices is expected. Need not to say that this would reduce our production cost and our products may become more competitive in international markets pushing our exports.
Not just prices, even interest rates would also go down. Banks have already started reducing interest rates due to increasing cash in their kitty. This process may continue in near future and interest rates may go down by 1 to 2 percent. Economists, who fear reduction in growth rate, should also look at the possible acceleration in GDP growth due to falling interest rates. This will happen because, projects (infrastructure, industrial and even services) which were unviable due to high interest cost, would become viable now. As a result more of infrastructure would be built, industrial investment will increase and country’s dependence on foreign investment or foreign debt may reduce. Would this not push up GDP growth? Apart from this, common man would benefit from reduction in EMI and would be encouraged to buy houses and consumer durables.
Indications from RBI show that if less notes come back to the banking channels, government’s liability (debt) would go down accordingly. This would reduce recurring interest liability of the government as well. This would give more space to the government for increasing expenditure on social services like health and education. Reduction in the size of black economy and the process of moving towards whiter economy may also give a boost to government’s revenue, which can be used for development and social welfare activities.
Therefore those people who are panicking about reduction in growth, due to disruption caused by momentary liquidity problems, must also consider these facts.
(The author is Associate Professor, PGDAV College, University of Delhi)
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