2017: Disorder, global headwinds

The Modi-inflicted demonetisation of higher value notes totalling 86 per cent of money in circulation on November 8 continues to take its toll regarding deprivation of cash for poorer millions and small traders with issues of livelihood and business thrown out of gear. 

The disruptive effects are also spreading to major segments of the economy.

While the country lauds the Prime Minister's fight to root out black money, continuing severe limits on cash withdrawals from their accounts in banks have accentuated the misery of the people at large. That the stress should be so acute, in a country of 98 per cent dependence on cash, even after five weeks of a fateful decision, shows up its grim downsides.

We see day to day the disruptive effects of the monetary onslaught on all sectors of economic activity and the explosive growth in joblessness or farm or urban labour not getting their dues. Major industrial sectors had begun reporting on the lack of demand and sales. States' tax revenues have taken a big hit.  Tamil Nadu and Kerala Ministers have spoken of significant fall in sales and other commercial tax revenues.      

The total unpreparedness for alleviating distress on the part of Government at the highest level or India's monetary authority has been laid bare. The majoritarian BJP in power may have celebrated this "surgical skill" at the cost of people who are asked to make temporary sacrifices for what the Prime Minister would like to call "Mahayagna", and wait for "long-term gain".

The peculiar circumstances surrounding the momentous decision have left RBI far behind in fulfilling its mandatory responsibilities for the currency it should provide and honour. That is far too serious a matter to haunt it for the future. Global rating agencies in adjudging the impact of demonetisation on growth have also raised issues about the degree of confidence in and credibility of RBI.   

The scale of demonetisation in a country of India's size and cash needs and a context of global economic slowdown has perplexed some of world's leading economists pointing to its disruptive consequences, and some view the decision as "botched" one or a "policy bungle", yet to be explained by the Prime Minister.

The opposition led by Congress and the other main parties have not covered themselves with glory either.   They have been taken to task for not debating the issue in Parliament threadbare but disrupting its proceedings for days leading to a virtual washout of the winter session.  The opposition had continually sought the Prime Minister's presence in Parliament for the debate while strangely Mr Modi was complaining in public meetings he was not being allowed to speak in Parliament.

Though Prime Minister Narendra Modi has kept reviewing the post-demonetisation situation, Government has been unable to go beyond marginal relaxation of limits - but banks have been told where to draw the line - and this has not eased the situation to any significant extent. The Supreme Court, where the legality of demonetisation decision is under challenge, has asked Government to ensure that the banks allow the permitted withdrawal of Rs.24,000 per week.

Indications from Government side are that the pain could last longer, well into the early months of 2017. The printing processes for new currency notes required to replace the rupee thirteen lakh crore of invalid notes surrendered by people would also take another six months to be completed. Why did Prime Minister Narendra Modi set a time limit of 50 days from November 8 for the people to meet their cash requirements in full?  Ominously, it might have been more of buying time to reduce the role of cash in Indian economy.   The technocrat in the Prime Minister wants to transform India from cash to digital economy overnight.

The preaching thereof is left to a loquacious but ace Parliamentarian, Finance Minister Arun Jaitley,  who seeks to persuade agitated sections and rural folks that digital transactions would not become a substitute and it would only be "a less cash economy". RBI may be already on intimation that the new Rs.500 note printing, the currency most in demand but not easily available, could be staggered.

The long and short of it all is that while the noose is tightening more around genuine bank customers, with all restrictions, Government is yet to declare victory over hoarders of wealth in cash or valuables against whom demonetisation was ostensibly targeted.   Meanwhile,   Government goes on announcing awards and cash incentives for promoting digital payments system.

Modi's 'astra' suits Government in two ways. Firstly, a beaming Finance Minister acknowledges augmentation of Centre's finances with resources from the Central bank (demonetised currency deposits, bulk of which to be remonetised over a longer period) besides the seizures of hoarded cash. That helps him to remain fiscally prudent as well as to become a poll-eve populist. Jaitley has also hinted at lower tax rates in his budget for 2017-18 to be presented on February 1. Secondly, Modi’s dramatic announcement of demonetisation was also designed to accelerate the move toward a cashless economy.

Demonetisation has already had an adverse impact on the economy in several ways. The Monetary Policy Committee itself on December 7 referred to business slowdown and lowered growth in the current fiscal from 7.6 per cent to 7.1 per cent (GVA).   The Asian Development Bank has also revised down its India projection to 7 per cent from the earlier 7.4 per cent.

This, it says, is due to weak investments and slowdown in the agriculture sector and the lack of cash, affecting small and medium scale businesses. However, ADB expects Indian economy to recover from the short-term effects and grow at 7.8 per cent in fiscal 2018.

India also faces interest rate hardening globally with another three rate hikes in 2017 by US Federal Reserve which increased the Federal Funds Rate to a range of 0.5 to 0.75 per cent on December 14. India is well-cushioned with foreign exchange reserves of some 360 billion dollars, but it could still experience exchange rate volatility and capital outflows.The dollar debt of India's corporates will also be rising, and new capital to access would be costlier.