Hard days ahead for people

In the world’s largest democracy, the people’s concerns, even touching daily life, may hardly matter when heady governments can do anything at their will, whether or not proclaiming a war on social evils like black money and corruption. There can also be momentary assaults on constitutional rights and liberties, some of which could become permanent conveniently for the life of that majoritarian government. 

These grim thoughts were evoked in the bitter experience the people had to undergo in the last quarter of 2016. As much as 86 per cent of money in circulation had ceased to be legal tender through an official fiat overnight (Nov 8/9).  The Modi Government to this day has not acknowledged, let alone apologise for, the widespread misery and distress caused thereby mainly to millions of poor and workers. All indications are for the hurt to millions would continue for long into 2017.

It was avoidable harassment for the people at large, if only the banking system had been equipped beforehand – when RBI is supposed to have fallen in line with Prime Minister Modi’s wish. Long queues of people in need had continued for 50 days – the deadline set by the Prime Minister for difficulties to ease. Shocks and fatigue also took a toll of over 100 live. The banks were still unable to meet cash needs of customers and offered only crumbs till December end.

Far from any anxiety to alleviate distress, the people are called upon to steel themselves for further onslaughts toward a ‘cashless society’. Such abrupt decisions are tantamount to an arbitrary exercise of power when the long-established cash-based economy is imperilled in meeting people’s day-to -day needs in a country with maximum dependence on cash.

As a way of reducing embarrassment for itself, the government is liberally extending incentives for folks with means and small businesses for the switch to digital modes of payment. More of them are due to come in the February 1 Budget.  But the luckless millions must grin and bear the “short-term pain for long-term gain”. Growth and jobs have lost their primacy in the modernisation agenda of the Modi Government.

The Reserve Bank of India (RBI), hitherto a globally reputed Central bank, has so badly failed the people that its prized credibility has been lost. Having fallen in line with the government's decision on demonetisation, RBI’s Financial Stability Report (FSR) is also mostly in tune with Government’s rosy view of the economy in 2017-18, playing down relatively the adverse effects of cash denial and the impact on demand.

Notwithstanding the “short-term disruptions in certain segments of the economy”, it contends that the withdrawal of (SBN) specified bank notes of Rs.500/1000, is expected to “significantly transform the domestic economy in the long run”.

In a Foreword to FSR, RBI Governor Urjit Patel says the withdrawal of Rs 500/1000 notes "will impart far-reaching changes going forward". He expects domestic economy to be transformed in terms of greater intermediation, efficiency gains, accountability and transparency through increasing adoption of digital modes of payments, “notwithstanding the short-term disruptions in certain segments of the economy and public hardship".

The Governor has said little to hold out any assurance on cash availability for customers by way of lifting or even raising of limits for cash withdrawals, given the current inability of banks to honour the permissible low levels.

His Report reflects faith in macroeconomic stability though the fundamentals apart from moderate inflation are not all in place. It commends “strong” supply-side measures of Government to manage inflation and reforms in view, notably GST, plus “lower levels of policy uncertainty” as a redeeming feature.

Bringing the “shadow economy” into greater focus, this FCR- a bi-annual publication - says further initiatives in encouraging non-cash digital payments and withdrawal of legal tender status of SBNs, accompanied by changes in Income Tax law, are expected to result in a shift away from over-dependence of Indian economy on cash-based transactions.  

Demonetisation resulted in a surge in bank deposits with a commensurate fall in currency in circulation. It had a dampening effect on inflation with a temporary loss of momentum in the growth of real gross value added (GVA) which RBI had revised down to 7.1 per cent in 2016/17 from the earlier 7.6 per cent.

While the precise impact on the economy may be difficult to capture at this stage, according to RBI, the disruptions in the cash intensive sectors of the economy are “likely to be transitory”. In the interim, policy measures to sterilise the impact of excess liquidity resulted in higher investment in government securities by the banking system.

The FSR has, however, underlined macro-financial risks arising from weak global recovery due to productivity and global trade slowdowns as well as the rise in US interest rates posing “a significant risk to emerging financial markets”.  For India, the risks are not insurmountable, RBI opines, because of, reduced policy uncertainty and tax and legislative reforms on the anvil. 

With capital outflows from which India is not excluded, Dr Patel cautions there is "little room for complacency, and it is important to guard against sporadic volatility in financial markets.”

While the transition to the nationwide goods and services tax (GST) is assumed to have only a minimal impact on consumer price inflation, RBI has cautioned that any reversal in global commodity prices, especially oil with OPEC decision to cut output from January 2017, would have to be carefully embedded in the outlook for macroeconomic policy.

The FSR is quite sanguine about the effects of demonetisation with its “potentially transforming” impact, but RBI has no word of comfort for the disappointed millions of customers now being turned away by banks due to lack of currency stocks.