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Disastrous Demonetisation

Disastrous Demonetisation

This may be a political move! The government intends to squeeze farmers in Uttar Pradesh, Punjab, Maharashtra and Kerala, among others. Modi seems to have unleashed a class war, putting systems against the poor and the lower-middle class

The sudden move on the part of the Prime Minister to withdraw money in circulation on the pretext of demonetisation is unprecedented in India, or any other country, or the world. The move has already proven immensely disruptive in a country where many people transact in cash. Many countries took recourse to demonetisation, but it was followed by hyper inflation or instability in their currencies.

This unprecedented move has disrupted the economy, resulting in production loss, particularly in labour-intensive sectors such as textiles, leather, garments and jewellery. More than 400,000 people fear joblessness. Around 32 million people are employed in the textile and garment sector, of which one-fifth are paid wages on a weekly basis. About 22 per cent of the leather industry has been affected. The realty sector has taken a big blow. MSMEs, almost 48 million units, employ an estimated 110 million people contributing to 45 per cent to the manufacturing sector and 4 per cent to exports. It requires only 50 days for killing a business, without any hope of a revival.

It may also lead to worsening of farm distress, as a sudden cash crunch has hit the farm economy, particularly at this juncture when the Rabi season is on the anvil and farmers and farm-traders need cash to do their work. Will this not seriously impact on farm productivity and output?

What will happen to those poor people in rural and semi-urban areas, who do not have any bank account? ATMs and physical banking are not able to meet cash requirements, leading to squeezing of consumer demand. People are not able to access their own money.

Black money or unaccounted money could have been better tackled in a more earnest manner by activating the income tax machinery and by adopting more prudent and broad-based tax policy with emphasis on tax deductible or collectible at source. Is the Income Tax Department not aware of the holders of black money?

Any move by the Indian government to treat currency, which is not surrendered during the ongoing demonetisation process, as profit will be "ill-advised", former Reserve Bank of India (RBI) governor D. Sub-barao has warned.

You need money in legally-valid or undemonetised denominations for buying vegetables and food grain, paying education fee, travelling by private transport and buying medicines to weddings and last rites.

This may be a political move! The government intends to squeeze farmers in Uttar Pradesh, Punjab, Maharashtra and Kerala, among others. Narendra Modi seems to have unleashed a class war, putting systems against the poor and the lower-middle class.

Money in circulation does not construe black money as transaction is captured by tax authorities. One should not forget that 86 per cent of the currency in circulation has been disrupted. This will have adverse impact on the standard of living of the lower-middle class and the poor. India's currency as a percentage of gross domestic product (GDP) is 12.5 per cent as against 18.6 per cent in Japan, 8.5 per cent in Singapore and 7.4 per cent in the US. So, worldwide, it is not in a dangerous dimension.

Indian farmers are already worst hit by two consecutive droughts. This year has seen good rains, but while Kharif crops are being harvested, transporting them to the markets and out of the markets has been hindered. Farmers are unable to procure fertilisers, seeds and other necessities for the Rabi crop. Hence, farmers are driven out to an artificially-created drought-like situation by the present move. Data shows 75 per cent of wheat has been sown in Punjab's fields till now - translating to around 2.6 million hectares of the state's 3.5 million hectare coverage area.

In Haryana, wheat is sown across two belts in a staggered manner. At present, sowing has been completed in around 70 per cent of the 1.9 million hectares across the state's southern and northern parts. However, there is another 550,000 hectares of land in the cotton belt, where sowing of wheat goes on till mid-December. Many farmers who had primed their fields for this activity lack money to purchase seeds, pesticides and fertiliser.

Effective penetration in the banking sector is just around 20 per cent. The banking sector is already in a bad shape. Non-banking financial companies (NBFCs) also face huge non profits of up to 50 per cent and now they are in shock. Many of the lending institutions, including Nidhi, chit funds, micro finance, self help groups (SHGs), etc., will be hit hard by the present move. Anybody involved in the currency circulation sector will collapse. The present move of the Prime Minister will inject trust deficit in the banking sector.

Nearly 40 per cent of India's economy lies in the unorganised sector, which is also the biggest job generator. The entire vegetable and flower trade is in cash. So are the trades and vocations undertaken by small and petty contractors, vendors, plumbers, carpenters, blacksmiths, barbers, mechanics, washermen, small eateries, dhabas, tea shops and multiple others. They constitute the core of India's economy. More than 60 people have died in the process of this misadventure by the PM.

Any economic decision will have to be based on economic criteria - will have to be selective so that it is good for the country, the people and the economy. This has misfired. Demonetisation has been done in haste and in an entirely unprofessional manner - mismanaged and mishandled. The present move is done to gain political mileage, keeping in view the forthcoming elections in Uttar Pradesh, Punjab and other states.

Ambit Capital thinks that the adverse effect will continue through 2017/18 with a GDP growth not more than 5.8 per cent. During the Great Recession - after the collapse of Lehman Brothers -India's GDP growth came down from 9.5 per cent in 2007/08 to 6.7 per cent in 2008/09, with a recovery of 8 per cent in the next year. The present drop will be greater than the Great Recession. It is also assessed by analysts that the actual GDP growth in the whole financial year 2016/17 will be 3.5 per cent less than that of the previous year. The finance ministry of the government of India projects a fall in GDP in the third quarter to 5.5 per cent, as against 7.2 per cent in the same quarter last year.

In 1929, the US Federal Bank had removed 30 per cent of money in circulation after a series of bad decisions. The shock caused to the market-economy led to the Great Depression of 1929 to 1933. In comparison, the present Prime Minister has removed 86 per cent of the money in circulation.

ICRA cut its growth forecast by 40 basis points. It had earlier forecast GDP and gross value added (GVA) to grow 7.9 per cent and 7.7 per cent, respectively. One basis point is one hundredth of a percentage point. Foreign investor banks have pulled out Rs 10,000 core out of the stock market.

K.C. Chakravarthy, former deputy governor of the Reserve Bank of India, has predicted that the financial chaos will continue for another six months. The unplanned, unprepared move has affected transactions to the extent of 70 per cent of the economy. The informal sector accounts for 45 per cent of GDP, and nearly 80 per cent of employment has been disrupted with his present move. The Rupee has also fallen to its nine-month low levels. The trust built particularly after the nationalisation of banks is being severely eroded and there are serious apprehensions that there will be a run on the banks after restrictions are removed after December 31. The edifice of the banking sector will fall like a pack of cards. Populist nationalism heralded by the Prime Minister has unleashed economic anarchy.

The writer is a Congress MP and Chairman, Parliamentary Standing Committee on Finance