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 By G. Srinivasan 

The Modi Government unveiled its third Cabinet reshuffle giving primacy to gender factor by elevating a woman to the defense portfolio and dropping, inter-changing and adding a few familiar and new faces and the spotlight naturally shifts to governance now.  But in the run-up to the reshuffle, a lot of ill-tidings gripped the government with the RBI announcing its final count of how much old currencies returned to the system to apprise the country rather obliquely of how the entire demonetization bid was a mountain labored to spawn a mouse! As if there is a distinct disconnect between official claims of demonetization and the stark ground reality, the Central Statistical Organization (CSO) came out with its first quarter gross domestic product (GDP) figures.

The CSO number on growth was a damp squib as real GDP growth slipped to 5.7 per cent in the first quarter (April-June) of 2017-18 from 6.01 per cent in the previous quarter, reflecting the resurgence of growth concerns. This is by far a 13-quarter low, even as the governing class has not refrained from chest-thumping that India continues to be one of the few fastest growing economies in the globe. Government functionaries including ministers had the unenviable task of defending demonetization as demonizing it would cost them dearly.

But a reality check reveals that there is not a scintilla of doubt that the demonetization exercise of declaring high denominational currencies of 500 and 1000 rupees from the mid-night of November 8, 2016 has had a deleterious impact on the economy, besides pushing the informal sectors into a state of disrepair as it was widely reliant on cash for conduct of its affairs. Even before demonetization, the factors swaying the slide of five straight quarters beginning from 9.1 per cent in March 2016 are many and varied as the Central government was hamstrung by leadership attention to State Assembly polls in Uttar Pradesh and a few other States. Still there is scarcely any doubt that the demonetization bid coupled with the uncertainty shrouding the July 1 adoption of a new indirect regime, viz., the goods and services tax (GST) remain the real culprits for slowing down activities in the real sectors of the economy under the fear of the unknown.

Though the initial teething troubles concerning the GST might be partly overcome in the second quarter as firms get entrenched to the new milieu of indirect tax regime, the crucial question of demand for industrial output getting any impetus remains shrouded in mist. The central bank last month said that its industrial outlook survey had signaled “a waning optimism in the second quarter about demand conditions across parameters and especially on capacity utilization and profit margins and employment”. A cursory glance at the sector-sector trends reveals that manufacturing expansion in gross value added (GVA) terms had slowed down to a near stagnancy at 1.2 per cent. This, from 5.3 per cent in the last quarter (Jan-Mar) of 2016-17 and 10.7 per cent a year earlier, is an unmistakable signal that things are not honky-dory on the industrial front. The persistent balance sheet problem of highly-leveraged industries on the one hand and lack of affordable credit from the banking system on the other which also suffers from identical balance sheet woes meant that there is virtually an investment famine gripping the crucial industrial sector. With private investment not picking up, the requisite pace and mojo, the issue of meaningful job creation through the real sector activities is in the backburner.

It is in this context that a beleaguered finance minister acknowledged that the challenge before the government now is to work out both policy and investment measures. This is absolutely necessary now to impart the needed thrust and momentum to keep the growth engine in at least half-throttle.  But the issue of keeping fiscal deficit at the ceiling prevents the government from loosening the fiscal tap lest any laxity should result in high inflation, high borrowing cost and crowding out private investment from the scene outright. This being the penultimate year to the next electoral gambit in 2019, the Modi Sarkar can ill-afford to keep its powder dry now as people promised of Acche Din precisely three years ago would turn restive .

Be that as it may, economists, policy analysts and critics of the government now contend whether the demonetization disruption was worth the effort especially after the RBI conceded in its latest annual report that well-nigh 99 per cent of banned high-value currencies were back. In the aftermath of the demonetization, there was widespread belief that it would bring a windfall to the Centre. To the extent that the demonetized high value notes were not deposited or exchanged at banks—particularly by those who hoarded their booty markedly in cash—the resultant reduction in the apex bank’s currency liabilities would produce a ‘profit’, which it could then distribute as dividend  to the government. But this did not supervene.

As the annual report has corroborated Rs 15.28 lakh crore or 99 per cent of the Rs 15.44 lakh crore worth of the notes rescinded overnight on last November 8 was turned in. Instead of fostering revenue boost—the original estimates put it at Rs 4-5 lakh crore— the RBI’s surplus payable to the Centre out of its earnings for 2016-17 fell to Rs 30,659 crore from Rs 65,876 crore the year before. With the central bank having had to incur extra costs on printing new notes of high denomination, disbursing interest on the excess cash it was compelled to absorb from banks and making an unexplained additional provision of Rs 13,140 crore towards a contingency fund, there was simply less surplus to distribute. The Centre’s expectations on demonetization on this score had sorely been belied.

In retrospect, the long queue to exchange old notes, the overstretched bank staffs behavior to their own customers of all hues, the manipulative capability of some egregious and errant elements within the banking system to help people wriggle out of their ill-gotten wealth and the money laundering it helped people of dubious proclivities are really worth the troubles they caused to the economy?

It is time the government  did a serious introspection as to how to revive demand and investment cycles so that the real sectors of the economy get a leg-up instead of placing its faith in legerdemains of ugly upshot, analysts wryly say. (IPA Service)


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