Tag Archives: Demonetisation

Demonetisation has hit jobs, paralysed growth

The government has tactfully shifted its focus from tackling black money to cashless economy in the absence of the impact demonetisation should have made on black money, counterfeit currency and corruption. It has now realised that the gamble has gone wrong.

The Indian economy is bearing the brunt of the ambitious drive. It has been on the negative slope when it comes to production of goods as well as consumer demand. The contraction in the output growth has started reflecting on the employment scenario. The formal and informal sectors of the economy were already struggling with depressed demand and investment and now the demonetisation impact is forcing them to cut jobs and freeze hiring.

Employment reacts quickly to changes in output, because the job market reacts to an increase in output in the same quarter. Weak output growth means lack of job creation. If we see the economic scenario of India just before demonetisation, it was struggling with slow demand, slow investment and, consequently, slow production. The industrial output had slipped to 1.9 per cent in October compared to an expansion of 9.9 per cent in the same month last year and this has happened due to the decline in production of capital goods and the unimpressive performance of the manufacturing sector.

The manufacturing sector, which constitutes more than 75 per cent of the Index of Industrial Production (IIP), recorded a contraction of 2.4 per cent in October. Similarly, the capital goods output shrank by 25.9 per cent and the mining sector by 3.1 per cent.

Then came the demonetisation blow which led to further contraction of the economy. From manufacturing to service, all sectors of the economy were adversely affected at a time when they were already exposed to the vulnerability of the market. If the Purchase Managers’ Index (PMI) of the service sector for November is any indication, there has been a sharp contraction of demand in the sector.

The index has reduced to 46.7 in November from 54.5 in the preceding month. Similarly, the PMI for the manufacturing sector has reduced to 52.3 in November from 54.4 in October.

Demonetisation has adversely affected manufacturing growth because of the slowdown in production as well as domestic consumption. Manufacturing production growth lagged amid cash shortages.

The adverse impacts demonetisation had on the economy in its entirety were reflected on the employment potential of the economy. Large sectors like information technology, BPOs, automobile, transport, gems and jewellery, handloom and leather industries had witnessed negative job growth during 2015.

Demonetisation would only add to their existing woes. For example, how will the textile sector, which employs nearly seven million people as daily labourers, pay to them in absence of cash supply?

Industries like handloom, leather and automobile face the same situation. The construction industry has also been badly hit with significant wage implications for its casual workforce. How will contractors pay labourers who are primarily daily wagers?

There is every likelihood that the country’s industrial production will shrink further because of the impact of demonetisation. Companies have already delayed production and cut down on targets. Manufacturing is the leading sector in output growth. To revive employment growth, we need to revive the manufacturing sector.

If employment in the manufacturing sector suffers the brunt, where would people find jobs? Every year we add 15 million job seekers to the market, but as per latest assessments, we would be losing four lakh jobs next year – because economic slowdown is a corollary of demonetisation. The e-commerce sector alone is expected to shed two lakh employees. Where will they go? The immediate concern is that if employment growth has been poor during a period of high output growth, it will probably worsen in the years to come, when the GDP growth is expected to weaken.

Sensing the reality, the Reserve Bank of India (RBI) has revised growth estimates to 7.1 per cent from 7.6 per cent. Some economists predict the growth rate will remain below 7 per cent.

The reluctance of the central bank to reduce the repo rate indicates the economy is likely to face inflationary pressure. Economic slowdown accompanied by inflation paints a dangerous picture of the economy post-demonetisation.

Apart from the formal sectors, demonetisation has severely affected the informal sector, which accounts for 45 per cent of the GDP and 80 per cent of employment.

As some economists have rightly remarked, a permanent dent has been made to the informal sector by virtue of the demonetisation. The consequences have already begun. Small business establishments are facing great inconvenience leading to job loss in the unorganised sector.

A jute mill in West Bengal’s Howrah district has to be shut down because the mill management can no longer pay wages to the workforce.

All the 2,500 workers of the mill have been rendered jobless. Hundreds of labourers have been rendered jobless in the bangle factories of Firozabad, Uttar Pradesh as 90 per cent of the factories have shut owing to a cash crunch. The knitwear units in Ludhiana are winding up their businesses too. Many tea garden workers in West Bengal and Assam are jobless. The diamond and ceramics industry of Gujarat is also bearing the brunt of the note ban with 60 per cent of the ceramics factories shutting shop.

The state’s textile industry has been paralysed after the demonetisation move led to thousands of workers losing their jobs. The adverse impact of demonetisation on the MSMEs, which account for 20 per cent of the GDP, will hit the job market the hardest in the long run. Sectors like FMCG, consumer durables, and retail too have stopped hiring as consumer goods sales are reported to have dropped by a third.

Ten million jobs per year is what BJP promised the youth of India in 2014. The reality is the number of jobs created in 2015 was much less than what it was a few years ago. Job creation is at its lowest in the last seven years. Large traditional sectors are not where jobs are being created. The agriculture sector is expected to see a decline of 25 million jobs by 2023. At this point, the slowdown of the economy will render lakhs of people jobless and millions will be deprived of their livelihood.

The objective of transparency in financial transactions and creating a cashless economy is a good one, but not in sync with the state of our economy. The strengths and weaknesses of our economy ought to have been taken into consideration before taking the decision.

The shock therapy we are witnessing in the form of demonetisation – without structural transformations – is capable of denting the momentum of job creation in the long run.

Source : http://www.dailyo.in/politics/demonetisation-job-growth-unemployment-black-money-corruption-bjp-cash-crisis/story/1/14625.html

A tale of two surgical strikes

It is time to pause and reflect on the outcome of the surgical strikes along the Line of Control on September 29 and the “surgical strike on the Indian economy” on November 8 and do a cost benefit analysis. Such a narrative should begin with a statutory declaration that it does not involve the question of nationalism. We all love our country as we love our families.

Ever since the Modi government had publicly declared that the Indian Army had carried out surgical strikes along the Line of Control targeting the terrorist launch pads, exchange of fires along the LoC has been a daily affair. Since then, we have lost more than 26 soldiers out of which two of them have been beheaded and their bodies mutilated. Besides, 12 civilians have been killed, 70 army men and 76 civilians have also been injured in the Pakistani firing and shelling. More than 300 ceasefire violations by Pakistani troops have taken place along the Line of Control and International Border after the surgical strikes. Compared to the previous year, infiltration has increased by 100 per cent in 2016.

The recent Nagrota incident and killing of seven Army personnel, including two officers, is a clear signal that nothing has been changed positively on the ground. Only the situation has been deteriorated with a spurt in attacks, infiltration and killings. May be the army action would have deterred the militants and the Pakistani soldiers from acting against India, but the machismo of the Modi government to make it public proved counter-productive causing loss of lives and property on this side of the border.

Apart from making a strategic army action public, the government did nothing in terms of economic and diplomatic offensive to contain the situation. A lot was said about review of the Indus Water Treaty and the MFN status to Pakistan but all the action ended in TV studios and social media platforms. The prime minister declared in Punjab that the water that belongs to India will be stopped from going waste in Pakistan. But, he is silent on how he intends to do it and to question his intention will be construed as anti-nationalism. In response to a Rajya Sabha question, the commerce minister Nirmala Sitharaman has replied on November 23 that no decision has been taken on review of the MFN status provided to Pakistan. So, the trade goes on, the diplomacy goes on and so also escalation of tension along the LoC.

While the Modi government still remains in celebratory mode turning a blind eye to aftermath of “surgical strikes”, the question still remains what is India’s strategy towards Pakistan? Tit for tat, offensive, defensive or long term solution?

Now let’s deal with the second tale of “economical surgical strike” and look at certain bare facts which separate the wheat from the chaff. The prime minister while announcing the “surgical strike on the Indian economy” on November 8 had outlined three objectives: recovery of black money and to curb its further generation, to stop terror funding and prevention of counterfeiting of currencies.

How far the demonetization succeeded to achieve these goals? As on November 29, 60 per cent of the

Rs 14.5 lakh crore have been returned to the banking system either in the form of deposits or exchanges and the fate of the remaining 40 per cent will be known after December 30. Further, as the demonetization process is not intended to touch the flow of resources, bulk of the black wealth will remain untouched. Therefore, it is an exaggeration that with the demonetisation process, the problem of black money will be over. It certainly requires comprehensive reform which is much more than note-bandi. If the proposed amendment to the Income Tax Act which has been passed in the Lok Sabha as a money bill is of any indication, there is serious doubt on the intention of the Government to fight against black money. If the objective was to convert black money into white by another disclosure scheme, why the common man who has nothing to do with black money is sweating before banks and empty ATMs?

Recovery of new currencies from terrorists, increasing terrorist activities and instances of counterfeiting signify that demonetization has largely failed on these objectives as well. There is a Sanskrit sloka in the Abhigyan Shakuntalam which roughly translates as follows: “when the fishing net was torn and fish leaped into the water, the fisherman becomes dejected and consoles himself by saying that he will get the punya for allowing the fish to escape.” This is exactly what our prime minister has achieved through the demonetization policy.

Notwithstanding what the prime minister outlined as the objectives of demonetisation, repercussions of the policy have already been visible. GDP growth in the second quarter of the financial year has been recorded at 7.3 per cent against 7.6 per cent during the corresponding quarter in the previous financial year.

Moreover, this is an agriculture led growth figure. Ratings have already lowered GDP growth forecast for this fiscal to 6.9 per cent from 7.4 per cent citing demonetization as a prominent reason. Demonetization has also had its impact on investors’ confidence on our currency which was one of the reasons why Rupee has crossed the psychological barrier of 68 against US dollar.

Though exact figures are not available, 70 people have reportedly died due to causes directly or indirectly related to demonetization. They include bank employees also. Farmers were happy that they had a good monsoon this year but the demonetization effect had reduced them to paupers. Neither they are able to buy seeds and fertilizer for the rabi crops nor finding market to sell their kharif produce. By denying the cooperative banks to exchange and deposit old currencies, the government made the lives of the farmers and the rural poor miserable.

Tourism sector, including medical tourism, has been badly hit due to the sudden withdrawal of currencies and it will have its repercussions in the GDP figure. Foreign tourists are taking to street performances to deal with the currency crisis.

The poor, the marginalized, daily wagers, farmers, migrant workers and the tribals who are outside the formal banking sector are the hardest hit. Rural economy is the worst victim of demonetization and it will have serious impact on the formal economy because the informal sector accounts for 20 per cent of gross domestic product and 80 per cent of employment. Job loss in the unorganized sector will adversely affect the rural economy which will further affect the formal economy due to impact on consumption and savings.

Certainly, things could have been planned better. The decision was taken without proper application of mind and without taking into consideration that Indian economy is a cash economy where 98 per cent of all transactions are conducted in cash and 2/3 rd of the total population do not have bank accounts and 96 per cent of people do not have plastic cards. These figures were simply ignored while taking the decision.

And, the consequence is people are dying in queues and soldiers are dying on border.

Source : http://www.mydigitalfc.com/op-ed/tale-two-surgical-strikes-565?fromNewsdog=1

Demonetisation is nothing but a wild chase for black money

First, the surgical strike and now the demonetisation – the impression being manufactured is that these are innovations of the incumbent government that were never a part of history; and secondly, that such “panacea” would solve all of India’s problems.

Neither India is the only country in the world to demonetise specific currency notes nor was it done for the first time in our country. In the past, India has resorted to demonetisation twice; first in 1946 and then in 1978, without evidence of any impressive results.

Black money is an evil. It is necessary to prevent illegitimate income generating activities and to stop generation of black money. Starting from the Voluntary Disclosure Scheme, 1951 to economic liberalisation in 1991 and the introduction of several other measures like the Prevention of Money Laundering Act, 2004, successive governments have made a series of sustained efforts to curb the menace. So, the prime minister cannot be credited with the invention of a new economic tool against black money.

It was a step taken with the right intentions, but with inadequate preparations. Credit: Reuters

The decision of the Modi government to demonetise the Rs 500 and Rs 1,000 denomination notes and to introduce new Rs 500 notes and Rs 2,000 notes has to be seen from three perspectives: first, whether the government has followed due procedure; secondly, whether any contingency plan was put in place so there is no inconvenience to the general public till banking activities are normalised because the entire exercise involves enormous administrative work for the RBI and other banks; thirdly and the most importantly, to what extent will it address the problem of black money in India?

It was a big procedural blunder to declare the demonetisation drive and introduce new currency without resorting to legislative routes, with mere executive decision. The last time it was done was the year 1978 through the proclamation of an ordinance, which later became the High Denomination Bank Note (Demonetisation) Act, 1978.

By avoiding the ordinance route, the government has made an attempt to bypass the legislative scrutiny of its executive order. Given the circumstances, the matter will be, at best, discussed Parliament, but not be subjected to vote. This is not the first time the Modi government has bypassed the legislature. Recently, the Cabinet approved the proposal for the merger of the railway budget with Union budget without the concurrence of the Estimates Committee, which was otherwise a must.

But, in this case, Parliament was bypassed intentionally, knowing full well that it does not have the numbers to ratify the ordinance in both the houses.

The unusually long queues at banks and the empty ATMs are enough to summarise that the government announced the decision without any contingency plan with the belief that the system will take care of itself.

People are committing suicide, dying of heart attacks, patients are being traumatised in hospitals, marriages called off and many Indians continue to live without everyday essentials. Many ATMs are yet to be made functional, leading to chaos in banks. The poor citizens who are outside the banking system are the worst sufferers as they have nowhere to go change the few thousands they have to keep their lives going.

Keeping in view that only one-third of India’s population has bank accounts, it would have been appropriate to put in place an interim arrangement before going for such a critical change.

Therefore, it was a step taken with the right intentions, but with inadequate preparations.

Coming to the most important point, that is the extent to which this measure will address the problem of black money in our economy, demonetisation as a policy intervention has its limitations.

Even though there are serious differences among the theories regarding the estimated value of black money in the Indian economy, one thing is certain: the quantity of black money in the country is a volatile concept. Black money is not limited to black currency, it goes beyond cash.

When we talk of demonetisation, it consists only of notes and not wealth in other forms. So, only the black currencies can be demonetised but not black wealth, which has a substantial share in the black economy.

The black money which is in flow or circulation, running the parallel economy, is also outside the domain of demonetisation. The scheme is limited to tapping people who hold their black money in cash on the date of demonetisation. Secondly, withdrawing certain high-value notes and replacing them with ,more of the same denomination and of higher value defeats the purpose.

By changing the colour of the money, you cannot dent the parallel economy. Thirdly, what  about the black money stashed in tax havens? Why is the government silent on the recovery of this huge stock of money?

Fourthly, the policies of the Modi government are not in consonance with its claim regarding black money. Corruption is the propeller of black money and the the government is living with the devil. By amending the Prevention of Corruption Act, it is encouraging corruption and the generation of black money. Black money is a serious challenge that requires concerted and determined efforts towards tackling its source – which is nowhere to be seen. Demonetisation alone is not going to solve the problem.

On the other hand, the effects of demonetisation on the economic system as a whole may be disastrous. It would shake the public confidence in the nation’s currency, with serious repercussions on its international value as well.

This confidence factor becomes more important considering the fact that 86 per cent of the total currency value in circulation was in 500 and 1,000 denominations. Secondly, if all black money in stock will become white, prices would indeed rocket sky high, causing inflationary pressure. Hope the remedy will not be worse than the disease itself.

The real solution for the evil of black money lies in not in lopping off its branches with an exercise like demonetisation, but in attacking at its roots. Reducing the burden of taxation is an effective solution to curb black money in the economy. We have the GST, even though it is no longer the law that was introduced in its earlier avatar. The government should revive the Direct Tax Code proposal, which will go a long way in direct tax reform.

Link : http://www.dailyo.in/politics/demonetisation-rbi-atm-chaos-rs-500-rs-1000-note-ban-black-money-gst/story/1/14037.html