1. Demonetisation: No raid raj, please; pump cash to the poor; revive economy first

Demonetisation: No raid raj, please; pump cash to the poor; revive economy first

Pump cash to the poor, focus on reviving economy

By: | Published: November 17, 2016 6:17 AM
cash-reu-1 Apart from the issue of who is to control the tax payments, it will force even cash segments of the economy to start maintaining books of accounts and, in the initial months and even years, that could slow down production. (Source: Reuters)

A lot will obviously depend upon how soon the government is able to replace the R14 lakh crore of 500/1,000-rupee notes that are no longer legal tender, but if it lasts a quarter—from a few days of pain the government was talking of earlier, even the prime minister is talking of 50 days now—based on simple money multipliers, we could be talking of GDP growth falling short by 1-2 percentage points as compared to the budget target of 11%. The impact will obviously be greater for different industries. Real estate, where the component of black money is very high, will take the longest to recover; most industries where cash payments to workers are the norm are already facing a crunch and there are enough news reports on how farmers are finding it difficult to buy inputs like fertilisers with over 80% of the cash sucked out of the economy—the scale of demonetisation means the cash compression India is seeing right now is probably amongst the worst the world has seen in decades. The R2 lakh crore of shortfall in FY17 GDP, needless to say, will have a fallout in terms of the fiscal deficit—already weakened by the poor sales of PSU shares as well as a lacklustre telecom auction—but much more than that is the human suffering since even companies that have white incomes are not able to withdraw enough cash to pay workers, and bank balance-sheets will take another hit if RBI doesn’t defer repayment schedules by a few months at least since a large part of business activity has ground to a halt after the demonetisation was announced; it is too early to talk of the impact on the NBFC sector that meets the financing needs of a large part of the informal sector, but that is an area of concern.

If this wasn’t enough of a disruption, keep in mind the fact that GST will have its own set of problems. Apart from the issue of who is to control the tax payments, it will force even cash segments of the economy to start maintaining books of accounts and, in the initial months and even years, that could slow down production. In such a situation, the last thing India needs is another disruption that a raid raj could result in. While talking about taking more action against those with black money a few days ago, the prime minister talked of seizing benami property—doing so is a laudable objective, but India’s more immediate crisis is one of getting the economy back on track, and of providing jobs for those who are in danger of losing them. Setting off another chain of panic across the economic system is something India can do without right now.

Indeed, given the collapse in spending power, and given the Jan-Dhan account eco-system is now up and running, the government’s best bet would be to start pumping in money into 25 crore Jan-Dhan accounts, so that people can start spending immediately. A decision on how to recoup this money by cutting different subsidies—such as on food or kerosene or MGNREGA—can be taken later. People have been badly hit by the demonetisation and the immediate need is to reduce that suffering at the earliest.

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