How de-mon damaged economy

While government functionaries persist in boasting about the (non-existent) good effects of the demonetization, the Reserve Bank of India’s annual report for 2017-18 has hitherto an unknown injury perpetrated by Prime Minister Narendra Modi’s invalidation of the high-denomination currency on November 8, 2016.

The RBI report carries a box, ‘The Curious Case of Reverse Import Substitution: The Indian Experience,’ highlighting the havoc wrought by demonetization. “During 2017-18, there was a surge in imports, especially in the category of non-oil non-gold items, which broke out of the traditional co-movement with export behavior but coincided with a period of sluggish manufacturing activity,” the RBI report says. “This has given rise to concerns that disruptions in the production/supply chain during post-demonetization have forced domestic demand to spill over into imports in order to overcome domestic supply constraints. This phenomenon of reverse import substitution could reduce GDP in India through leakages of domestic demand into external markets.”

In plain English, it means that the demonetization destroyed several ecosystems in the economy in the name of formalization. The RBI, however, says that the ill-effect in terms of growth was “transient.” According to the central bank, “from November 2016 up to September 2017… reverse import substitution effects was (sic) at best transient and ebbed gradually as industrial activity in India emerged out of its sluggish phase and regained its momentum.”

The fact that needs to be highlighted here is that the growth momentum might have been regained but there is no evidence to suggest that the job loss in the unorganized sector because of reverse import substitution was compensated. There is no point in having decent economic expansion if no employment is generated. As I have emphasized time and again, the overall growth rate during five years (1999-2004) of the Atal Bihari Vajpayee regime was below 6 per cent but in that period 60 million jobs were created. In the 10 subsequent years under the United Progressive Alliance, the GDP grew at an average of about 8 per cent, and yet about 15 million jobs were added.

It is only economists and politicians who get excited with GDP numbers and concepts like formalization, compliance, and tax base; people want employment, which both the UPA and Modi governments have failed to engender.

Unsurprisingly, , Modi’s apologists keep tilting at windmills. Finance Minister Arun Jaitley recently wrote in a Facebook post, “Was the invalidation of the non-deposited currency the only object of demonetization? Certainly not. The larger purpose of demonetization was to move India from a tax non-compliant society to a compliant society. This necessarily involved the formalization of the economy and a blow to the black money.”

One has to be extremely credulous to believe that these objectives have been met. Then there is NITI Aayog Vice Chairman Rajiv Kumar who introduced a red herring. He recently said that that economic growth in the six quarters starting from the last quarter of 2015-16 slowed down due to rise in non-performing assets (NPAs) and not the 2016 demonetization drive. Wrong, Mr. Kumar, NPAs have been rising, primarily because your government has failed to privatize public sector banks, and doing a great deal of damage to the economy; the demonetization exacerbated that damage.

Transient or not, the damage was there; the RBI report has highlighted this fact. No amount of sophistry by the Jaitleys and the Kumars can bury this fact.