Bengal famine 1770: "The British had removed a large fraction of the coinage, evidently, which destroyed the mechanism of the exchange of goods. It is difficult to buy food when there is no money."
- Richard Stevenson, historian
"Money for day to day transactions became scarce. In rural Bengal, rupees alone had amounted to two-thirds of the currency. (In Modi's India, the banned notes amounted to over 86% - my note). Money became so dear that prices of all other goods slumped; the scarcity of money was accompanied by deflation. Artisans, weavers and workers were thrown out of work due to the slump in demand. The credit market collapsed...without credit and in the absence of traders, equalizing supply and demand became difficult and had a destabilizing effect on the economy."
- Sashi Sivaramkrishna,
In Search of Stability: Economics of Money, History of the RupeeThat was in the 18th century. Ever since the midnight of 8/9 November 2016, the economy has suffered so severe a liquidity crunch that, says the CII, the decline in daily trade is of the order of 50-70%. This is just as it was in 1770 - precisely because "the removal of a large fraction of the coinage" (86% in demonetized notes, up from two-thirds in 1770) led to "money for day to day transactions becoming scarce"!"
Owing to the prevailing uncertainty, even those with ready resources in 2016 are not entering the market, as they did not in the 18th century. Sales of high-end automobiles - usually paid for by cheque or other banking instruments - are down between 20% (Hyundai) and 38% (Mahindra). Two-wheelers are hit by 35-40%; tractor purchases have collapsed by 63%; in the labour-intensive textiles and garments sector, four lakh workers have been laid off, and 60,000 in leather. These are figures for the last three weeks of November. This is not in consequence of only demonetization but the deleterious collateral damage that demonetization has inflicted on the economy as a whole.
Leaving aside apologists for the Modi regime, most independent economists are agreed that GDP for the next two and possibly three quarters has taken such a hit that GDP growth will decline by at least one percentage point or more, with Ambit Capital estimating that GDP growth will be more than halved to 3.5% for FY 2017.
Transition costs before the restoration of normalcy is brought about have been estimated by the Centre for Monitoring Indian Economy to be in the region of Rs 1.28 lakh crore, borne by ordinary households, commercial and manufacturing enterprises, banks, government and the RBI. Moreover, deposits of demonetized notes have already crossed Rs 13 lakh crore of the Rs 15 lakh crore earlier in circulation. Almost all these deposits are lilywhite, representing the hard-earned income and savings of ordinary folk. Black money held in cash has never exceeded 5-6% of the total stock of illegally held wealth. So it was always ridiculous to imagine that the menace of illegal money could be met by demonetizing so-called High Denomination Notes (HDN). The Government gave their game away when they informed to the Supreme Court that they hoped to garner 4 lakh crores through black money hoarders not depositing HND for fear of exposure. The BJP's evident but unstated intention was to use this bonanza to announce populist schemes through the Union Budget on the eve of the Uttar Pradesh and Punjab elections. In the event, I am given to understand by reliable sources that internal estimates in the RBI show that the sterilized amount on the last day of December is unlikely to exceed Rs 50,000 crore. Thus, there will be no bonanza for Modi to compensate the
aam admi for the rough time he has been put through.
And times have been rough since Modi went on TV that dreadful night of 8/9 November. Just as the
kisan and
khet mazdoor were recovering from two successive years of drought, cash-dependent sales, transport, marketing and distribution of agricultural produce, especially of perishable fruits and vegetables, have suffered huge losses along the entire supply chain from the farm to the
mandi and the
rehriwallah. Non-availability of ready money has resulted in a staggering drop in labour employed in farm and farm-related activities. Plantation labour is not getting paid, not because plantation owners and management do not have the money to pay them, but because owners and management are unable to access their own money.
Similar is the situation in construction and real estate, the second-largest employers after agriculture, accounting for 34-45 million daily-wage jobs in an economy of jobless growth. Contractors are laying them off in droves because the contractors are denied access to their own money to pay their labour. Wage-earnings in construction have thus been slashed by 80%-90%. One prominent news magazine has a cover story portraying Real Estate as descending from "Boom to Doom".
As for manufacturing, millions - literally millions - of small and medium enterprises have closed down. At least 60,000 microfinance companies are badly hit, repayment collections having dropped by 600 cores and disbursements having collapsed in similar measure. (See the parallel to 1770 when, to quote Sivaramkrishna,
"Artisans, weavers and workers were thrown out of work due to the slump in demand.") Urban unemployment has shot up from a little over 7% to well over 9%. As one financial analyst succinctly put it: "cash shortages (have) hampered growth of new work, buying activity and production". (That is what Stevenson meant when he said of the shortage of money that aggravated the causes of the Bengal famine of 1770, that this
"destroyed the mechanism of the exchange of goods"). As for the informal sector of the economy that employs 90% of the work-force, the renowned economist, Pronob Sen of the International Growth Centre, has bluntly stated that demonetization has "penalized" the entire informal sector and damaged it "permanently".
It is against this background that one must evaluate Dr. Manmohan Singh's speech in the Rajya Sabha and his article in
The Hindu that S Gurumurthy of the RSS has sought to rebut in his recent
piece for the same journal.
While subscribing to the goals of ending the evil of black money and fighting the menace of counterfeit notes used by terrorists, Dr. Singh said in the Rajya Sabha that the process of demonetization initiated by the Modi regime had been marred by "monumental mismanagement". He underlined that agricultural growth, small industry and the informal sector employing some 300 million workers, will all slow down. Therefore, "GDP can decline by about 2%", adding that "this is an underestimate, not an overestimate". The earlier paragraphs of this column have shown in some statistical detail how badly these sectors have been affected since Disaster struck at Midnight.
Gurumurthy does not dispute any of this, but
claims that to get out of the mess allegedly left him by his predecessor, it was Modi's express intention to "force temporary decline in growth" that "will cause hardship and hit growth." Oh, really? Then why did Modi himself not say so? Why did he promise that all would be well within a few days - later amended, with much shedding of tears, to "give me 50 days more". Those 50 days are coming to an end and the "hardship" that Gurumurthy admits has been "forced" on the country will last for at least 500 days. And as Dr. Singh said in Parliament, "50 days torture can bring about disastrous effects."
Dr. Singh added in
The Hindu that the "vast majority" of Indians "earn in cash, transact in cash, and save in cash". They cannot move instantly, without preparation, to a "cashless economy" because "600 million Indians live where there is no bank". So, "cash is the bedrock of the lives of these people". The undeniable facts are that banking penetration is no more than 46%; internet connectivity is limited to 22% of the population; 19% are without even electricity; and only a little over one million of over 14 million merchants possess a Point-of-Sale device. Surely, Modi (and Gurumurthy) should have put in place the required infrastructure before going off on a wild goose chase for their chimera of a "cashless digital economy".
Dr. Singh was also absolutely on the ball when he challenged Modi's (and Gurumurthy's) "wrong assumption that all cash is black money and all black money is in cash." He went on to say, "To tarnish these as 'black money' and throw the lives of these hundreds of millions of poor people into disarray is a mammoth tragedy." In fact, most black money is not held in rupees at all but sent abroad to be re-routed to India from Mauritius through anonymous Participatory Notes, as Gurumurthy himself admits in his "rebuttal" of Dr. Singh, ruing that PNs had reached Rs 3.81 lakh crores in 2007. Then why during the renegotiation of the Double Taxation Treaty with Mauritius did Modi not insist on PNs being banned - if he were indeed serious about blocking channels that turn black into white? For one reason only, Gurumurthy
avargale - that Modi is not serious about ending black money. That's just another
jumla. Moreover, he knows that HDNs have little to do with Terrorism - it is now well-established that only 250 notes in every one million are counterfeit. And those who were churning out bogus 1,000-rupee notes can now churn out double the value in forged 2,000-rupee notes!
The atmosphere is pervaded by increased uncertainty, consequent risk-aversion on the part of potential investors, Indian and foreign, and strains on corporate balance sheets. As Dr. Singh wrote, "the faith and confidence of Indians that the Government of India would protect them and their money was destroyed". The new 2,000-rupee note, he gravely asserted, would facilitate the hoarding of illegitimate money. Demonetization had neither tackled "the stock of black money" nor "stemmed its flow". And along comes Gurumurthy to say, Why only one thousand rupee notes? Modi could even - and probably will - next demonetize the new 2000 rupees note! Who can possibly trust such a government - or such a chartered accountant confidant of the government?
Dr. Singh concluded his speech with the dire warning that demonetization had been "a monumental management failure" amounting to "organized loot, legalized plunder". And his
Hindu article concluded bemoaning the "one hasty decision" that has caused so much "suffering". His final words were, "The scars of an overnight depletion of the honest wealth of a vast majority of Indians, combined with their ordeal of rationed access to new currency, will be too deep to heal quickly".
Instead of responding to these real concerns, Gurumurthy has resorted to voodoo economics. First, he has gone off on a fishing expedition about the condition of the economy under NDA compared to UPA I & II. Unable to alter the reality that real GDP under Manmohan grew at the unprecedented rate of 8.4% annually, Gurmurthy compares inflation under Vajpayee at 4.6% with inflation under Manmohan at 6.5%, and attributes UPA growth to "price inflation" being "passed off as high growth". This is patent nonsense. Nominal GDP is boosted by inflation; real GDP is determined by nominal minus inflation. The GDP figures he has cited are of "real" not "nominal" growth. Indeed, the only reason Modi's growth rate has exceeded 7% is that for the first time in Indian history, deflation has resulted in nominal growth being lower than real GDP; so, by adding, instead of subtracting, the price rise, Modi and Jaitley have been able to project a totally misleading narrative of real growth in our economy. (Compare this to Sivaramkrishna on 1770:
"Money became so dear that prices of all other goods slumped; the scarcity of money was accompanied by deflation.")
Of course, high real growth will need higher money supply. Hence, Gurumurthy's figure of cash with the public rising from 9.4% of GDP under NDA I to 12% under UPA is indeed correct. But there is nothing mysterious about that. High growth needs the injection of larger money supply. And, of course, HDNs would be in much higher proportion - although the very term "HDN" is misleading. How can 500 be called HDN when it represents less than two days wages for a daily-wage construction worker? Indeed, why call even Rs 1,000 HDN when a construction worker earns much more than that in just a week and remits most of it to his family in the village? Is banning such notes the way to "reinstate real growth and jobs" as Gurumurthy claims? Indeed, if HDN is to be defined, a good starting point would be the new 2,000-rupee note. So, if HDN is such an unmitigated evil, why is the Modi government so steeping itself in sin? To double the ease of "smash and grab"?
(Mani Shankar Aiyar is former Congress MP, Lok Sabha and Rajya Sabha.)Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.