A K Bhattacharya: Don't lose the digital momentum

Increasing e-transactions would be the economy's real and perhaps only gain from demonetisation

Two sets of data are now available to assess the impact of demonetisation on the pace and pattern of economic activity in the country. The second advance estimates of national income for 2016-17 were released by the Central Statistics Office last week. A little while prior to that the Reserve Bank of India (RBI) came out with its data on the pattern of financial transactions in the last few months. Both sets of data indicate not just what happened in the last few months after demonetisation, but more importantly the likely pace and pattern of economic activities in the months ahead.

Those who argue that demonetisation had no adverse impact on any sector of the Indian economy in the third quarter of the current financial year should look at the data for the construction and real estate sectors. The construction sector, which relies a lot on the availability of cash and labour from the unorganised sector, had begun showing signs of growth in the first quarter of the year at 1.7 per cent. In the second quarter that ended in September 2016, the growth rate picked up to 3.4 per cent. But in the third quarter which saw 86 per cent of the country’s total currency being pulled out of circulation, the construction sector growth dipped to 2.7 per cent. 

The real estate sector, whose data come along with the finance category, also showed a marked deceleration in its growth rate at 3.1 per cent in the September-December 2016 period. In the previous two quarters, the sector had witnessed much higher growth rates — 8.7 per cent in April to June and 7.6 per cent in the July-September period. Government officials have explained that the dip could be due to the uncertainty associated with the operation of the new real estate law that may have dampened the pace of activity.

If that were so, why would the real estate sector’s growth recover quite dramatically to 5.9 per cent in the fourth quarter of the year? Indeed, the construction sector also is slated to witness a recovery in its growth rate to 4.8 per cent in the January-March 2017 period, according to the second advance estimates of national income for the full year. With the current healthy pace of remonetisation, it is reasonable to believe that both the sectors of construction and real estate would regain higher growth rates. Conversely, this would also confirm that demonetisation did have an impact on these two sectors at least in the first six weeks or so after that disruptive decision. 

The puzzle, however, continues with regard to the third quarter growth numbers for the manufacturing sector and private consumption, which have seen a significant rise to 8.3 per cent and 10.1 per cent, respectively. One explanation for this rise in spite of the disruption caused to overall economic activity is that demonetisation gave a big push to formalisation of the economy. That brought new players within the formal economy and also the tax net, which contributed to a spurt in the growth numbers. 

The concern now is that with the remonetisation drive in full swing, economic activities that had been formalised might move out of the net once again. Indeed, the projected fourth quarter numbers show a dip in both manufacturing and private consumption growth rates to 6.8 per cent and 6.5 per cent, respectively. If that assessment is valid, it would be unfortunate as demonetisation would fail to garner even the benefits of digitisation for the economy. 

Fears on this count are not exaggerated. The RBI data do show that financial transactions under the real-time gross settlement system in February were actually lower than what they were in October, before demonetisation. Although transactions under the national electronic funds transfer system and credit cards through point-of-sale machines continue to rise, the use of mobile payments is on the decline. 

The good news, however, is that the number of point-of-sale machines in the country has risen from 1.5 million in October to over two million by the end of January and the number of debit cards has also risen from 739 million to 818 million in the same period. The number of credit cards, too, is on the rise from 27 million to 29 million in this period. 

In short, the momentum already seen in a widening platform for digital transactions cannot be lost even as remonetisation picks up pace. The government focus has to be back on increasing digital transactions. If anything, that would be the economy’s real and perhaps the only gain from demonetisation.