TT Ram Mohan: Lean times for pundits

Demonetisation is not the only instance in recent times of the pundits having got things wrong

Following the demonetisation move last November, the pundits — academics, economists, media commentators and others — were quick to pronounce judgement: Narendra Modi had blundered. 

The withdrawal of high-denomination currency notes, they said, had caused enormous economic hardship. The Prime Minister should have known better. He should have consulted experts before embarking on such a radical measure. Mr Modi would pay the price in the state elections that were to follow.

It’s now clear that the pundits got it wrong. Demonetisation did not work against the Bharatiya Janata Party in the recent polls and may have even contributed to its huge victory in Uttar Pradesh. 

Some pundits argue that it was the political narrative of demonetisation that mattered, not the economic content. Demonetisation did cause hardship to the poor. But they didn’t mind because they could see that the rich would suffer more.

One can go along with this view if the hardship amounted to putting up with long lines in banks. But not if the hardship meant a sharp slowdown in economic growth and losses in jobs and incomes. When people lose their jobs in an economic slowdown, they don’t go out and celebrate because multi-millionaires have lost even more on the stock exchange! 

The truth is simple enough but the pundits don’t seem to get it. Demonetisation has not derailed growth as much as they had predicted. Two agencies respected for their independence and professionalism, the Central Statistics Office (CSO) and the Reserve Bank of India (RBI), have estimated the impact of demonetisation on the gross domestic product (GDP) growth for 2016-17.  

Using the Gross Value Added (GVA) approach, the RBI estimates the impact on the GDP growth at 33 basis points in its monetary policy statement of February 8. Again, going by GVA, the CSO estimates the impact at 30 basis points in its second advance estimates released on February 28.  

Economists may have difficulty in accepting these numbers but bankers seem to think they reflect the ground reality. Bankers did not see any significant increase in stress in their loan book in respect of large corporates and small and medium enterprises. They say that some stress was evident only in respect of micro-enterprises. Repayments of agricultural and micro-finance loans were surprisingly resilient. 

Many of those who had warned that the third quarter (Q3) numbers for 2016-17 would show up the impact of demonetisation have since changed their tune. Wait for the Q4 numbers, they say.  We’ll know soon. In the meantime, we have the recent election results to go by. Voters don’t seem to have found the short-term costs of demonetisation very steep. And they believe the PM when he says it will deliver long-term gains.

This is not the only glaring instance in recent times of the pundits having got things badly wrong. In June 2016, when Raghuram Rajan announced that he would not seek a second term as RBI governor, the Modi government drew a barrage of negative comment. The pundits warned that India’s image abroad would be badly dented, foreign investors would flee, the combination of Brexit and Rexit could cause a currency crisis, the RBI’s autonomy was in peril… some of us may have been pardoned for supposing that the end of the world was in sight. None of these dire outcomes has materialised.  

Our pundits are in good company. Following the British vote on Brexit, many foreign commentators predicted a sharp slowdown for the British economy and enormous uncertainty for the world economy. Among the doomsayers was Mark Carney, the governor of the Bank of England (BoE). 

Ahead of the vote on Brexit, the BoE issued warnings about the potential effects of a vote for Brexit. After the vote, it moved to cut interest rates and boost stimulus measures to contain the adverse impact. Mr Carney has since revised his forecast for 2017 upwards. The world economy is also doing better than was forecast in 2016. Nobody talks about the impact of Brexit any more.

Then, we have the Donald Trump phenomenon. The liberal media in the US did its damnedest to stop Mr Trump in his tracks in the run-up to elections. They forecast ruin for the US economy and the world at large given his hostility to some aspects of globalisation. Paul Krugman famously wrote that the stock market would “never” recover from a Trump victory. The Dow Jones Index went on to touch an all-time high after Mr Trump won. 

In all these cases, the pundits got it wrong because many were hopelessly prejudiced. They did not like Mr Modi, so they were quick to fault demonetisation and the exit of Mr Rajan. They did not want to see the European Union unravelling, so they viewed Brexit as a disaster for the UK. They hated Mr Trump as an individual (and favoured Hillary Clinton), so they predicted a setback to the US economy. By forsaking objectivity in assessing policy outcomes, the pundits have ended up undermining their own credibility and standing. 

The writer is a professor at IIM, Ahmedabad

 

ttr@iima.ac.in