Earlier this week I asked a businessman who runs a chemical company, what effect notebandi had had on his operations. His surprising answer was that it had helped sales. Many of his competitors are in the medium-to-small scale sector, they operated in the cash economy, and so had suffered; consequently his sales had improved. Welcome to the complexities of trying to understand the Indian economy.
Reporters have filed spot reports from industry towns such as Moradabad (brassware), Tiruppur (hosiery), Ludhiana (bicycles and hosiery) and Firozabad (glassware), the uniform message being a sharp drop in business. But the business mood as reflected in the November purchasing manager’s index, though lower than in October, is no different from preceding months.
The newspapers are full of stories about workers leaving their jobs to go back to their villages, and of people losing the day’s wages in order to queue up at banks for cash, but the Centre for Monitoring Indian Economy (CMIE), which runs the largest sample survey in the country on a near real-time basis, has reported a drop in unemployment (perhaps because this is the sowing season).
Consumer product companies such as Dabur and Godrej talk of a 40 per cent drop in business, but CMIE reports an improvement in consumer sentiment too! We read reports and see pictures of empty agricultural mandiswhere there are no supplies, or no sales, but agricultural prices as a whole seem unaffected by the disruption.
Some contradictions are more easily explained than others. Thus, the automobile companies have reported improved sales for November, but that reflects movement of vehicles to dealers (who were low on stocks after the Diwali sales rush). Retail sales to customers, as reflected in car loans, have actually nosedived by about 40 per cent. So the analysts who have forecast a GDP drop of 1-2 per cent may well be right, and the economy is taking a bit of a hit. Certainly, the stock market seems to think so. Is the price worth paying? The answer depends naturally on whether the stated purpose of the notebandimayhem (reducing the scale of the black economy) will be achieved.
It would seem, at this stage, that the pay-off is likely to be less than most initial estimates had it. The early forecasts (including one in this column three weeks ago) were that about Rs 3 lakh crore of cash would not surface, and therefore would stay demonetised.
The plan was to distribute some of that as government largesse to those holding Jan Dhan accounts — a Robin Hood-style transfer of wealth, if ever there was one, from the rich to the poor. But the bonanza now looks like being much smaller, perhaps no more than Rs 1-2 lakh crore. Against that must be set off the cost of the entire exercise, for which one estimate is over Rs 1 lakh crore.
The net benefit, even assuming some revenue from the latest voluntary disclosure scheme, would be quite small when placed against the scale of the disruption that has been caused. Nor is such an outcome likely to make much of an impact on the black economy. Anecdotal evidence suggests, for instance, that the real estate sector has been busy these past few weeks, with cash payments for real estate getting done at a furious pace, as those with cash have hurried to exchange it for hard assets in the ground. What the sellers who took the cash in invalid notes hope to do with it is not clear, but the laundering business has obviously been active.
This negative cost-benefit balance would change if the government is able to promote digital payments on a massive scale, thus raising the future stream of tax revenue; and if systemic changes can be made to reduce the incentives for tax evasion and black transactions — like the introduction of the goods and services tax and a reduction in stamp duties on real estate transfers, among other measures.
The point, though, is that these could have been done independent of notebandi, which at this stage looks like a bad idea, badly executed on the basis of some half-baked notions.