What in your opinion will be the effect of demonetisation on Indian economy? Explain

During the second half of UPA 2, there was some anxiety over India’s future, especially its economic future. After two and a half years of NDA government, the present scenario brings to the same standards of concern.

Stagnated growth

• Despite the headline GDP growth number, private investment has been more or less stagnant. Had there been even tepid growth in the private investments, it would have been projected with great fervour. It is because the private investment growth gives more information about how the economy is doing and is likely to do.
• Also, it was said that India can grow despite state intervention. But, this has occurred first time in a decade that the share of public investment in projects under implementation exceeds private investment.
• This means that share of state funding is likely to continue dominate the investment environment for some more time.
• However, the result is that the economy is not growing despite the state support. Instead it is becoming more dependent on state. The risks of such economy are that it will need constant push by the government, creating all sorts of fiscal and institutional distortions.
• It is a fact that the present government had inherited a slew of problems and hence the economic boom will take time. But it is necessary that economic growth is positive compared to lusterless global economic scenario.

Execution capabilities is weak

The present government had been confident about its execution capabilities. However, it has been seriously dented by demonetisation. But, demonetisation is a recent phenomenon. Yet, the execution capabilities of the government are coming under serious questions in comparison the standards set up by it.

One of the better performing ministers in the government, Ministry of Roads and Highways, has admitted that road building targets are way short of the ambitious targets (20-25km/day); in fact, they are at a lowly six kilometres per day for the year.

The mobilisation of private investment for infrastructure is stuck and there are modest successes in energy and on the renewables.

However, there is no doubt that total capacity augmentation exceeds that of the previous UPA rule. Let us look at performance of few flagships programmes:

• Swachh Bharat gained initial boost but its impact is less visible.
• Clean Ganga mission, just like previous programmes, has failed to evoke the required response and consistency. Though, the momentum is building up slowly.
• Smart cities programme need to do more than announcing the list of cities and creation of SPVs. However, here too, the city government reform is not even on the agenda despite its sore need.
• Make in India has not seen progress as touted.
• Programmes like Jan Dhan and Aadhar have acquired great momentum which is positive step in direction of financial inclusion and identity proof.
• No doubt, these are all long term projects whose results will be delayed. But the problem lies not in ambition, but execution.
• Demonetisation has hit rural consumption demand harder than urban demand (more cash intensity), services more than manufacturing (higher proportion of unorganised sector), and exports more than imports.
• The government failed to predict the consequences of such a drastic policy step and match up with the execution of its remedial measures post demonetisation.

Syllabus Indian Economy and issues relating to planning, mobilisation of resources, growth, development and employment.

Rise of arbitrary state

• India has an established rule of law which demands respect for law. The core institutions of intelligent law enforcement are police, investigating agencies, prosecution and judiciary. Yet, the institutional capacities of none of them has have increased in past few years.
• In fact, sometimes it is felt that the government wants to discipline the society by arbitrary injections of fear every now and then, just as it was visible in 1970s.
• Currently, government is being empowered in unprecedented ways to regulate and control the lives of individuals.
• The government is facing a stand-off with judiciary, the investigating agencies are just doing as they were without any improvement of confidence of people in the institution and the questions on surveillance, privacy, the appropriateness of data-sharing, choice seem to be sidelined.
• The media is not able to speak its mind. For example, during UPA government, a mere possibility of siding with USA would evoke protests, but now, even when it is clearly visible that India is aiming for alignment with USA, there is no discussion!
• In addition to it, any arguments against government decisions are called anti-national. This is in violation of basic principle of democracy- the right to dissent.

Short effect on economy

• The current demonetisation move is expected to have a short term effect on economy as per the Indian industry representatives. But it has requested the government to take steps for improvement in productivity and consumption so as to spurt increase in demand.
• The digitisation of the economy was discouraged by lot of cash payments and the heavy charges. Now with government incentivising the usage of digital medium, the economy should get a boost, at least beginning with the formal sector till the informal sector gets used to it.
• Also, the Indian economy is expected to rebound as soon as remonetisation is completed. The government has assured for the earliest results.
• According to a report by Nomura, India’s growth is expected to largely remain unchanged at 7.1 per cent in the coming year and will rise sharply to 7.7 per cent in 2018.

This means that some of the reforms that might hurt growth in the near term but are positive for the economy in the medium to long run include — the recent demonetisation and implementation of the goods and services tax (GST) — along with a reversal of the terms-of-trade gains.

India has emerged as the fastest growing major economy in the world as per the Central Statistics Organisation (CSO) and International Monetary Fund (IMF).

The improvement in India’s economic fundamentals has accelerated in the year 2015 with the combined impact of strong government reforms, RBI’s inflation focus supported by benign global commodity prices.

These should be considered as kick starters and growth simulators for more investments, both public and private.

Though the economic growth is expected to suffer dent due to demonetisation, the government has taken a bold step which was much needed to ouster black money and terror funding.

The work approach and attitude of government does seem autocratic in nature but it shall never be able to demean democracy and its principles as people have the power to accept or reject the government on its performance.