Op/Ed, 11 February 2017. Prime Minister Narendra Modi thinks he couldn’t have picked a better time to demonetise the economy. Speaking during the motion of thanks on the President’s address to Parliament, Modi used the analogy of medical surgery to defend his decision.
No matter how critical, a surgery is carried out only after ensuring the patient is scoring fine on vital parameters such as blood pressure, heart rate etc. The Indian economy was in good health when the government decided to scrap Rs 500 and Rs 1,000 notes, Modi said.
Also, it was done at the risk of minimal disruption because it came days after Diwali, when the economy usually enters a lull phase. That is why, he argued, the government could successfully implement what has now come to be known as the biggest disruption in India’s financial history.
Given that this was the first time the prime minister spoke on demonetisation in Parliament, one expected he would support his claim with hard data and empirical evidence. Unfortunately, he didn’t. He didn’t because he can’t. Because, the economy was as shaky at the time of the note-ban decision as it was when Modi came to power in May 2014.
Data available now suggest industrial output contracted in as many months as it grew during the January-October period last year. More importantly, October had seen a sharp increase, 5.6%, raising hopes that the economy was finally turning around.
This was also reflected in exports, which had picked up a sustained momentum through September and October, after a roller-coaster ride for nearly two years.
Non-oil imports also tracked a similar trend. These green shoots of a smarter economic recovery were also mirrored in business confidence. According to industry body FICCI, which routinely conducts a survey of its member companies, business confidence had picked up between April and September.
Companies were beginning to explore investing in new projects, sluggish private investment has kept the broader economy from growing faster.
In such a scenario, the economy needed measures that would bolster sentiments and sustain the momentum.
Demonetisation, it would be difficult to argue, was one such measure.
Latest government data on industrial production show factory output contracted 0.4% in November; exports slipped nearly 15% month on month; and FICCI’s quarterly business confidence index dropped to 58.2 in October-December period compared to 67.3 in the preceding quarter and a high of 72.7 when Modi became prime minister.
Data on job losses and other effects have yet to come in, but it would be fair to say the story would not be any different there.
Another way to look at the strength of the Indian economy at the time of note-ban decision is to place it in a global economic context.
Crude prices had begun to firm up and foreign investors in the stock and bond markets were beginning to pull out as part of a worldwide trend in which capital was moving out of emerging economies to safer financial markets such as the United States.
In October, FIIs pulled out more than Rs 5,000 crore. That number jumped to a monthly average of Rs 13,000 crore after demonetisation. Such flight of capital, coupled with rising crude prices, tends to weaken the rupee and add to inflationary pressures.
Last week, the Reserve Bank of India refrained from cutting its key lending rate. The central bank fears inflation, which dipped temporarily because of the cash crunch after demonetisation, may rise again.
One of the biggest expectations from demonetisation was that it would help reduce interest rates. There has been some softening, but not enough to accelerate growth in credit and investment flows. And the stance taken by RBI means any further reduction is ruled out for now.
There was nothing right about the timing of demonetisation, just as there was never an economic rationale for the decision. It is time the government acknowledged it made a mistake.
The author is Chief Content Officer, Hindustan Times
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