Is Modi’s War on Cash Working? We Might Never Know.

08.02.2017 • Emerging Markets

Vivek Kaul – Vivek Kaul’s Diary (India) –

The Economic Affairs Secretary Shaktikanta Das recently told The Hindu Business Line“There are no statistics on the impact of demonetisation. What people are talking about are impressions and presumptions.”

What Das means here is that there is no official data which can help tell us the impact that demonetisation has had on the Indian economy. And he is more or less right about it. What we have are news-reports and private surveys, with which the government has nothing to do.

Take the case of this news-report in The Times of India on the glass and bangle industry in Firozabad in Uttar Pradesh. The report quotes a union leader as saying: “Around 65% of bangle factories are still shut. A majority of those which are operating are exploiting workers. A large number of factories have lowered wages in the range of Rs 30 to Rs 50 per day from the Rs 400 per day that an average worker used to get. Workers are forced to work for long hours and even on Sundays and are being threatened when they raise their voice. They are openly told that scores of others are waiting to work in their place.” This is not official data but just an on the ground newsreport.

Or take the case of a survey carried out by All India Manufacturers’ Organisation(AIMO), which has projected a loss in revenue of 55 per cent and a drop in employment of 60 per cent before March 2017, for small businesses. As The Indian Express reports“The AIMO represents over 3 lakh micro, small scale, and medium and large scale industries engaged in manufacturing and export activities.”

Or take the case of another survey, the Assocham’s Bizcon Survey, which says: “Demonetisation of high value currency notes would leave quite a negative impact on SMEs, rural consumption and job creation in the immediate run.”

Again, these are private surveys and have got nothing to do with the government or its data.

Or take the case of what Raju Shetti, an MP from the Swabhimani Paksh. Shetti, who is an ally of the BJP, recently told The Indian Express: “The rural economy is majorly cash oriented and is not ready for cashlessness. Post demonetisation many farmers had called me to complain how the traders were forcing them to take withdrawn notes – the government had not put proper mechanism in place.”

Again, this is something an MP thinks on the impact of demonetisation. It’s got nothing to do with government data.

Or take the case of the troubles being faced by power projects. As a report in The Financial Express points out“Though power sector entities initially gained from the facility opened after demonetisation to pay utility bills in scrapped banknotes, latest performance reports from various transmission projects show that numerous construction sites are facing constraints. In the monthly progress report of inter-regional/inter-state transmission schemes published by the Central Electricity Authority (CEA), various such projects have cited demonetisation as a reason behind the delays.” This is the first case where we can say that there is some government data to show the negative impact of demonetisation.

Lest I be accused of cherry-picking only negative news-reports, there have been non-negative reports on the impact of demonetisation as well. Let me highlight a few of these as well. Ajay Kaul, CEO of Jubilant FoodWorks, told ET Now that the impact of demonetisation on their business was constantly coming down.

A report in the Mint says“Cement makers have survived the demonetisation shock quicker than expected with the southern markets affected the least, several manufacturers and analysts said. A full recovery may not be far either.”

Or take the case of cargo handled by ports. “Cargo handled by major ports after demonetisation has shown a growth in comparison to the same period last year,” Shipping Minister Mansukh Lal Mandavia told the Rajya Sabha in a written reply to a question.

The impact of demonetisation on company earnings also seems to have been limited in the period of three months ending December 2016. As a report in the Mint points out: “A Mint analysis of 94 of the BSE500 companies shows that 55 have reported earnings that met or beat estimates. The ratio is little changed from the September quarter.”

Now what is the difference between the two set of examples that I have written about? The negative newsreports are largely around businesses in the informal sector. On the other hand, the non-negative newsreports are around businesses in the formal sector.

Hence, to that extent the Economic Affairs Secretary Shaktikanta Das, quoted at the beginning of this piece is right. There is no official data that shows that the informal sector is in a bad shape after demonetisation. In fact, as the economist Esther Duflo told the Mint sometime back“We do not know that yet and we might never know. This is because there is no effective mechanism to measure GDP creation in the informal economy. I was told that informal economy GDP is calculated by indexing it to the formal economy GDP. If that is the case, we might never know the exact magnitude of loss.”

This is something that the Economic Survey authored under the Chief Economic Adviser Arvind Subramanian, points out as well. As the Survey points out: “It is clear that recorded GDP growth in the second half of FY2017[October 2016 to March 2017] will understate the overall impact because the most affected parts of the economy-informal and cash based-are either not captured in the national income accounts or to the extent they are, their measurement is based on formal sector indicators. For example, informal manufacturing is proxied by the Index of Industrial Production, which includes mostly large establishments. So, on the production or supply side, the effect on economic activity will be underestimated.”What does this mean? It means that the informal sector is not captured in the gross domestic product (GDP) numbers. If it is, then it is indexed to the formal sector. This basically means that the size of the informal sector is captured in the GDP number based on the size of the formal sector. If the formal sector number is not impacted, then the informal sector is not impacted either, at least theoretically.

So, therefore the GDP numbers in the time to come may not capture the negative impact of demonetisation totally. As the Economic Survey puts it: “The impact on the informal sector will, however, be captured insofar as lower incomes affect demand for formal sector output, for example, two wheelers.”

Given this, as Duflo puts it: “The government might use these figures to argue that there was no significant setback.” In fact, as Das’s statement at the beginning of this piece shows, it already is.

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