Demonetisation in Retrospect

Pic Courtesy +Mint 

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What happens when “post truth” meets statistics?

One enters a new world of counter-factual spins.

So, now that the third-quarter GDP estimates indicate growth at a healthy 7%, tighten your seat belts and get ready for a new wave of economic sophistry on demonetisation.

This writer has neither claim nor pretence of being an economist. However, as a roving marketer he has travelled through several states since demonetisation was announced on 8 November.

Like every other Indian, he, too, had some views on note bandi—based not on erudite economic theory but observations and anecdotal conversations during field trips, which he had penned down from time to time.

After some initial hesitation most political parties, save some notable exceptions like Nitish Kumar’s Janata Dal (United), had jumped on to the bandwagon of demonising demonetisation. A couple of leaders among them, notably Mamata Banerjee and Mayawati, were particularly strident in their protest.

Economists across the spectrum lambasted the move, except a few sarkari ones who were seen to be beholden to the government of the day.

The first signs that demonetisation might have been over-flogged came with the Maharashtra civic polls. Similar, murmurs were probably also emanating from the Uttar Pradesh campaign trail, which saw a subtle shift in the discourse to traditional topics like caste and community with the mandatory Om Ganeshaye Namah mention of development.

Also read: What explains 7% GDP growth despite Modi’s demonetisation drive?

We have already started hearing, the cautionary “don’t count your chickens too soon; wait for the Q4 estimates” kind of counsel that could well turn out to be true. The analogy of a speeding car brought to a screeching halt by firing at its wheels has quickly changed into the explanation of momentum carrying the juggernaut through an extra quarter. There may be some merit in that argument too, but it still does not explain the paradox fully.

So, where is the disconnect between theory and reality?

First, as this writer has argued in the past, it was erroneous to judge demonetisation through the single lens of economics. There were multiple dimensions to the decision of demonetisation, even if some appeared to have been added as afterthoughts. Therefore, one needed to view through a prism of economic, political and governance objectives.

Second, one cannot paint the entire country with a single brushstroke seeing the queues outside ATMs in Delhi. There are not only differences in the economies of states, say between Uttar Pradesh and Maharashtra, but also the attitude of people. For example, the public reaction to dry ATMs in south India was very different from those in Kolkata.

Similarly, one found traders in “rurban” Rajasthan and Madhya Pradesh to early adapters of digital transactions than, understandably, in rural belts of Hindi-heartland.

Finally, the pundits and politicians in their eagerness to trash demonetisation, forgot to factor in the resilience of the average Indian, whose DNA has been engineered to cope with shortages and scarcities. Living with the vagaries of nature and whims of the masters, they are used to long periods of hardship due to natural calamities, such as poor monsoon or floods, or man-made crises created by hoarding or chronically inefficient public distribution system. For them, demonetisation would be only a small speck in memory.

While the government may be guilty of trying to retrofit logic to justify a decision that seemed to be on the verge of backfiring, politicians and analysts critical of the government be can be accused of selectively ignoring or debunking indicators such as statistics of rabi sowing or record car sales in January. There was also little mention of the bumper kharif crops after a good monsoon in most parts of the country.

One read about alleged retrenchment of staff by a certain private bank, but the record profits declared by the same bank in the third quarter did not receive the same attention, just as largescale hiring by one of their foreign peers expanding their operations in India.

As a roving salesman what one observed in the behaviour of the rural consumer was postponement of discretionary purchases that normally follow a good harvest. A sort of Giffen effect kicked in. The credit cycle increased in the villages with delay in realisation of crop sale as well payment for seed purchases. There was also a readjustment in buying patterns with a move towards small unit size packs for many products. But, hardly any peer group competitors in the field talked of more than a 10% shortfall in their sales targets.

What, of course, did not happen is much of the channel stock up that traditionally takes place in December in anticipation of a demand surge post winter. This was more than compensated by a pick up in January, but without the increase in prices that usually accompanies it. Therefore, those looking for speculative gains and stock profit were left disappointed.

Sectors like real estate have indeed suffered. That is because it was the largest playground for cash transactions. In sharp contrast, one did not see much contraction in infrastructure work except in poll-bound states.

It would be disingenuous to say the economy is hunky-dory just as it would be dishonest to make doomsday predictions. At the same time, there may not be a sharp “rebound” as many were expecting in the fourth quarter—simply because there was no major dip in third quarter. The real action will start in FY 2017-18.

An iconic Bengali satirist wrote a story of an astrologer, who predicted to a person who had come to see him that the stars would not be favourable till his age of 38. Excited, the client asked what happens after 38? Pat replied the astrologer, “After that you will get used to bad times”.

Whether people have gotten used to demonetisation or not, it is stale news and it’s time that our politicians and economists start to look ahead. The next two years indeed holds a lot of promise and interesting possibilities for the Indian economy. With goods and services tax on the horizon and a thrust on infrastructure spend in the last lap of Modi government, we must make the most of it instead of being stuck in a chronic desi malady of naysaying.