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.

Aam-aadmi and Demonetisation

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The aam-aadmi must be rewarded for their travails and support of #DeMonetisation by lower taxes, interest rates and social security schemes:

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A Dummy's Guide to GST

GST breakthrough a watershed moment in India's Economic History

Photo courtesy +ABP NEWS 

Article first published in +ABP NEWS  Read here


The introduction of Goods and Services Tax, or GST, is arguably the most ambitious tax reform attempted by India since Independence. It aims at transforming the country into a common market, dissolving artificial economic barriers that create differential tax regimes for similar products and services across States.

It is a destination-based tax system that levies tax at the consumer end rather than at source and various stages of value-addition – which adds  layers of taxation ultimately inflating the cumulative tax impact.

Recognising the importance of Indirect Taxation in a country like India, where the Direct Taxation base is small, GST casts the net at the point of consumption or delivery of service while rationalising the total levy, merging multiple taxes such as Excise Duty, VAT, Service Tax, etc into one composite rate.

GST is designed to give a boost to manufacturing, not only by reducing the incidence of tax (from a current compounded level of 25-26% to 18%) but also increasing the physical and bureaucratic ease of inter-State movement.

At the same time there are concerns about States that are high on manufacturing losing out to States that are essentially consumption centres. This is addressed by guaranteeing States compensation for revenue loss for up to five years.

GST will also radically change the way distribution and transportation of goods happen that should benefit both consumers and manufacturers, ultimately also expanding markets and reach.

Costs of maintaining warehouses in each State and non value-adding transhipment will practically disappear, adding to the profitability of manufacturers while making it worthwhile for organised logistics companies to invest in more efficient vehicles and systems of transportation.

However, in the process of harmonisation, taxes on services may marginally increase from current levels, which would pinch the middle-classes more palpably, as eating out, travel and mobile bills become more expensive.


Similarly, some sectors – like textiles and branded jewellery that enjoy a lower tax rate today will get more expensive. Therefore, whether it will be perceived as “Acche Din” by the common man is doubtful as they are more prone to notice the taxes on service bills (example restaurants) while taxes get easily hidden in the MRP (cost of goods).

However, what the Government is banking upon is the overall boost to the economy. If indeed the expected 1-2% spurt in GDP does materialise, all will be forgiven.

While GST would be a major political victory for the Narendra Modi Government and take away its image about not being able to push through economic reforms, its implementation is not going to be a painless process.

Therefore, putting in place a grievance redress mechanism will be as important as careful chaperoning of the process of implementation. Any setback will be a bigger embarrassment than not being able to pass the Bill.

GST will be one achievement that would vindicate Narendra Modi’s unshakeable trust in Arun Jaitley whose singular contribution it would be for getting the main Opposition to the negotiating table.

But, it will also need all of Jaitley’s legal acumen to overcome the technical minefields that are strewn in the path of the GST’s roll-out.

Interestingly, States have insisted on exemption of alcohol for “human consumption” for understandable reasons. So there is no relief for the wicked.

Dateline Indore: Travel through the land of saffron poppies

Article first published in +ABPLIVE Click here

The tract from Chittaurgarh in Rajasthan to the adjoining districts of Neemuch and Mandsaur in the Malwa region of Madhya Pradesh is remarkably prosperous. These are few areas in the country that have ‘licensed’ cultivation of poppy. After handing over the contracted quantities to the state there is enough ‘extras’ and left-over by products (like Poshto and Doda) to be traded under the benevolent eyes of a deity – Sanwariya Seth – considered as a ‘business partner’ by the locals. Needless to add, the supplementary income exceeds the official earnings by multiples. So, Digvijaya Singh was being clever by half when he dared Shivraj Singh Chauhan to ban poppy cultivation in Madhya Pradesh.

Business here is generally insulated from economic downturns unless, of course, the crop is severely affected. Opiates are in demand both in times of depression and boom – a local associate with interest in real estate and jewellery enlightens me. Unlike neighbouring Rajasthan where  a certain degree of dissonance is palpable, Malwa is still soaked in saffron. On a visible high after the resounding success of the recent Ujjain Simhastha Kumbh, he is not worried about another term for BJP in the state or a second innings for Modi. But, as a businessman his critique of Modi Sarkar is on approach and strategy.

Modi-ji had promised to get “Kala-Dhan” from abroad – but instead his government seems more concerned about unearthing black money of the people who voted for BJP. He was upset at the real-estate business being in the doldrums stuck with high inventory and the counter-productive excise duty imposed on jewellery. The fear of the taxman had led to the flight of free-cash – the life-blood of builders . For jewellery – the one-percent tax is not an issue – but that it would force jewelers to declare transactions in “white” would be a major nuisance for the trade. He blamed such ‘impractical’ decisions on bureaucrats – whom he felt were alive to the difficulties of large industrialists but had little understanding of the problems of small businessmen and traders. A subtle replay, as it were, of the ‘suit-boot’ refrain – but the general angst at the elusive “miracles” that one saw a year ago had distinctly dissipated.

Yet – he is hopeful of the future. After three consecutive bad seasons the Rabi crops were healthy. A bumper Soya Bean harvest was in the offing. Now with predictions of a good monsoon the mood in the rural economy is looking up. Infrastructure projects are showing signs of traction and with the elections on the horizon – the state government is beginning to loosen its purse strings. Overall – the realization was beginning to set in that – while the dream of ‘Acche Din’ may have been a hyperbole – things could have been much worse and the government had managed the economy pretty well under the circumstances.

Now, cut to Indore. Meet a bunch of saffron-ites from the trading community of the city and nearby towns.  Though there was no windfall for the ‘faithful’, they can sense a certain stability and predictability in the business environment. Even though it has been a long time since Congress last ruled the state – the memories of mismanagement and corruption are yet to heal and the factional infighting between the major and minor royalties does not inspire confidence for a resurrection any time soon.

I tease them about the prices of tomatoes. That we can think of having tomatoes in summer is itself a sign of changing times, they retort. Indians are accustomed to cyclical shortages and inflation is part of progress and the people they feel are convinced about the sincerity of the government. If these crises were to happen due to “ghotala” (corruption), reckless action or negligence there would be backlash. Now they know it has happened despite the best efforts of the central government. So no one is blaming Modi.

Everyone understands, the key is growth of the economy and as long as that is ensured everything else will quietly fall in place. Meanwhile, the benefits of all the schemes launched by the Prime Minister – be it Jan Dhan Yojana or Crop Insurance will start yielding dividends and reduce dependence on doles.

Again I try to bait them on BJP’s uncertain prospects in Punjab and possible set back in Rajasthan. As they invoke the now familiar logic of the changing dynamics between state and central elections. I argue why would the same not apply to Rahul Gandhi or Kejriwal – but it only invites laughter of derision. The ‘Bhakts’ if you insist on calling them so  are convinced Modi and Amit Shah are working to a plan and 2019 will see an encore of the “Modi Magic”.  Citing Modi’s towering ratings in all recent opinion polls the say “the Man is the Message” and that is why Modi cuts through the layers and communicates directly with the masses.

And, just then Boom!! Narendra Modi comes on air to answer everything the nation wanted to know but were afraid to ask.

Rising 12 points in the Ease of Doing Business is like Air-India claiming improvement in OTP

India rising 12 places from 142 to 130 in the World bank's Ease of Doing Business Index,  sounds almost like Air-India revising its OTP ('On-time Performance') statistics by 12 points (may be from 70 - 80%). Makes little difference to a business traveler waiting at the airport with no signs of a flight already delayed by over 4 hours and the airline staff equally clueless. It also doesn't help when a co-passenger (obviously used to the vagaries of the national carrier) recalls how it used to be even worse till some years back - when flights would be routinely cancelled without notice and the airline put passengers up at 5 Star hotels at its cost. Some may actually long to go back to those days of free layovers.

Businessmen live in the present. Their points of reference would be current benchmark with other countries. Those who were dealing with India years ago may either gone or dead. When Gujarat scored high on ease of doing business it was in comparison to other Indian states. Modi had achieved this by creating a business friendly environment riding on the enterprising Gujarati spirit - but above all by creating a responsive and efficient bureaucracy.

No matter how many how many Dream-liners Air India buys - the dream of turning around the airline won't fructify till the attitude and work-culture of the staff change. The command structures are different at the state level - where the writ of the Chief Minister runs. Delhi has its own laws of the jungle which can't be managed out of a CCR (Central Control Room) in South Block. Introducing bio-metric attendance systems or curtailing Golf sessions of senior bureaucrats - don't automatically make for an efficient administration (as an aside, in many other Asian countries - it is in fact par for the course - to discuss business over Golf with Ministers and Bureaucrats).

Many foreign business honchos will say - how difficult it is to obtain audience with senior secretaries. Very often they don't get past the PAs or at best the Joint Secretaries. There is a story - perhaps, apocryphal, about the visiting CEO of a large MNC who with great difficulty managed to get an appointment with a senior minister. It seems the Minister - a cricket enthusiast - was busy watching an ODI match on the TV in his office - throughout the meeting - commenting on the game and educating the foreigners (obviously not British) on the nuances of cricket. Finally, said good-bye to them after 10 minutes with a polite "I shall look into it" assurance that really meant nothing.

In contrast, Indian businessmen find access much easier - given their old relationships and the tacit acknowledgement of "The current environment may change and we would need each other again"). This makes many MNCs to look for local partners who will help 'facilitate' entry and many even miss the old 'liaison' experts who helped open doors.

Contrary to popular perception - as revelations of several scams across the world would show - not all investors are lily white. They are willing to do "business" with the powers-that-be of whichever country keeping their own hands clean. But, what they seek is transparent policy and regulatory clarity, fewer window and doors to negotiate and time-bound decisions (like airline OTP, as it were). Above all they require access to people who are in a position to "deliver". On the last, they are quite agnostic about who to deal with - as long as the individual's word counts. That could be the Crown Prince in one country, the ruling Party President's assistant in another. Rest - by and large - they are willing and capable of managing or working-around given their vast experience across the world.

Once that is done - the states, starved for investment, will lap it up - and the best among them, who are able to get their act together, will be the winners. But, in a final analysis - it is the hydra headed monster of Indian bureaucracy which the British left behind and the Congress fed and 'fatted' - that Narendra Modi and his Ministers will have to tame if he is serious about "Make In India".

Article first published in +ABP NEWS Click here to read