The Economic Survey for 2016-17 estimated the loss in economic output arising from demonetisation to have been anything between a quarter of a percentage point to one percentage point of lost growth. GDP growth rate slowed from 8% in 2015-16 to 7.1% in 2016-17 to 6.7% in 2017-18.
There are those who quibble that growth lost steam for reasons other than demonetisation, such as introduction of GST in July 2017 and the twin balancesheet problem depressing investment in the economy, as banks refused to lend, groaning under their burden of bad debt, and large companies, squashed under unserviceable loans, the counterparts to the banks’ bad loans, started few large projects. Yes, allocation of blame for deceleration to individual factors is not easy, although the Survey made its claim after some statistical exertions. What is not hard to identify is the common thread running through all three maladies — poor economic management.
Let us try to put a number to the loss in GDP arising from demonetisation. Take the midpoint of the range between 0.25% and 1% of GDP estimated by the Survey, and since GDP of both 2016-17 and 2017-18 were affected, take the average GDP for these two years. Output loss due to demonetisation is a little over Rs 1 lakh crore.
The latest annual report of the RBI, for 2017-18, has two additional statistics that damn demonetisation. One, household savings held in the form of currency shot up, from an average of 1.12% of Gross National Disposable Income (GNDI) in the pre-DeMo five years to 2.8% of GNDI in 2017-18. In other words, savings in the form of currency multiplied 2.5 times, not quite the less-cash result the government had hoped for. Worse is the increase in financial liabilities. In the five years prior to demonetisation, household financial liability averaged 3.06% of GNDI. This went up sharply to 4% of GNDI in 2017-18. Liabilities went up by 83% from Rs 3,70,964 crore in 2016-17 to Rs 6,79,349 crore in 2017-18.
Small enterprises were the worst hit, and some of them presumably never recovered. It stands to reason that they would have had to borrow to tide over hard times. That would explain the rise in liabilities. The poor and the less well-off would have borne the brunt of it.
Demonetisation would never have hit illicit wealth held as real estate, shares, gold, silver and foreign currency. Only smalltime concealers of income keep their money in cash. These include women hiding income from their men, to create a stash they could use to buy gold or in a health emergency. Demonetisation hit such people hard, not the big fish.
What has been the gain from demonetisation? A big jump in the number of tax filers has been attributed to it. GST would have increased the number of tax filers, in any case. GST creates multiple audit trails, leading to a big expansion in the base of direct tax. Digital payments rise when data networks become ubiquitous and when the government removes hurdles to digital payments. These should be taken out of demonetisation gains.
What remains is the political impact. This columnist had written, a week after demonetisation was announced, that the goal was not ending black money or any other economic outcome but to position the PM as a champion of the poor who takes on the filthy rich on their behalf, and invites them to participate in this epic battle of redemption by standing in endless lines in front of banks.
The people of India bought that story, by and large. Even those who complained of the hardship they had to suffer on account of demonetisation praised the PM for his courage, in taking on the rich and the powerful, and accepted their suffering as a price worth paying for it.
This expanded the BJP’s support base. The poor and the not-so-poor, in whose breast class antagonism can be stirred, turned supporters, even as sections of the petty-trader support base suddenly experienced an unexpected improvement in their clarity of vision, as rosetinted glasses dropped off.
If demonetisation is seen to not have achieved the goal of slaying the black money demon, even while raising the debt burden of the poor and the middle classes, it would impact the ruling party’s popularity negatively. Hence the chorus in support of demonetisation, never mind what the RBI annual report shows.