Farmers hit hard by demonetisation: Time to act is now

Jagdish Bhagwati and associates in their analysis of demonetisation in The Times of India played an old mind game: create a straw man and then demolish it. But the real debate on demonetisation remains.

There was no serious contention to the fact that ‘black money’ made policy reforms difficult, if not impossible since private actors had more resources available to drive the economy to their benefit rather than policy desired outcomes. The debate was on the design and timing of the reform. Now that a somewhat unedifying election debate is over, we can get back to the boring stuff of maintaining and accelerating the growth rate.

Let us please first get the hapless Chief Statistician out of the way. The poor man has to give quarterly estimates of GDP growth. When the IMF proclaimed the International Data Dissemination Standards in the mid- nineties, I was the Minister, including for Statistics. We protested.

Our seasons are not quarters but follow the monsoon and the agricultural year starts in June. Any way our business cycles are not quarterly determined, but protests against globalisation did not go far. We fell in line.

But this time around the Chief Statistician of the Government is getting faltu ka flak. As long as desis are abroad and managers of Indian origin in control of Mutual Funds there and the RBI wisely do not reduce the interest rate, the desis will keep on sending billions of dollars. So we didn’t grow by 7% but 6%. Yawn.

Everybody knows that demonetisation in November last year did not lead to a consumption crisis in that quarter. In fact when the Government knocked the base out of that one great pillar of any modern economy: Cash, the first reaction was what any baccha monetary economist would know.

The households with cash went and converted it into the assets allowed. These were cars and construction. If they could, they were not going to put money in the bank with a Government owning most banks and with no credibility, having gone back on the promise printed on the note.

So, while we have no money to repair roads, there are a whole lot of very swanky new cars and on my morning walks, I have to be careful of the teen driving a Merc or a Skoda, into the pavement. So, demand for cars went up as also cement, although the Index of Industrial Production was still growing only at 3%, a little higher than earlier.

So, it wasn’t a broad-based recovery and again from January onwards we are in a different world. The hapless CSO had no options but to bite the bullet. But those who say that critics of demonetisation are anti-national must remember that the Chief Statistician went out of the way to say that he has not factored in informal sector job loss and will revise when that becomes available. More Mercs and Skodas don’t give many jobs.

Agriculture was doing reasonably well and need not have been knocked by demonetisation. But the RBI got into the act. There are two RBIs. One is the professional monetary economists and the other is the old FERA guys. The Rural Divisions are still Planning Wallahs in the nasty sense and so they decided to knock the cooperative credit system.

I can see the spirit of old Datar Saheb, the Grand Daddy of the Rural Debt and Investment Surveys, highly disturbed at all this. So, the money the credit societies needed, still more than three quarters of crop finance, got choked. The poor kisan got walloped. The numbers we get on disbursements are rolling over of old loans. For Kharif, only the first stage processing and marketing costs had to be funded and they managed somehow. But credit in the Rabi season is a real problem. Come with me to nearby village chaupals to see for yourself. Do something now RBI, better late than never.

Come January, when demonetisation was hitting hard, foreign inflows were there and the services sector was giving the 6% growth rate. But President Trump is showing to the world that the US economy will prosper as it cuts down imports of goods and services. The globalisation pundits will gnash their teeth but cannot do much about it.

Where is our policy response? The cherry-picking budget, which had everything and so nothing was obviously not enough. Investment levels have fallen by over two percentage points of GDP from 2012. Last year they fell every quarter. Government had to show the light at the end of the tunnel. If politics requires no resource raising for a stimulus to sectors with large ripple effects, let’s use deficits. The RBI will complain but cover up with interest rate changes. It’s not wise merely to twiddle our thumbs.

The author is Chancellor, Central University of Gujarat and former Union Minister of Power, Planning Science and Technology.

This is an opinion piece and the views expressed above are the author’s own.