Tuesday, 3 January 2017

Demonetization: All pain & No gain

India's demonetization failed leaving "All Pain" and "No Gain".

Direct expenses to RBI & GOI Rs.16,800 crores.
Banks to bear an estimated cost of Rs.35,100 crores.
Cost of queues to exchange currency is estimated at Rs.15,000 crores
Enterprise* losses are estimated at about Rs.61,500 crores.
Transaction cost of demonetization is estimated at Rs.128,400 crores

* includes all businesses including farmers, input suppliers, transporters, wholesalers, retailers, manufacturers, stockists and distributors, malls and other retail outlets, restaurants, entertainment and other enterprises

The impact of this loss would reverberate through the supply chain over time. The impact of a broken supply chain would play out over several quarters. It would impact capacity utilisation of manufacturing companies and employment as well. Over the medium-to-long term this will impact investments as well.

Government told the Supreme Court that it expects to unearth about Rs.4-5 lakh crores of unaccounted cash. Estimates made by economists range from Rs.2.5 lakh-Rs.5 lakh crores. Most estimates gravitated towards Rs.3 lakh crores by end Nov and to little over 1 lakh crores by Dec 30, 2016. This makes demonetization a monumental economic failure.

The most significant casualty is Prime Minister Narendra Modi’s reputation as a sound economic manager.

India’s economy will eventually recover from this self-inflicted wound, but there’s no question that demonetization has created doubts about Mr. Modi’s competence. The decision, reportedly hatched in secret with a coterie of trusted bureaucrats, showcases the prime minister’s faith in the command-and-control ethos of the civil service rather than in the “minimum government” he once promised.

Some supporters view demonetization as a quick way to invigorate a sluggish banking sector with cheap funds. Even if demonetization ends up producing some gains, the question of whether it was worth its considerable costs will linger. Moreover, the simple fact that no credible expert suggested such a drastic policy before Mr. Modi announced it makes many arguments in its support look like belated apologia.

The policy’s shabby implementation—through an avalanche of amendments, rollbacks and patchwork fixes—undercuts Mr. Modi’s reputation for quiet efficiency. It also underscores his overreliance on India’s notoriously heavy-handed bureaucrats.

The long-term effects of India’s demonetization gambit remain unclear, largely because no other major economy has attempted such an experiment except during a crisis. But with growth slowing and job losses rising, the short-term prognosis appears grim. The growth estimates for India were trimmed from 7.4% to 6.5% for the financial year 2016-17.

Demonetization has resurrected fears that the ruling Bharatiya Janata Party takes policy advice from quacks. It damaged the credibility of India’s central bank. Though a few economists have applauded Mr. Modi, the weight of informed opinion leans heavily against his decision.

Two and a half years ago, based on his record as the business-friendly chief minister of Gujarat, Mr. Modi stormed to national power as India’s great economic hope. At least for now, the demonetization debacle has shaken this assumption to its foundations.

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