Demonetisation triggered current economic slowdown: Former Chief Statistician

Former Chief Statistician of India Dr Pronab Sen on Monday said demonetisation of high-value currency in 2016 was the initial trigger for the country’s economic slowdown, HuffPost reported. Sen, who is the currently the director of the International Growth Centre’s India programme, told the HuffPost website that the global economic slowdown was only a “contributory factor” to India’s problems.

On November 8, 2016, Prime Minister Narendra Modi had announced that Rs 500 and Rs 1,000 currency notes would be invalid starting midnight. Subsequently, the government introduced a new Rs 500 note and a Rs 2,000 note.

“What happens with demonetisation is that the farm prices fell dramatically because the market was not able to buy farm produce,” Sen said. “The farmers were having to practically throw away their produce. But now this problem continues because what has happened subsequent to that is the major effect fell on agriculture traders – people who buy from the farmers at the village or mandi. They do not have cash. Now because of that even if there is a need for food, the cash availability is limiting the ability to buy from the farmers.”

As a result, farm produce was sold at a relatively lower price, Sen said. This, in turn, led to the agrarian distress the country is facing at present. He added that rural wages were falling because agricultural labourers were either not getting employed or were getting employed at low rates.

Sen said that since rural India accounted for about 70% of the country’s population, the demand for goods and services in the country depended largely on the growth of incomes in rural areas. The former chief statistician added that the fall in the sales of trucks and commercial vehicles was troubling because it showed that more vehicles were not needed for the transportation of goods.

A liquidity crunch

Sen said demonetisation had sucked out liquidity from the economic system. Though remonetisation of the system took place, people became afraid to withdraw large amounts of cash, he added. This, according to Sen, implies that liquidity in the system has not returned despite remonetisation.

“The fact of the matter is that everybody needs liquidity, including the farmer, informal sector,” Sen said. “It is just that the two kinds of liquidity are different. Industry needs liquidity in terms of bank credit whereas the farmers and informal sector requires liquidity in the form of cash. So what business papers would call a liquidity crunch that is what has happened.”

Sen pointed out that capacity utilisation in the corporate sector was low as a result of poor demand. This meant that the corporate sector was hesitating to reinvest, he added. As a result, investment demand is low.

The former chief statistician told HuffPost that the poor growth in the global economy means India cannot export enough to create an alternative market for production of goods. In this way, the global economy was a contributing factor to the economic slowdown.

Sen said the measures announced by Union Finance Minister Nirmala Sitharaman on August 30 would not help reverse the slide. He said only one new measure – recapitalisisation of banks to the tune of Rs 76,000 crore, was announced. The former chief statistician said this would not be enough as there was not enough demand for the loans the banks wish to give out.

Bringing the economy back on track

The former chief statistician said the best way to stimulate demand and turn around the economy was putting money into the hands of people in rural areas. Sen said he appreciated the PM-Kisan scheme, but added that the money meant for it had not been fully spent. He said that in December 2018, before the Lok Sabha elections, Rs 18,000 crore to Rs 20,000 crore was allocated to the scheme “but money has not been spent, and there doesn’t seem to be any sign of money being spent”. In the Budget presented in July, the money allocated for the scheme in the interim Budget was shown as unspent.

Under this scheme, households with agricultural landholdings of below two hectares or five acres are eligible to receive Rs 6,000 annually as direct benefit transfers from the Centre.

“So that was one thing which could have addressed this problem, it may not have solved it; that depends upon the magnitude,” Sen said of the PM-Kisan Yojana. “The second, of course, is increasing your rural spend. So the government has been doing rural roads, rural housing...” Sen added that the government should be doing more to build rural infrastructure.

The former chief statistician claimed the Mahatma Gandhi National Employment Guarantee Scheme could help generate rural incomes, but pointed out that it continues to languish.

Sen also dismissed Sitharaman’s estimate, announced during Budget presentation, that India’s nominal Gross Domestic Product growth would touch 12%. For that to happen, the real GDP growth would have to be 8%, which has not been achieved in two years, he pointed out. Simultaneously, inflation would have to stand at 4%. The inflation recorded in July was 3.15%.

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