 "Demonetisation and the economy: Signs of distress everywhere")
When Prime Minister Narendra Modi addressed the nation on November 8 and announced his government’s big move to tackle black money, currency counterfeiting and terror funding by banning old currency notes of Rs 500 & Rs 1,000, there were murmurs of protest.
Since then, economists like Amartya Sen, Kaushik Basu and many others have expressed criticism of this move to demonetise old currency notes and replace them with new notes in due course of time. They have talked about how this is going to hurt the economy as it sucks out liquidity. The effect on the informal (not to be confused with black) economy have been talked about. The view from economists - barring few - has generally been bleak.
Not to say that the Modi government’s move has not found support. Economists like Bibek Debroy, Surjit Bhalla and celebrities like Aishwarya Rai, Baba Ramdev and Amitabh Bachchan have expressed their support for this audacious move.
Corporate figures have had different views but some have supported the move as transformational. HDFC Bank MD, Aditya Puri does not believe what economists are saying about the economic consequences of demonetisation. Puri is gung-ho about India going cashless as it would lead to higher levels of transparency he says. Read about it here
When asked whether the exercise has been executed well, he says, “I don’t have the guts to say there is no pain but then let’s look at it in two ways — transition and long run. Transition is 50 days when the currency has been pulled out and has to be put back.”
He adds how people were responsible for shortages, “Yes, there was a combination of issues such as people misusing the banking system and then creating shortages, people making a lot of noise and not creating normalcy and long queues etc, but the worst is behind us.”
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While disagreeing with the general view held by economists, he asks how often they have been right. So, what does the news from around India say about the economy? Is it stuck or moving smoothly? Are economists wrong?
Here are reports from Business Standard that shine some light on the current situation:
The textile sourcing hub for global brands like Walmart, Ralph Lauren, Diesel, Tommy Hilfiger, H&M, and Marks & Spencer, Tirupur has come to a grinding halt thanks to the Modi government’s move to demonetise. Only 60% of workers are on the job and orders have suffered significant cutbacks. Read more here
In Indore, MP’s commercial capital, the Sarafa Bazar has lost its shine and MSMEs are struggling to cope with the aftereffects of demonetisation as well. Job losses are talk of the town and farmers worry about finding fertiliser for their winter crop. Detailed report here
Surat polishes 95% of all diamonds in the world and thanks to cash crunch as a result of demonetisation, the diamond and textile hub has come to a halt. Surat employs more than 2 million people in these industries and people expect things to get worse. Here is the Business Standard special report
Demonetisation is causing trouble not only for Tirupur, Indore and Surat, it is now hurting many sectors. Business Standard has sector-wise details of how each of these sectors has been affected by the note ban.
Indian start-ups have seen a drop in business in the last three weeks after demonetisation came into force. Detailed report here
In tea plantations, “labourers are heading towards a major crisis as payments are likely to get stuck or delayed due to the vacuum in liquidity generated after demonetisation which is yet to be filled“. Read more here
Consumer durable sales decline 30-40% in urban areas, 60-70% in rural as cash-strapped customers have not been buying electronics even though this is the wedding season. While sellers expected a bumper season post Diwali, now they are staring at losses in the month of November. Detailed report here
Real-estate sector has been hurt by the twin blows of demonetisation and RERA. It is likely to lead to “defaults and exert serious pressure on refinancing upcoming debt payments of real estate companies”. Detailed report here.
Cash starved farmers have started selling groundnut in distress to improve upon liquidity and enable them repay borrowers' dues in time to maintain their credibility for future. Detailed report here
While all of India struggles to withdraw money from banks and ATMs, nearly 8 million bidi workers are yet to be paid their wages which have been stuck since November 8, 2016. Detailed report on the distress here
Three weeks after the Prime Minister announced demonetisation of Rs 500 and Rs 1,000 notes, India saw chaos at banks and ATMs today thanks to it being a payday. “The situation has surely gone worse with people now having to deal with total cash payments to domestic helps, drivers, grocery bills.” Detailed report here
Stories of distress from different industrial hubs and sectors confirm the worst fears of economists. Indian economy is showing signs of distress all around and there is no sign of relief. This is exactly the kind of situation that economists have been warning about. Safe to say they have been right this time.
Twitter: @bhayankur