Anecdotal versus real

The demonetisation impact has started showing up

Finance Minister Arun Jaitley has dismissed reports of economic slowdown triggered by the government’s demonetisation decision on November 8. To buttress his argument, Mr Jaitley has quoted the latest tax collection data: In the first three quarters of the current financial year, direct tax collection is up by 12 per cent and indirect tax collection is up by 25 per cent. It has also been pointed out that the excise duty, which is levied on goods at the factory gate, has grown by 31 per cent in December. And staying with December-specific data, collections from direct and indirect taxes are up 14.4 per cent and 14.2 per cent, respectively. Mr Jaitley has termed all reports to the contrary as anecdotal.

But, a closer look at the numbers may dent the minister’s optimism. For one, year-on-year comparison shows indirect tax collection growth, at 25 per cent between April and December this year, is far below the 33.78 per cent rate over the same period last year. The month-on-month changes are more revealing. Even accounting for tax buoyancy in October due to the festival season factor, the decline in November and December is quite sharp compared to October. Overall, indirect tax growth has decelerated from 30.5 per cent in October to 23.1 per cent in November and 14.2 per cent in December. The only upside is on the direct tax collection front, but that is partly due to a change in the advance tax payment schedule.

Data from several other sources are pointing in the same direction. For instance, according to Knight Frank India, home sales in eight major cities during October and December fell by a sharp 44 per cent, year on year. In the same quarter, new home launches have come down by 61 per cent, year on year. This has resulted in an estimated loss of Rs 22,600 crore to builders. Similarly, according to the Society of Indian Automobile Manufacturers (SIAM), automobile sales hit a 16-year low in December, led by a sharp dip in two-wheeler sales. Barring the light commercial vehicles segment, which grew by a paltry 1 per cent, all segments were hit by demonetisation. 

Clearly, there is no way to escape the fact that economic activity has been hit because of demonetisation. The first thing for the government to do is to accept this reality. It is possible that the government would like to, for political face-saving, blunt such criticism by suggesting that much of this economic activity was fuelled by unaccounted money. But, that still does not take away from the fact that growth has been hit and it shows up in the widespread job losses of the kind that a recent survey by the All India Manufacturers’ Organisation (AIMO) has shown. The AIMO study points out that in the first 34 days since demonetisation, micro and small-scale industries on average cut 35 per cent of their workforce and saw an up to 50 per cent dip in revenue. Besides, bank credit offtake has declined to a historical low of 5.1 per cent, year on year, as on December 23. Just after demonetisation, from November 11 to December 23, credit offtake declined by Rs 5,229 crore while banks’ deposits grew by around Rs 4 lakh crore, a study by the State Bank of India’s economic research wing has shown. The government would do well to plan its forthcoming Budget by considering these “real” numbers.