Across the aisle: CSO calls the government’s bluff

I have been making the arguments for weeks — that the government has totally failed to address the issues of declining investment as a proportion of GDP; sluggish credit growth; and non-creation of new jobs. These trends were visible in early- and mid-2016.

Written by P Chidambaram | Published:June 4, 2017 1:10 am
repo cut, lending rate cut, lending rate, Public sector banks, public sector bank loans, bank loans, business news, banking news Demonetisation was quackery. There was absolutely no reason to disrupt the economy by declaring, in a near-midnight strike, that high-value currency notes would no longer be legal tender.

There are three kinds of people who claim to have some knowledge of the state of the economy — economists, quacks and students of economics. I believe I am a student learning economics every day since Eco 101 in 1967-68. Most of my learning was on the job as Commerce Minister or Finance Minister.

My first teacher was Dr Simon Kuznets. I am proud to count among my teachers Dr Manmohan Singh, Dr C Rangarajan, Mr Montek Singh Ahluwalia, Dr Venugopal Reddy, Dr Bimal Jalan, Dr Parthasarathy Shome, Dr Saumitra Chowdhury, Dr Jahangir Aziz, Dr Raghuram Rajan and many young economists. Those names should ring a bell. Each one of them occupied a key position in the UPA government and, at any time, four or five of them were available to advise the Prime Minister and the Finance Minister. Each one of them was a renowned economist and did not indulge in quackery.

Demonetisation was quackery. There was absolutely no reason to disrupt the economy by declaring, in a near-midnight strike, that high-value currency notes would no longer be legal tender. After talking to a number of people I had predicted that the cost to the economy would be between 1 and 1.5 per cent. I am not happy that I have been proved right.

Opposition spot on

The data released by the Central Statistics Organization on May 31, 2017, has proved that the Opposition was spot on:

* The Indian economy began slowing down in mid-2016 (beginning of Q2); demonetisation made it worse.

* Gross Value Addition (GVA) is the new metric. Growth of GVA declined from 7.9 per cent in 2015-16 to 6.6 per cent in 2016-17. The cost to the economy was 1.3 per cent. That is bang in the middle of the range that I had predicted.

* Between Q4 of 2015-16 and Q4 of 2016-17, the quarterly growth rate of GVA declined by an astonishing 3.1 per cent (from 8.7 per cent to 5.6 per cent). It was a man-made calamity.

* On the new base year of 2011-12, GDP declined by 0.9 per cent (from 8.0 per cent in 2015-16 to 7.1 per cent in 2016-17).

If you drill further into the data released by the CSO, you will find many other disquieting features. Core sector growth, which is a truer measure of industrial activity, fell from 10.7 per cent in Q4 of 2015-16 to 3.8 per cent in Q4 of 2016-17. Mining, manufacturing, electricity, construction, trade, hotels, transport, communication, finance, real estate and professional services had declined. Of these, the construction sector, which is the second largest job-creating sector, shrunk by 3.7 per cent in 2016–17 (meaning, job losses). Gross Fixed Capital Formation (GFCF) as a proportion of GDP, at constant prices, was 29.5 in 2016-17 against 30.9 and 31.3 in the previous two years. The government had flatly denied a decline in investment and cited FDI numbers. That myth now stands exposed.

Three major failures

All these confirm the arguments I have been making for weeks — that the government has totally failed to address the issues of declining investment as a proportion of GDP; sluggish credit growth; and non-creation of new jobs. These trends were visible in early- and mid-2016. Instead of addressing those issues, the government relied on the advice of quacks, kept out the Chief Economic Adviser, demonetised high-value currency notes, sucked out Rs 1,544,000 crore from the system and sent the economy into a tailspin. The government tried to justify demonetisation by putting up three objectives — end to black money, end to fake currency and end to terrorism. The objectives were unexceptionable, the minor difficulty being that none of them could be achieved — or was achieved — through demonetisation!

Ending corruption was added as an objective, but in the light of numerous seizures of cash in new Rs 2,000 notes from government officers, that objective was quickly abandoned.

Cash is back

The narrative was then cleverly shifted to digitisation and the impractical idea of a cashless economy. A lot of people were taken in by the surge in non-cash transactions. That surge was temporary because cash was not available. Once cash became available, the balloon of digitisation was also punctured. Look at the RBI’s data released at about the same time as the CSO’s data. Electronic payments month-wise since November 2016 have been:

Cash is back, as the primary channel to exchange value. One day the RBI must disclose the volume/value of the demonetised currency notes that were returned to the RBI. It must also re-monetise the economy sufficiently to meet the needs of the people. When both numbers will be known, the believers in demonetisation will realise that India is back to the pre-November 8, 2016, days and will ask the inevitable question: ‘What purpose did demonetisation serve except to disrupt the economy and heap misery upon millions of people?’

It is time for the government to stop fooling the people that all’s well with the economy and that the current policies are working. They are not. The government must get on with the job of reviving the economy by relying on the advice of truly knowledgeable economists. They can start with the only one they have, Dr Arvind Subramanian.


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  1. M
    M M
    Jun 6, 2017 at 6:34 am
    Look at the hard reality of economic situation which is objectively highlighted by analysts like Chidambram. Economic and national security issues are in bad shape and so is the deteriorating foreign relations. Farmers and army personnel are totally disappointed as the promises made to them have not been fulfilled. In the meantime, action taken against the media houses, namely NDTV, is in bad taste as it smacks of vendetta for airing the wrong doings of the government. All this signals the sighn of the present government moving towards the way out since it can't deliver on Ache Din. It seems unlikely for the Modi Sarkar to retrieve the lost ground. Let us say bye bye to this Sarkar
    1. S
      Jun 6, 2017 at 2:44 am
      1. V
        Vikram Chhabra
        Jun 6, 2017 at 1:08 am
        Chiddu tu harmi hai. Thats a fact. Tere jalne se kuchh nahi hoga. Your office used to give insiders tips for stock market. How corrupt and low one can go, you are a live example. I wish I could hang you and the likes of you to death. It's only money Chiddu, desh ki janata samajh a hai ki tum kitne bade Chor ho..apne hi desh ko loot. Chiddu besharam tumko chullu bhar pani paani mein suicide kar lens chahiye.
        1. E
          Employ Ment
          Jun 5, 2017 at 11:45 pm
          💲💲मुफ्त रोजगार योजना💲💲 ✔मोदी जी द्वारा चलाए गए डिजिटल इन्डिया से जुड़े और कमाए हर महीने 15,000 - 50,000 रुपए ✔अब कोई नही रहेगा बेरोज़गार और नही करेगा कोई बेरोज़गार आत्महत्या ✔क्योंकि अब आ गई है 21वीं सदी की सबसे बड़ी रोज़गार क्रांति ✔हमारा सपना पूरे भारत को ही नही पूरी दुनिया को डिजिटल इंडिया से जोड़ना 💲सबका साथ सबका विकास💲 ➡शुरुवात कैसे करे ✔C.h.a.m.p`C.a.s.h को प्ले स्टोर से इन्स्टल करे, और साइन अप करे, $1 डॉलर बोनस स्पौन्सर ID: 468942 ➡चैलेंज को पूरा करे ➡और इंकम करनी शुरू करे 👇🏻इसे जरूर नोट कर ले👇🏻 स्पौन्सर ID: 468942 ........................ Jhsuhdijdjdk
          1. I
            Jun 5, 2017 at 11:40 pm
            How is your son, Karti? DId he & your family have a good time on U.K.? I hope this government is not harassing him more. I feel your son is alleged to be corrupt, what next? Saint Lalu yadav corrupt? Robert vadra corrupt? You & all of the above named are good people. This govt is dumb & corrupt. Thank you for being alive & fil pages for the newspaper. Please publish comment in democratic press.
            1. V
              Jun 5, 2017 at 11:29 pm
              Thanks to demonitization lot of cash which was stacked and occasionally circulated in grey market or benami transactions in real estate which in turn was causing inflation at higher rate than growth is back in banking system What's the use of growing at 8 when inflation is at 6 , actual returns is just 2 rather its better to grow at 6.5 and inflation down at 2.9
              1. A
                Jun 5, 2017 at 7:32 pm
                World Bank projects 7.2 growth rate for India in 2017 !!Chiddu eat that
                1. A
                  Jun 5, 2017 at 11:10 am
                  The only purpose is that Modi is credit hungry and he wants that historians may take note of this and he may be declared as Muhammad bin Tughluq II. Otherwise nothing has been achieved except harassment to people. It is foolishness to call patient (economy) is healthy after sucking 86 of blood(currency).
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