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Posts Tagged ‘demonetisation

It’s time to rid India of the GDP disease

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A woman in the Aravalli hills of Rajasthan carries home a headload of field straw. India’s National Accounts Statistics is completely ignorant of the biophysical economy.

On 5 January 2017 the Central Statistics Office of the Ministry of Statistics and Programme Implementation, Government of India, issued a note titled “First advance estimates of national income, 2017-18”. The contents of this note immediately caused great consternation among the ranks of those in business and industry, trading, banking anf finance, and government who hold that the growth of India’s gross domestic product is supremely important as it is this growth which describes what India is and should be.

In its usual bland way, the Central Statistics Office said that this was “the First Advance estimates of national income at constant (2011-12) and current prices, for the financial year 2017-18” and then proeeded, after a short boilerplate explanation about the compilation of estimates, delivered the bombshell to the GDP standard-bearers: “The growth in GDP during 2017-18 is estimated at 6.5% as compared to the growth rate of 7.1% in 2016-17.” [pdf file here]

To me, this is good news of a kind not heard in the last several years.

But India’s business and financial press were thrown into a caterwauling discord which within minutes was all over the internet.

An example of one out of the many messages in a daily barrage delivered by the Government of India’s ‘GDP First’ corps. This is from what is called the Make in India ‘initiative’ of the Department of Industrial Policy and Promotion, Ministry of Commerce. “Make in India is much more than an inspiring slogan,” the DIPP says. “It represents a comprehensive and unprecedented overhaul of out-dated processes and policies.” For this childish GDP rah-rah club, environmental protection, natural reserves, watershed conservation, handloom and handicrafts are all outdated practices and ideas.

‘GDP growth seen at four-year low of 6.5% in 2017-18: CSO’ said the Economic Times: “Most private economists have pared the growth forecast to 6.2 to 6.5 percent for this fiscal year, citing the teething troubles faced by businesses during the roll out of a goods and services tax (GST).”

‘7 reasons why FY18 GDP growth forecast should be viewed with caution’ advised Business Standard: “The fact that growth will be 6.5% is significant as it is even lower than the Economic Survey assumption of 6.75-7.5% for the year. Hence, it is not expected to be higher than the base mark which means that it would be lowest in the past three years. The effects of demonetisation and GST have played some role here.”

‘CSO pegs FY18 growth at 6.5%; why forecast is an eye-opener for Narendra Modi govt’ said Firstpost: “The healthy uptick in volumes displayed by many sectors in November 2017, is expected to strengthen in the remainder of FY2018, benefiting from a favourable base effect and a ‘catch up’ following the subdued first half. Accordingly, manufacturing is likely to display healthy expansion in volumes in H2 FY2018, which should result in a substantial improvement in capacity utilisation on a YoY basis.”

‘GST disruptions eat FY18 economic growth; GDP seen growing at 6.5%, lowest under Modi government’ huffed the Financial Express: “For a broad-based recovery the rural economy needs to recover and we can expect the upcoming budget to focus on alleviating some of the stress in the rural economy and concentrating on measures to augment the flow of credit in the economy. Overall growth is likely to improve in the coming year and possibly move up beyond the 7% mark in FY19.”

‘India’s GDP growth seen decelerating to 6.5% in 2017-18 from 7.1% in 2016-17’ said the Mint: “The nominal GDP, or gross domestic product at market prices, is expected to grow at 9.5% against 11.75% assumed in the 2017-18 budget presented last year. This may make it difficult for the government to achieve the fiscal deficit target of 3.2% of GDP in a fiscally tight year.”

‘India Sees FY18 GDP Growth At 6.5%’ observed Bloomberg Quint: “Growth in gross value added terms, which strips out the impact of indirect taxes and subsidies, is pegged at 6.1 this year, versus a revised 6.6 percent last fiscal. Both GDP and GVA growth were marginally below expectations. A Bloomberg poll had pegged GDP growth at 6.7 percent. The RBI had forecast GVA growth at 6.7 percent at the time of its last policy review in December.”

‘India’s FY18 GDP growth estimated at 6.5%, says CSO data’ said Zee Business: “Real GVA, i.e, GVA at basic constant prices (2011-12) is anticipated to increase from Rs 111.85 lakh crore in 2016-17 to Rs 118.71 lakh crore in 2017-18. Anticipated growth of real GVA at basic prices in 2017-18 is 6.1 percent as against 6.6 percent in 2016-17.”

So great is the power of the School of GDP and of its regents, who are as priests of the Sect of GDP Growth, that the meaninglessness of GDP is a subject practically invisible in India today. Just as it has no meaning at all to the woman in my photograph above, so too GDP has no meaning for all, including the 2.7% (or thereabouts) who pay income tax.

This tweet shows us the scale of the problem. An article by Klaus Schwab of the World Economic Forum (a club of powerful globalists) is posted on the website of Prime Minister Narendra Modi ! The head of the ruling BJP’s information unit broadcasts it.

India’s National Accounts Statistics presents every quarter and annually, estimates of the size of the country’s GDP, of the rate of GDP growth, of the size of ‘gross value added’, to which GDP is bound in ways as complicated as they are misleading. There are wages, interests, salaries, profits, factor costs, net indirect taxes, product taxes, product subsidies, market prices, industry-wise estimates and producer prices to juggle.

For the most part, these are prices and costs alone, upon which various kinds of taxes are levied and whose materials and processes may qualify for subsidies. All these are added and deducted, or deducted and added, and finally totalled show a GVA which then leads to a GDP. The prices are arbitrary and speculative, as all prices are, the arbitrariness and speculative nature being attributed to something called market demand, itself a creation of policy and advertising – policy to choke choices and advertising to spur greed. On this putrid basis does the School of GDP stand.

The GDP and GDP-growth frenzy in India spares not a minute for a questioning of its fundamental ideas, which in certain quarters had begun to shown as hollow and destructive in the early 1970s, when the effects of the material and consumption boom in Europe, North American (USA and Canada) and some of the OECD countries after the end of the Second World War became visible as environmental degradation.

Over 30 years later, sections of those societies inhabit and practice what are called ‘steady state’ economics, ‘transition’ economics (that is, transition to low energy, low consumption, recycling and sharing based ways of collective living) and ‘de-growth’, which is a scaling down of economic production and consumption done equitably and to ensure that a society (or groups of settlement and their industries) strictly observe the bio-physical limits of their environment (pollution and pollutants, land, water, biodiversity, etc).

But the Central Statistics Office of the Ministry of Statistics and Programme Implementation, Government of India, is ignorant of such critical thinking. It is just as ignorant of the many efforts at swadeshi living, production, cultivation (agro-ecological) and education (informal learning environments instead of reformatted syllabi lifted wholsesale from countries whose exploitative economies installed globalisation as the default economics mode) that are visible all over India today. The CSO and MoSPI are not entirely to blame for this abysmal blindness, because the Ministry of Finance (like every other major line ministry of the Government of India, and like every state government) has decided to be even more blind.

To read the insensate paragraphs disgorged every quarter from the CSO (and Ministry of Finance, likewise the Niti Aayog, the chambers of commerce and industry, the many economy and trade think-tanks) is to find evidence to pile upon earlier evidence that here is an administration of a very large, extremely populous country which cares not the slightest about the indubitably strong correlations between ‘GDP growth’ and more forms of environmental damage than have been reckoned.

The GDP-GVA-growth fantasy cares not the slightest about energy over-use and CO2 emissions, about the effects of widespread atmospheric and chemical pollution on the health of the 185 million rural households and 88 million urban households (my estimates for 2018) of India, and about the terrible stresses that the urban households in more than 4,000 towns, district headquarters and metros are subject to as a result of their lives – through mobile phone apps, banks, the food industry, the automobile industry and the building industry – being micro-regulated so that an additional thousandth of a per cent of GDP growth can be squeezed out of them.

The GDP asura has brought ruin to India’s environment, cities, farms, households, forests, rivers, coasts and hills. Let 2018 be the year we burn the monster once and for all.

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Of money good or black, digital or paper

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500 and 1000 Indian rupee banknotes are kept in front of an image of the Hindu deities at a cash counter inside a bank in Jammu, November 10, 2016 REUTERS/ Mukesh Gupta

500 and 1000 Indian rupee banknotes are kept in front of an image of the Hindu deities at a cash counter inside a bank in Jammu, November 10, 2016 REUTERS/ Mukesh Gupta

The decision by the BJP government on 8 November to demonetise the 500 and 1,000 rupee currency notes has been presented as “strength in the fight against corruption, black money, money laundering, terrorism and financing of terrorists as well as counterfeit notes”.

The release added: “Prime Minister Shri Narendra Modi made these important announcements during a televised address to the nation on the evening of Tuesday 8th November 2016. He said that these decisions will fully protect the interests of honest and hard-working citizens of India and that those five hundred and one thousand rupee notes hoarded by anti-national and anti-social elements will become worthless pieces of paper.”

Rs 14 lakh crore – 86% of the value of Indian currency currently in circulation – became useless from midnight of November 8, 2016. The Rs 500 notes amount to Rs 7.85 lakh crore and Rs 1,000 notes amount to Rs 6.33 lakh crore, according to Reserve Bank of India data. The immediate result was panic, in hundreds of towns and cities, as citizens ran for ATMs. Confusion prevailed as on the next day, 9 November, all banks were to shut to the public and ATMs too.

There was chaos outside hospitals, railway stations and petrol pumps which were allowed to accept Rs 500 and Rs 1,000 notes till Friday (but interpreted the directions as they pleased). Smaller denomination notes such as Rs 100 and Rs 50 were in short supply due to the heavy demand. Small traders, rickshaw pullers, taxi and auto-rickshaw drivers, daily wage labour, and unorganised sector workers said they have been hit hard.

This public inconvenience was necessary, said the government, to have the time to restock bank branches and ATMs with new currency notes and to prepare the bank branches for the exchange services they would have to begin on 10 November.

The government explained that:

1. A law was passed in 2015 on disclosure of foreign bank accounts. In August 2016 strict rules were put in place to curtail benami transactions. During the same period a scheme to declare black money was introduced. These efforts have over the past two and a half years, brought more than Rs. 1.25 lakh crore of black money into the open.

2. These efforts have led to India emerging as “a bright spot in the global economy”, a preferred destination for investment and an easier place to do business in. “Leading financial agencies have shared their optimism about India’s growth as well.”

3. Indian enterprise and innovation has received a fillip due to the ‘Make in India’, ‘Start up India’ and ‘Stand up India’ programmes for enterprise, innovation and research in India.

There is no doubt that India’s economy has been plagued by the creation of wealth in some quarters that is obscenely disproportionate to the stated sources of individual and family income (see the press release from the Department of Economic Affairs, pdf). This has for long signalled corruption, and the means by which the corrupt (both giver and taker) become so is cash (but not only). The demonetisation has affected the political class and bureaucracy which accounted for the bulk of the corrupt money. The other difficulty the government and enforcement agencies have grappled with especially over the last decade is counterfeit currency notes, which have been used to maintain anti-national, secessionist and terrorist networks.

With about 86% (by rupee value) of currency in circulation being in the notes that have been demonetised. There are 16.5 billion Rs 500 notes and 6.7 billion Rs 1,000 notes in circulation now, and replacing them with lower denomination notes, and also the new series of Rs 500 and Rs 2,000 notes, will take several weeks.

Old high denomination bank notes are seen kept in buckets at a counter as people stand in a queue to deposit their money inside a bank in the northern city of Kanpur, India, November 10, 2016. REUTERS/Adnan Abidi

Old high denomination bank notes are seen kept in buckets at a counter as people stand in a queue to deposit their money inside a bank in the northern city of Kanpur, India, November 10, 2016. REUTERS/Adnan Abidi

I have several concerns about the demonetisation of the 500 and 1,000 currency notes, and the accompanying directions that the banking and financial services sector in India is now pushing the public.

Question 1 – Estimates are that currency in public circulation in 2006 was around Rs 4 lakh crore. In 2016 it was about Rs 16 lakh crore. If this estimate is of what RBI printed, why did it for ten years print physical currency at a rate higher than top annual GDP growth estimates?

This article explains the extraordinary rise of cash economy through high denomination notes, powered by generation of black money in real estate, stocking of gold, bribery and corruption. But it does not help answer my question above. “While the high denomination notes made illegal businesses, including hawala transactions to transfer money out of India easy to execute, it has facilitated huge tax evasion even in the otherwise lawful businesses. High denomination notes have made it easy for the bribe taker to handle huge bribes with ease.”

Question 2 – As the 500 and 1000 notes are ‘high value’ and so used for hoarding ‘black’ cash, why is the higher of the two (1000) being replaced by a note twice its value, that is, Rs 2000?

Since yesterday, there have been explanations offered about the effect of demonetisation on consumption and on slowing down an economy whose GDP growth is rated as the best amongst the large economies. “Consumer spending will likely fall in the immediate weeks as households adjust to the new system. India’s economy grew 7.1 percent during April to June, the slowest in 15 months, but the government and experts have been pointing out that a pick-up was likely in the next few months riding on good rains, a pay bonanza for government employees and festive-season buying.”

According to the national income data for the first quarter (April-June) of 2016-17, private final consumption expenditure (PFCE) – which measures household spending – at current prices is estimated at Rs 21.19 lakh crore, or about 55% of the gross domestic product (GDP). These are the numbers that a new class of ‘growth’ advocates in India are betting on. There is a connection to inflation – in the price of services, cost of manufactured articles and the prices of food – which however has not been answered as yet. Raising the denomination of the highest value currency note from Rs 1,000 to Rs 2,000 is in my view such a signal.

A person stands with his documents in a queue outside a branch of the State Bank of india as people wait to exchange old high denomination bank notes in Old Delhi, India, November 10, 2016. REUTERS/Cathal McNaughton

A person stands with his documents in a queue outside a branch of the State Bank of india as people wait to exchange old high denomination bank notes in Old Delhi, India, November 10, 2016. REUTERS/Cathal McNaughton

A number of petitions challenging the notification by the Department of Economic Affairs, Ministry of Finance, Government of India (which is the order for demonetisation) have been lodged at various High Courts and with the Supreme Court. Some protest the order as “illegal and arbitrary” and others for the order not granting reasonable time for ordinary citizens (presumably with legitimate cash in hand) to comply without jeopardising livelihood (by having to spend time in bank branches, for which leave is to be taken or a day’s income has to be foregone). While the Supreme Court may hear a petition next week, the response of the Madras High Court – that it cannot interfere in the policies of the government related to monetary system – should help prise open to greater public scrutiny one of the most opaque areas of policy making: the public monetary and fiscal system.

Question 3 – Is the net monetary gain by Government of India – more physical money from the ‘black economy’ brought onto the national accounts books – a way to ensure that India will next financial year also record the ‘fastest GDP growth’ (without the manufacturing, service and agriculture sectors doing so)?

For this question I can see only a few partial answers. These have to do with the enlargement of the digital rupee and digital payments, and this is the most serious concern. A government-appointed panel was set up in August to suggest ways such as tax rebates and ‘cash back’ to incentivise card and digital transactions. The government is also examining the feasibility to create a history for all card and digital payments, how to use the Aadhar database for authenticating card/digital transactions, providing low-cost micro-credit based on credit history.

Another partial answer comes from the Ministry of Finance, which said that “weak global demand” is among the “strongest challenges” in the near term for Indian economy. “Weak global demand is one among the strongest challenges in the near term. Exports and imports together constitute 42 per cent of the GDP (gross domestic product), even at the reduced levels in 2015-16.” The ministry said that reviving the savings and investment cycle in economy is challenging. The savings rate that stood at 34.6% in 2011-12, declined to 33% in 2014-15. Investment rate declined from 39% of GDP in 2011-12 to 34.2% in 2014-15. So these are the conventional macro-economic arguments, but the demonetisation will as I see it push any revival in savings and investment in quite a different direction from what the rural and agricultural base of the population require.

That direction is the ‘cashless’ one, with cash being blamed for fuelling the black economy. This is a danger-filled direction, one which we have already had a troubled history to look back at recently – the micro-credit bubble of the 2000-10 decade – to serve as a guide of what not to do. The banking and financial services industry has been expanding over the last two years, in tandem with the mobile telecom industry, with mobile payments and ‘wallets’.

“You cannot have 12% of India’s GDP in shape of currency,” Finance Minister Arun Jaitley has said. “Ideally developed countries have only about 4% and therefore you have to squeeze the amount of currency available and you need to get people into the habit of using digital, cheques, plastic currency and so on.” This – apart from the short-term gain by herding cash hoards into banks to be taxed – is what the direction is: the rupee as a bit, the rupee’s already tenuous basis in a physical standard now becoming more virtual, and this in a monetary and fiscal environment about which the public has scant understanding and in which the public has no participation.

Such a direction only widens the already troublesome gap between an acceptable physical basis for a value that the rupee represents (we have no gold standard, or any other acceptable equivalent) and the assigning of a notional value to a digital rupee whose issue, transfer and control will be entirely electronic. When viewed against the increasing “liberalisation” (or increasing “reforms”) of the banking, insurance, non-banking finance, financial services, small credit industries that has taken place in the last two years, and especially the opening up of these new services to foreign direct investment (FDI), the picture of the cashless economy so strenuously advocated by Finance Minister Arun Jaitley.

Consider this gleeful reaction from what is called the fintech sector (we had IT, BT and there’s FT): “We might grow 10x when it comes to digital payments. Today, three to five percent of the transactions happen digitally, but we will see a 10x growth to almost 15–20% when it comes to digital transactions in the country. This is huge and this rise in digital transactions will lead to a digital exhaust where better credit risk scoring will happen, catapulting into exponential growth.”

This is the very troubling new landscape that the demonetisation decision – taken with the good reason of weeding out a black economy – has brought the rupee into.

Written by makanaka

November 10, 2016 at 09:26