Demonetisation impact: Will it help the economy and reverse jobless growth?

So what is demonetisation? Is it, as former finance minister P Chidambaram declared on Tuesday, “the biggest scam of the year”? Or is it, as Prime Minister Narendra Modi has been at pains to insist, a move that will curb black money, bring more into banking sector, widen the tax net and push us towards a more digitised economy? Does this, as the former finance minister claimed during a news conference, make poor people even poorer or will it, as Modi promised, create more jobs and diminish poverty?

In the heat and dust of a debate, often the larger points remain unnoticed while we squabble over perceptions. Demonetisation has unleashed a beast so strange and powerful that politicians, economists, media and every other stakeholder have since turned into blind men trying to describe an elephant.

While economists remain sharply divided over its impact (Amartya Sen and Larry Summers, for instance, have trashed it while Jagdish Bhagwati and Ken Rogoff see it as a bold, audacious move and a major reform), politicians bicker and commentators get tethered to their prejudicial divides, an interesting perspective has been offered by RSS ideologue S Gurumurthy.

A chartered accountant by profession and a commentator on matters economic and political in his own right, Gurumurthy, who is said to have the prime minister’s ear, has presented demonetisation as a much-needed remedy against “economic mismanagement” of the UPA years where sharp growth was accompanied by a rather strange fall in jobs.

His contention is that the economy under former prime minister Manmohan Singh, a noted economist and a former RBI governor, was fuelled by asset inflation that resulted in the creation of huge amount of black wealth. This unmonitored cash, according to him, drove up the real estate prices, stock market and gold that eventually pushed up the GDP but did little to create jobs and hence was not beneficial for the common man.

Speaking to CNN-News 18 during the sidelines of a seminar on Monday, Gurumurthy said that under Singh and Chidambaram, “the quantum jump in illicit cash in the economy fuelled an asset price bubble in gold, stocks and real estate, which reflected as high GDP growth in the UPA years and continuing till now. However, that growth couldn’t create jobs because it was black money spirited out of India and round-tripped back in the form of investment in assets,” he said.

In his column for Tuesday’s edition of The Hindu , the research professor of legal Anthropology at SASTRA University provided some figures to elaborate on his theory a little more, comparing the economies under NDA government led by Atal Bihari Vajpayee and UPA 1 under Manmohan Singh.

“During the NDA rule (1999-2004), real GDP grew by 27.8 percent, annually 5.5 percentage points. Annual money supply, that fuels inflation, by 15.3 percent. Prices by 23 percent, annually 4.6 percent.” He then goes on to calculate the rise in various metrics: stocks 32 percent; gold 38 percent and a “phenomenal” rise in jobs by almost 60 million. Under Manmohan Singh’s UPA, however, says Gurumurthy, “real GDP grew by 50.8 percent, annually 8.4 percentage points — one-and-a-half times that of NDA’s,” but only 27 lakhs jobs were generated as against 600 lakhs during NDA’s 5 year-term, he writes.

He explains this jobless growth arising out of “asset price inflation, not production,” and goes on to add that stock and gold prices recorded a three-fold jump whereas property prices “doubled every two-three years.”

In his critique of demonetisation in Friday’s column for The Hindu , Singh had admitted that India’s cash to GDP ratio “is very high vis-à-vis other nations.”

What explains this high circulation of cash? Gurumurthy puts it on a rise in high denomination notes (HDNs) which make it easier to generate black wealth. He writes that while in 1999 cash with the public was 9.4 percent of nominal GDP, by 2007-08 it had jumped to 13 percent. This is an unusually high figure because rising bank and digital payments should have made the figure come down. HDNs in the hands of public, he writes, shot up from 34 percent in 2004 to 79 percent in 2010 and touched 87 percent the day Modi announced the decommissioning of notes.

During the Nani Palkhivala Memorial Lecture in Chennai on 30 November, Gurumurthy had cited celebrated French economist Thomas Piketty to say that the economic growth during 2004-2014 did not improve the lives of the poor because of “Piketty effect” and the higher GDP failed to haul people out of poverty," according to another report in The Hindu .

How accurate is the RSS ideologue’s contention that Indian economy during UPA years was awash with “unmonitored cash”? Is it true that these years actually saw a fall in jobs despite high growth?

The Institute of Applied Manpower Research (IAMR), a think-tank of the Planning Commission, in a research paper published in 2013, found that not only did India witness jobless growth during the UPA tenure, it also saw millions pushed to become casual labour with little social security.

The authors, according to The Times of India report, revealed through their research that despite a phenomenal 8.5 percent growth in GDP, “employment in total and in non-agricultural sectors” did not grow. “This jobless growth in recent years”, they found, “was accompanied by growth in casualisation and informalisation”.

According to the study, as cited by The Times of India report, manufacturing sector saw the loss of 5 million jobs between 2005-10. The services sector witnessed only 4 million additional jobs in 2005-2010 (as compared to a massive growth of 18 million jobs during 2000-2005). This, the report said, was odd considering the growth period is often called that of ‘service-led’ growth.

If this points to a crippling problem that falsified growth while making it jobless, by sucking out extra, unmonitored cash, demonetisation may help the economy do a much-needed course-correction.

So the choice before the Modi government was to either maintain status quo — a combination of illicit cash fuelled high GDP and joblessness — or to reboot the economy through demonetisation that would trigger initial hardships but eventually restore real growth and jobs. Gurumurthy feels the government did the right thing by choosing the latter option.

As Columbia University Professor of Economics and Law Jagdish Bhagwati pointed out in his article (co-authored by Pravin Krishna and Suresh Sundaresan) for The Times of India , “Although the process is inconvenient, and subjects many households to hardships, it forces the cash from the black economy to be deposited into the banking system, potentially increasing transparency and expanding the tax base and revenues to the government from taxes and surcharges.”

The jury is still out on perhaps India’s most disruptive reform. But just as it would be foolish to tout demonetisation as a magic bullet, it similarly makes little sense to call it India’s biggest scam.