No demon in demonetisation!

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Bikky Khosla | 07 Mar, 2017
And now yet another twist in the demonetisation story. When PM Modi took the whole nation by surprise by announcing the note ban of November 8, initial public perception was widely positive. The move was cheered as an attack on black money and corruption. But as reality soon proved to be harsher than expected mainly due to poor implementation of the scheme, the euphoria took not much time to calm down. With the crisis deepening in the following weeks, the media now nicknamed the move "DeMon'. The opposition also saw a chance to turn the tide. Some economists even started predicting a recession. But the third quarter GDP growth estimate of 7% now paints a starkly different picture.

Controversies have continued, however. After the release of the growth projection, Modi took a dig at the critics of demonetisation, with his "hard work is more powerful than Harvard" barb, which came in the backdrop of Nobel laureate Amartya Sen's dubbing the act as a 'despotic' action. The Congress and the Left, in contrast, viewed the data as 'questionable' and even 'fake'. According to two top ex-ministers in the former government, the higher-than-expected numbers are a result of bending of methodology and based on increase in revenue from indirect taxes, which is not a true reflection of growth. The robust growth data is met with scepticism also by some rating agencies.

So what's 'questionable' with the data? Private consumption, which denotes demand, rose at a double digit rate of 10% in third quarter, against 5% in the previous quarter. Sceptics question how such a high growth rate is possible when demonetisation had drained out 86% of the currency in circulation. Investments, which had seen contraction for previous three quarters in a row, grew by 3.5%, despite capital goods segment of the IIP contracting 7.7%. Some others question the 8.3% GVA growth in manufacturing sector on the same ground. Also, 2.7% growth in construction sector, which was expected to be hit the worst by the note ban, is higher than general expectations.

The third quarter growth projection, beyond question, comes as a surprise, but the extreme reaction it has provoked in the political arena is unwelcome. Most of the data on which the estimates are based belonged to the period preceding November 8, and so we can expect a clearer picture only after release of the fourth quarter GDP figures. There shouldn't be a rush to question the credibility of the CSO. There's no sense either in indulging in chest-thumping as it will hardly change the fact that demonetisation -- despite the long-term benefits it promises -- caused some major, though temporary, disruptions, mainly due to poor planning. Instead, it's better to admit and rectify and also move away from the obsession with GDP as the only measure of progress.

I invite your opinions.