Are reports of the slowing down of the economy post-demonetisation anecdotal, as the Union finance minister has claimed? Or are they substantial and credible? Seventy-five days after demonetisation was announced this question needs to be answered.
Arun Jaitley’s confidence is based on direct tax collections rising by 12% and indirect tax collections by 25% in the first three quarters of this financial year. But look a little deeper and the picture is different. April-December saw indirect tax growth of only 25% compared to nearly 34 last year. Second, indirect tax growth decelerated from 30.5% in October to 23.1 in November and 14.2 in December. No doubt direct tax collection has accelerated but that is, at least, partly due to a change in the advance tax payment schedule.
However, the real reasons for questioning Jaitley’s statement are a series of recent surveys. Their findings are worrying and cannot be taken lightly.
The Society for Automobile Manufacturers says sales of cars, two-wheelers and commercial vehicles has fallen by 18.7%, the biggest drop since 2000. Knight Frank India says home sales in eight major cities have fallen by 44%. The All India Manufacturers Organisation says Small and Medium Enterprises (8% of GDP and 45% of manufacturing) have cut their workforce by 35% whilst their revenues have dipped by 50%. Finally, the State Bank says bank credit off-take has declined to a historic low. Surely these are not anecdotes but real facts? You can’t ignore or dismiss them.
Going further and possibly building on this, the Centre for Monitoring the Indian Economy says the average daily value of new investment proposals announced since November 8 has slumped by nearly 60%. Its Managing Director, Mahesh Vyas, now expects GDP growth of just 6% this year – compared to last year’s growth of 7.6 – and it will stay at that level for the next five years. If that turns out to be the case, it could be very depressing.
However, there are a few reports and statistics that point in the other direction. Contradicting the bad news, the recent industrial production (IIP) figure shows an increase of 5.7% in November, the highest for 13 months. With regard to agriculture, Niti Aayog claims its growth story is “intact”. In a recent report it says: “Demonetisation is found to have had insignificant effect on output growth as well as farmers’ income.”
However, the IIP figure could be misleading because of what’s called the base effect. In November 2015 it fell by 3.4% which could make this year’s rise seem bigger than it is. And Niti Aayog’s confidence is questioned by reports (Indian Express 9/1) that the average daily demand for NREGA recorded a 60% increase in December.
As I am not an economist I’m not sure what conclusion to come to. The IIP figure is the only indication that industry is unaffected. All the others convincingly suggest otherwise. On the agriculture front we may well perform better than 2015-16 but that was a second consecutive drought year.
So let me end with a note of caution: the economic suffering may be exaggerated by some but it’s not anecdotal and it would be unwise to dismiss it.
The views expressed are personal