Debates on the effects of demonetization dominate every kind of
media. Economists are rolling out all kinds of numbers from -0.25% to -3.5% of
GDP growth slow down. While no one questions the intentions of this master
stroke but the effectiveness of its implementation is where the opinions are
divided. Look at following points and then you can form your opinions.
Time to Digtial
Economy: This may look good as a slogan but do you know how much is the
penetration of Internet and Smart Phones in our economy to go cashless? How
will those living below the poverty line buy a smart phone and get a data pack
to use mobile phone as their wallet? We do not have consistent power supply in many
villages and when it rains, the mobile towers do not function for days. When
villagers are struggling to get clean drinking water and primary health
facilities, going for a cashless system will force them to migrate to towns but
the cost of living in towns and the availability of jobs would put them into
helpless situations for a long time to come. Our former PM Man Mohan Singh
reminded us ‘In the long term, we all will be dead’. Yes, both the poor and
rich, all of us die in the long term. But this move will likely make the poor move
closer to their death prematurely. Short term impact can really be devastating.
If the situation is not handled well, the same people who hail Modi now will
begin to criticize him.
Self-Defeating
mechanism kicks in: When Real Estate transactions reduce, construction activity reduces
which employs unskilled labor in big numbers. And the consumption of Cement and
Steel would come down. That would mean the mining activity will also see a
slowdown. What will happen to the new investments in these sectors? How about
the new jobs which were supposed to be created in these sectors? Automobile
industry is cutting down their production levels. If the situation continues
for some more time, how much will be the job loss resulting from it? When GDP growth
begins to slow and deflation begins to hurt, rich will lose their wealth and poor
will lose their jobs.
Pressure on banking system
increases: We thought liquidity will drive down the interest rates but RBI
has a different plan. It sucked out the liquidity, may be for a good reason. But
this will push out the timing to reduce lending rates for banks. When the
revenues are going down, profits will slide at a higher pace and this will put a dent on many
companies ability to service their loans. Bad loans will raise again. Most of
the existing bad loans are in Infrastructure space and that sector will see a
significant headwind (as demand for cement, steel drops), so the pressure on
banking system will intensify.
If relief measures (such as reducing taxes) are brought in, it
may compensate for the damage partially but how soon they will roll it out and what
would be the magnitude of it is not known yet. But the long queues at Banks show the struggle
for a common man to get the cash to spend on the necessities. The behavior of
Indian is going to change for sure, but will it be for good? It depends on
further steps the Govt. will take. Acid test has begun for them. If they cannot
manage it, they will learn a big lesson themselves despite good intentions.
