GDP Post Demonetization

The impact of demonetization in day to day life are well discussed and evident. Select state elections will reflect people’s verdict as well.

GDP is the barometer and an objective evaluation of the impact. Recent reports on the fourth quarter economic parameters point towards economic compression directly related with demonetization. Despite demonetization being a fundamentally appropriate policy towards containing the unaccounted money within the system, it floundered. It is not a political question – it was a national initiative and a unique opportunity. What went wrong? This is a prelude to an upcoming blog on how change could have been managed properly.

Sometimes, those seating at far off can see things better than those who are seating at the epicenter. This is the case with GDP. I had already prognosticated, that the GDP would suffer setback from 0.5 to 1.25. I also opined that demonetization is good in the long term, GDP effect is a short term disability. Of course, the way demonetization was carried and the way the system defaulted to earlier state, it proved no value overall. In the absence of mid – long term value, we can only focus on the short term impact.

Though arguable, it impacted the GDP. True, it removed all soiled Rs.500 currency from the market, possibly from some black marketers and terrorists. That’s the sum total of Demonetization. Here is my question – Did Modi lacked resources in envisioning, (impact and scenario) analysis, planning and executing or did he not trust folks around him or did he do this in haste? I trust, it was a combination of the first and the last reason.

India is too heterogenous country. A system wide change needs a vision, deep rooted trust in people, a sound understanding of the ground level constraints and a thorough evaluation and impact analysis capturing those into the execution plan. In hindsight – Can we think of how this could have been done better, more surgical? Less traumatic? Possibly, therein lies the solution for Second Generation Demonetization.

‘I have not failed, I have just found 10,000 ways that won’t work’ – Thomas Edison.

That which does not kill us makes us more stronger.


Citations:

Despite demonetisation, India’s GDP growth stays 7 per cent: Govt data

https://www.forbes.com/sites/timworstall/2017/03/07/as-fitch-says-that-7-gdp-growth-for-india-looks-odd-given-demonetisation/#3ac3c61c48ed

http://economictimes.indiatimes.com/news/economy/policy/modis-victory-has-made-a-mockery-of-the-criticism-that-demonetisation-got-christopher-wood/articleshow/57627263.cms

 

Demonetization – A Class Divide?

Demonetization – A Class Divide?

Despite being a tool for fighting corruption, demonetization has polarized us as a society. How do we, as a society, think on a matter of vital national interest? Please see the opinion of the common man at the end of this blog. What should be done to make this a national initiative? Please read http://wp.me/p7XEWW-km

Background

The current demonetization drive for stopping corruption has either become a boon or a bane. Demonetization of currency has strongly opinionated Indian. At the core of our values, we all want corruption to be eradicated. We all differ in our perspective towards how this should be executed. Eradicating corruption is a fundamental initiative that has significant impact to our identity, polity and to the country’s Macroeconomy. Across sections of the society, many are doubtful and cynical. What makes us feel so? Why do we see a class divide and a strong polarization of opinion? What can be done to reduce this gap and drive this initiative as a national cause?

Is this stop gap? Or will it really stop?

Nefarious means are unlikely to change unless we see a substantial change in attitude towards way of living and transacting in our daily life. Whenever radical change is initiated, and if it is unaccompanied by fundamental change, the system is bound to go back to status quo. I already see those signs. So demonetisation will either stall or impede the flow of black money, temporarily but it won’t nix this at the bud.

Who likes or dislikes demonetization?

Service class and Expatriates for sure are supportive of this initiative. Their earnings are all white transactions. Business, Politician, Illegal (drugs, alcohol, nefarious political-business connections and terrorist), those using hawala, are unlikely to accept or adopt this change. Farming community will be neutral. Poor will be swayed by the noise rather than the voices they hear.

What an irony, we haven’t learnt for centuries

Earlier, the Englishman arrived in sixteenth century. They stayed, understood, conquered, consolidated, ruled and looted and deprived this golden land not just materially but made us defunct morally.

We still haven’t changed. We still think our cause above the country, prefer to be blind sighted to others perspective. Seems like, that is within our genome and our destiny or else, why can’t we listen to each other’s perspective, why should we not have a national inclusive dialog?

No, that inclusive dialog won’t happen because somewhere, we deeply trust that ‘My truth is superior than your truth’ and we go a step further, to engross all the credit for this achievement. Collectively, we have forgotten what is best for this country.

We know corruption is a national menace, it’s like an enemy within.  In the best interest of the nation, we should be unified for this national cause, we should come forward and adopt and accept, and provide constructive recommendations, rise above ourselves to let this happen. To some, this may sound hollow, but nations like Japan and several from European Union, have risen because, their constituent decided to adopt that pathway. It is not a utopian principle, it’s realty with pragmatism.

Should Prime Minister Modi be inclusive?

Yes, if this needs to succeed! Do we need to do more than withdrawing old currency and circulating new notes? Do we need this to be backed up with change in our attitude and fundamental way we think and work in our daily life?

Why Presidents Fail And How They Can Succeed Again

Kamarck, a Sr. Fellow at Brookings Institute Governance Studies, argues that presidents spend too little time investing on Governing. She explains the difficulties of governing in our modern political landscape, and offers examples and recommendations of how our next president can not only recreate faith in leadership but also run a competent, successful administration.’ I believe, we can easily extrapolate this to include our administrators as well.

A Kind request

This is a non-partisan exercise, not supported or aligned with any political group. Neither is this supported by any business or vested interest. To many, it is a matter of national importance and I would appreciate your motivation in spreading this message. By spreading this message, you may get to know the perspective of those within your community.

Please share your opinion when you visit the survey on the link below. As always, polls are anonymous. I have enabled single voting per device. If you have a question, kindly use the comment box to submit.

Note: I have disabled advertisements from this site. Despite if you see any advertisements, kindly report to me with a screenshot or time stamp the event. 


Additional Reading

  1. Demonetization and India’s Macroeconomy – Will Rupee Depreciate? Copy paste this link if the above won’t work http://wp.me/p7XEWW-jt
  2. Surgical Demonetization? What Is Good And What Needs To Be Fixed? Copy paste this link if the above won’t work http://wp.me/p7XEWW-eA
  3. Why Presidents Fail And How They Can Succeed Again

Demonetization and India’s Macroeconomy – Will Rupee Depreciate?

Demonetization and India’s Macroeconomy – Will Rupee Depreciate?
After the recent demonetization in India, an event with significant and deep reverberations across its economy, the Indian economy will eventually bounce back in three phase in 1 – 3 quarters, unless accompanied by additional steps to curb the parallel economy under current economic and political environment. Next 1 -3 quarters will report at least a drop by 0.5 to 1.25 percent point in India’s GDP. Despite the economy contracting, this will be similar to deflation. Economic indicators during these phases will differ. Earliest ever blog on India’s Demonetization and its macroeconomic impact. Demonetization and India’s Macroeconomy – Will Rupee Depreciate?

Demonetization – How will it affect the Indian Macroeconomy?

Obviously, the cash financing the legal, semi legal and illegal activities has vanished. Parallel channels, pumping money on the side have suddenly gone dry. Diminution of revenue will have a domino effect in the short term. Diminution of revenue will have a domino effect in the short term. While sparing essential living activities, this will have effects on every aspect of the economy – building, sales, travel, spending etc.

This decrease will eventually, reflect on the overall economy and its growth projections. A significant proportion of free floating cash financing several essential and non-essential daily operations will be strangulated. Cash earned irrespective of means, is an asset and not having an asset or liquidity will have deep impacts. Bloomberg feels it is contraction. To me, its deflation will follow and contraction. Primarily, contraction will be due large volumes of money being sucked out of the parallel (Juggad) economy with accompanying system wide impact. It will change the barometers of all key indices, Irrespective of sectors.

These phases will last 3-4 quarters, unless complemented by addition steps to curb the parallel economy. Next 3-4 quarters will report at least a drop by 0.5 to 1.25 percent point in GDP, at best, definitely risking it from calling it recession. Does that mean inflation and recession? No, despite the economy contracting, this is not recession though it is more similar to deflation. Economic indicators on each of these phases will reflect a different figure.

Now, does that mean I am against Demonetization? Certainly not! No pregnancy is without pain and no delivery is without cry and smile, except when you induce with Cesarean section under anesthesia. However, we are talking about the birth of a new era, and we are trying to understand how this newborn will impact existing earnings and revenue potential of the country in general (the macroeconomic considerations or implications). I see deflation (not recession) with overall contraction in the economy in the immediate future. Mauro Guillen, Director of the School’s Lauder Institute and a Professor at Wharton commented, “In the short term, the move could stifle some businesses that are legal and clean, if they use cash payments. But everyone will adjust. And while it can hurt some small businesses and individuals, it is better to do it than not.”

Three phases of recovery –

Economy will be impacted on several counts from GDP, Per Capita earning, Consumption, Investment, Industrial Production, Fiscal Balance, Public Debt and Unemployment Rates. However, this recovery will be marked by three distinct phases. Each phase demarcated by particular barometer of the economy.

  • Phase One – Lasting until end December, when the last notes would be officially accepted.
  • Phase Two – Deflationary pressure contracts the economy
  • Phase Three – Drop in Interest rates drop to bump up economy

Phase One – The Cash Crunch Phase:

Also the immediate phase succeeding demonetization, marked by severe depletion of cash or cash crunch. Only essential purchase activities will continue. CPI and CFPI will drop during this phase. The manner in which the denominations were retracted created a perceived rather than real loss. Cash spending reduced significantly so also purchase activities. Of course, loss of purchase activities, specifically based on Cash economy, would definitely result in a drop in GDP. Consumer spending activity fell to a near halt. Consumers are refraining from making any purchases except essential items from the consumer staples, healthcare, and energy segments. However, deflation will not be seen until phase 2.

Phase Two – Deflationary Phase:

Though Bank remittances will be high, the system will still be deprived of cash flow. The system has a tendency to bounce back and people will find ways to mobilize cash to support their cash based, if not illegal transactions. This phase will be marked by  liquidity mobilization will see a fall in prices on big ticket items such as real estate, less spending on luxury items etc. Apart from Real Estate, Gold and jewelry will also see diminution in value by approximately 10-15%.The next phase will have a little rebound to the GDP along with CPI but big ticket purchase will still be low.

During this period, real estate is likely to show significant down trend. Home prices may drop significantly, especially where investors have high stakes without support. Tier 1 cities will be most affected, primarily due to real estate activities being funded by investors. Tier 2 and Tier 3 will follow suite. Some reports say, accounts activity in the real estate sector, which includes a lot of cash and undocumented transactions, has already slowed down significantly, Metropolitan and Tier 1 cities reported up to a 30% fall in house prices. Industrial production will slow down on account of decrease appetite for domestic consumption. Rupee will continue depreciation against Green bag and the downward slide will be supported by Central intervention. However, decrease fiscal deficit and public debt will help Rupee from falling further. Also, imports will be impacted negatively and that will retain the value of Rupee in midterm.

Phase Three – Drop in Interest Rate:

Continued economic slowdown will mandate stimulation and the interest rates would drop, possibly by 0.5 to 0.75 percent. Trade deficit will decrease marginally. GDP will still not be back to the Nov 30, 2016 value. CPI and WPI will bounce back but not to the Oct 2016 values. Big Ticket items will continue to reel under the deflationary pressure.

End Note:

In the next 2-3 quarters, it will depreciate but eventually, after 3-5 quarters, it will be the most appreciating currency across the globe, primarily for its intrinsic strength but also secondary politicoeconomic phenomenon across the globe. By than, Trumpism will show its negative impact on dollar, Pound would not be as strong as it was Pre-Brexit, Euro should be sliding or at the most stabilized itself from sliding. Yen and Yuan both won’t show much potential for appreciating. Despite their strength, Canadian and Australian dollars won’t have to much impact.

Several factors will weigh in in favor of Rupee. As mentioned earlier, Rupee will depreciate in the next 2-3 quarters but start appreciating by early 2018. Turnaround in Rupee valuation vis a vis major currency baskets (appreciation), and slide of dollar, will most likely coincide at the same time, given the current political economic situation. Rupee should start appreciating and will dominate overall currency baskets after 3-5 quarters.

I always trust, when the enterprise, entity or a country stands on sound morals and ethical values, its long term outlook is strong. We definitely are moving in a direction towards that needed change. However, as noted earlier, I also feel this pregnancy and delivery is not without pain, cry and smile.

(Published on Dec 5 2016, this blog is still under construction)

Selected Citations:

Surgical Demonetization? What Is Good And What Needs To Be Fixed?

D SubbaRao – ex RBI Governor’s View on Demonetization ( Full Text )

Demonetization Dos and Don’ts (Gita Gopinath, Prof Economics at Harvard)

Reuters poll – Rupee’s slide from outflows, demonetization likely near end

India Rupee Demonetization: A Government Windfall? (Yahoo Finance)

What are the impacts of Demonetisation on Indian Economy? (Indian Economy; Economy & Finance)

THE CASE FOR FINANCIAL INFRASTRUCTURE: RURAL WELFARE AFTER INDIAN DEMONETIZATION (Wharton, Nov 18, 2016)

Impact of Demonetization on Macroeconomic factors (Nov 24, 2016)

Demonetization Will Impact Amazon’s Growth In India (Nov 29, 2016)

Demonetization in India: Who Will Pay the Price? (Wharton, Nov 16, 2016)

How Could Demonetization Impact the Indian Economy?

Demonetization of Rs 500 and Rs 1000: The Ultimate Brahmastra on Parallel Economy –

Macroeconomic implications of the Indian Rupee Demonetization?

India: Demonetization and its Discontents

India: Growth picks up in the second quarter of FY 2016

Inflation India 2016

India: Demonetization and its Discontents

Several Interesting Topics to Read on – FinanceProfessor.com

Macroeconomics (National Institute of Public Finance Policy)

Macroeconomic Policy (Mapping Finance)


Updated link (below) added on Feb 27, 2017 –

http://www.financialexpress.com/economy/brexit-to-demonetisation-why-is-economic-forecasting-so-difficult-asks-meghnad-desai/567674/

Surgical Demonetization? What Is Good And What Needs To Be Fixed?

I consider demonetization as a key policy that has reverberations with system wide impact and a potential to clean the swamp from decades of moral erosion and political ineptitude. It’s a defining moment of our century and for India, while it was long overdue. I so strongly wish this initiative to win! So, what’s wrong and how to fix the 2016 Demonetization? Those who don’t consider it as a misfired shot, should explain how these 600 million people should manage being cashless or cash strapped until Mid or Last December, 2016. Those who consider this as not a misfired shot, should also explain how this is salvo actually hits those who indulge in black money?

The situation is similar to surgery. I mentioned two fallacies with any surgery and let the readers choose options on how to fix those. By participating in the survey, you will see where you stand amongst those who are vocal on this issue. Polls are open until Dec 4, 2016. Visit after a few days to see how your peers have voted.

What Is Good And What Needs To Be Fixed?

Or, let us ask – What is wrong with Surgery?

Surgery is indicated for an existing abnormality that causes significant functional compromise and it cannot be managed conservatively because of the inherent limitations. The procedure removes acutely offending situation, an example would be an appendix, a tumor or structural abnormality. It does not however remove the root cause that resulted in the outcome mentioned above.

Two pertinent things though – It is done with best interest standards and, the probability of successful outcome is high with anticipation, planning and execution with precision. If a doctor has vested interest in operating an appendix that was never swollen, or if the procedure is accompanied impromptu with inefficient planning and execution, no doubt, the outcome would be compromised or fail to achieve the desired outcome.

Demonetization is a long overdue indicated surgery. No doubt. A system where parallel economy is the norm meant that this was long overdue. It was obvious earlier too but no one dared challenge the system. It was as usual pleasing populist politics. It required a leader, not just with a vision, mandate but also a character, that is so much devoid of our polity. It was hard to find a leader until Narendra Modi undertook that mission.

It’s definitely a radical move, in industry parlance, they call it radical change. That radical change has to be supported by underlying fundamental change in ethos and values. Simply changing overt artifacts is unlikely to change the ground realities. When radical change is implemented without fundamental change, the system has a tendency to bounce back to its original state.

At least two major fallacies with 2016 demonetization

Of the several fallacies with the 2016 demonetization wave, I will focus on the two, which I mentioned in my earlier paragraph.

  1. Logistics and planning were not envisioned, anticipated, planned nor executed
  2. Selected few were aware of the likely change in advance and had already capitalized on the possibility.

Is the media biased?

Every day, we get to hear dreaded news from Modi’s Demonetization, when we talk with folks from India or whether we read a news channel. Generally, outside newspapers don’t have any political stake or bias. Generally, i won’t believe the Indian media, because you get biased news either way, highly positive or highly negative.”, the same holds true with my folks back in India. So, I can take them without that pinch of salt.

Even if I am not reflecting system wide, I can say, it was planned inadequately and executed improperly or else, why do we have to roll back the changes for farmers, college tuition, hospitals, rural areas? If this was anticipated, why is the common man at such a misery? Any radical surgery is associated with post-surgical pain, but the managing doctors have a plan, will never ask you to wreath in pain unattended. It is wrong to say the pain is created by the media, media hype. Don’t we know that the same Modi was so much exalted by the same media?

Why do we care for JFK?

Often Modi supporters point towards his celibacy and character. To be true, celibacy and personal character has nothing to do with political character or political ideology. History is replete with anecdotes of successful kings and emperors having harems with multitude of concubines. What mattered was their feel of the pulse for the masses. These rulers kept the state above themselves. Their personal life was a relaxation and second only to the state or the subjects they ruled. Not long ago, it was revealed that John F Kennedy always had a lady serving him while he was flying abroad as leader of a great nation. We all know, his vision for US and the world order, as well as the value he espoused for the most downtrodden. We all know how decisive he was during the 1962 Cuban war in avoiding third world war. To many, he is credited with putting Man over the Moon.

Why we want Modi to succeed with this initiative?

Personally, I see this as a MUST and long OVERDUE correction for Indian economy, not because of emerging digital phenomenon but to starve or eliminate the parallel economy. A failure of 2016 demonetization will be sad. An astute and courageous politician is likely to face electoral rout in the upcoming state elections, not because of acting for a good cause but for lack of vision, planning and execution.

This is one core deliverable from Modi that is so highly regarded and appreciated. It was eclectic for its system wide impacts of transforming the ethos and economy of India. Yet, it was planned with such belligerence, neglect, logistic flaws and ineptitude of executioner’s vision. This is a lesson learnt while governing a country like India with its complex mesh work of distinct economic layers.

Selected References:

I am in constant search of unbiased opinion. When I try Indian newspapers, they are either biased for Modi or vehemently against Modi. Either of which are inappropriate for understanding the ground realities. By extension, the same happens when I talk with my folks back in India. Thus, I am just disappointed gathering information from Indian Newspapers or those residing in India.

To me, established players from media from advanced countries offer better perspective. Generally, amongst India media, I choose to read Times of India, The Hindu, Financial Times, Economic Times. I prefer to read BBC, Bloomberg etc. for unbiased news about India. Below, is a collection of selected articles.

Demonetization and India’s Macroeconomy – Will Rupee Depreciate?

India: Demonetization and its Discontents

Jets Loaded With Banned Cash Draw India’s Ire in Graft Crackdown

Noted American experts divided over India’s demonetisation drive

The Economist | Free exchange: Paper pains

The Economist | India’s demonetisation: The ropy rupee recall

The Trouble With India’s Demonetization Gamble

IMF says Modi govt’s demonetization move needs to be handled prudently

How Narendra Modi’s demonetisation move brought Raghuram Rajan and Subramanian Swamy together

Did The Government Use Raghuram Rajan’s Exit To Push Through The Demonetisation?

Here’s What Raghuram Rajan Thinks Of Currency Demonetisation

Rural Distress Is On The Rise But Support Grows for Demonetisation: HuffPost-BW-CVoter Survey

Manmohan Singh Gave Major Burns To Modi On Demonetisation Today And Twitter Is Ecstatic

How India’s Cash Chaos Is Shaking Everyone From Families to Banks

India’s Modi Holds to 50-Day Pledge as Cash Chaos Intensifies

India’s Economy Grows Less Than Estimated Before RBI Rate Review

Modi’s Revolutionary Dreams

Noted American experts divided over India’s demonetisation drive

Can India’s currency ban really curb the black economy?

India rupee ban: Currency move is ‘bad economics’

Slew of U-Turns Blight Modi’s Cash Ban, Leaving Indians Outraged

What Will India Do With 23 Billion Worthless Banknotes?