Mr. Modi is full of action and an
intent to progress. That makes him a popular world leader with less populist
policies. Just as when he was looking invincible, he has taken the biggest
risk. The demonetization might end up as a botched up operation.
Like one mistake don’t make the
doctor bad, Modi has built up huge credibility, this one misstep is not going
to make him less endearing to his supporters and many Indians who voted him to
power. One reason being, there is no one else.
Only that when great leaders make
one mistake and followed by many mistake, they get trapped in a vicious cycle.
No doubt on the strategy, but why
the execution of demonitisation is in a mess today?
The timing was all wrong. After
not so good two season, this year was a very good season with copious rainfall
for the farmers. And exactly at the time when the commodities were taken to
market is when the market liquidity affected the price of the commodities. Even
vegetable prices are low. There are arguments that if the farm prices are lower
that should have reflected in the food prices. Not necessarily, even in case of
perishable commodities farmer has no holding power nor facilities, the produce
is immediately sold to market. It is the trader who might have held the produce
and gained thereafter.
October to January is the time
when the fishermen get very good price for their produce and also the
consumption is higher. Prior to that from April onwards is summer and the
non-veg consumption is less, then come the trolling ban, thereafter is various
upvas/lent because of which the consumption is very less. During maximum
consumption time, demonitisation sucked
cash out of the market. At Sassoon docks it was a sight to watch very high
priced seer fish going sold for a bargain price. And fish is an expensive
commodity with one Kg costing 10 USD for seer fish.
Diwali is an auspicious time for
taking possession of the home for the new home buyers. 3 to 4 months after
Diwali is a good earnings time for the carpenters, electricians, plumbers, the
blue collar workers. None of them get paid by cheque or credit card. The small
time contractors does all transactions in cash and the sellers to these small
contractors do not accept cheque too. Many people who took new homes postponed
their further work. This impacted the earnings of blue collar class of people.
The mom and pop stores and the
small time road side vendors had a customer segment. This was a section of
purchasers who were not comfortable with the organized retail environment.
These customers were not comfortable with the card transactions and also the
buying experience in a organized retail shop. All these reluctant customers were
one shot migrated to the organized retail points like , nilgris, foodbazars,
Hypercities, Dmarts etc. And the small time sellers who were dependent on these
customer segment got impacted. Their sales may not come back to them because
almost a month the customers were away from them with a different type of
buying experience and they may not go back now.
It will be interesting for the
social scientist to observe the changes in spending habits and buying behaviors
post demonitisation. Many families as a discipline use cash for their expenses
and use credit card only in very unavoidable circumstances. When they are
extinguishing the cash in their hand, there is a clear idea how much savings
from the monthly kitty is getting burned out. Need to be seen the impact of excessive
use of the credit card and the impact on family savings. This all on a sudden
migration to the card spending is certain to bust at least few families.
A section of right wind media
army kept broadcasting news that all dissent is because the rich do not want to
stand in line with the poor hence the noise. On the contrary the maximum
impacted was the poor. Rich had their drivers and others who will go and stand
in ATM line. And in metros there came up even startups offering runners
services where someone will stand in queue for one.
While the earning from the
exercise is quantified, it also need to be noted the loss of the above
mentioned part of the GDP.
This article is actually about
the challenges that PM Modi government will face from here on going forward.
All sections of the society is
now looking for the rewards for their ‘sufferings’ due to this exercise.
Salaried class, ‘after the hours’ of standing in queue for cash believe all the
exercise was done for them, so as to reduce their tax burden. They are counting
the amount of cash seized in all the raids and the tax paid on the deposits to
pay for the national expenditure and reduce their burden. This is also a very
vocal class. They need to be kept happy.
There is another not so vocal
class, but this one erupts like a volcano. This is the section mentioned above
in this article. They don’t appear in media with their woes, but politicians
are afraid of this class. There is
already noise for direct debit of
returns from demonetization to these people accounts.
If one read the analyst
predictions before the demonetization (Try read this, it is interesting how the
projections can go wrong) almost everyone predicts about the sensex closing at
29K to 30 K 2016 end. And the underlying theory everywhere was about rural
consumption. Which is now reflecting negatively in the numbers now. Markets
seem to be for a prolonged no growth period as the impact of the negative
earnings are to be there till the Q1 results are out.
But the problem is economy is
like a Huge goods train. Once it is slowed to gain momentum it will take time
and input to push it. All eyes are on the budget. All sections are expecting
government will do something to kick start the growth.
But there are some uncontrollable
factors which may tie finance ministers hand.
A lot of courage to government in taking risks
came from the positive oil dividends due to the low crude prices. Now the crude
prices are almost double from the lowest and seems to be on the uptrend. Oil is
an input which goes into the all part of the economy. This doesn’t seem to be
on the favorable side now.
Another issue is Hindustan during
Trumpistan: It is yet not clear how the new administration will open its gates
to India. But at least if Hilllary was the president it would have been a
continuity and nothing negative would have come if not positive. Any impact on
the young IT population will have its ramifications on the economy as a whole.
This earning crowd is also the biggest spenders in the economy. Be it the new
homes, vehicles or movies.
Due to the increased hostilities
with Pakistan, government speed tracked many defense spending projects.
Billions of dollars are earmarked for modernization of all the three forces.
India has chosen to take up a
diagonally opposite line from China. The Chinese in a way didn’t do much to
block their parallel economy. In fact many economists said the parallel economy
helped both India and China wither the global recession. Whatever that may be,
the parallel economy drives up prices, increases inflation, cheats government
from giving taxes but also creates more livelihood. There will be always less
number of stomach going to bed empty when activity is high in economy.
What could have been done better?
No doubt the current 1% of people
paying taxes is quite small and this needs to go up. Several steps could have
taken to incentivize the public spending in digital mode and dis incentivize
the cash.
Progressive monthly penalties could have been
levied on all cash withdrawals and transactions. Starting immediately with the
urban areas and slowly all across the country. VAT and service tax could have
been increased with a payback option if the transaction was done digitally in
B2C businesses.
The real challenge is if the
things go wrong and do not improve in months to come all blame going to ISI,
Pakistanis, Communists, Mughals, Nehru etc.
And further things don’t improve
then the fringe elements will be busy identifying ‘more ISS and ISI’ in India.
When the economists fail to
deliver dark forces start conjuring to thrust the reasons of the failure to
sections of society which has always happened in history.
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