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Demonetisation was a mistake. This is what Modi government is hiding from you

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Kamal Mitra Chenoy
Kamal Mitra ChenoyJun 02, 2017 | 15:03

Demonetisation was a mistake. This is what Modi government is hiding from you

The famous economist John Maynard Keynes warned about the dangers of demonetisation on the economy. He believed that demonetisation could have very serious consequences, and warned that badly planned, it could "debauch its currency". India is a particularly serious case.

From midnight of November 8, 2016, as much as 86 per cent of all currency was demonetised, meaning that it was useless, though it could be deposited in the Reserve Bank of India or other banks.

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It is not known how much of the value of the notes banned has been replaced by the new Rs 2,000 and Rs 500 currency notes.

Despite efforts by a parliamentary committee which RBI governor Urjit Patel has evaded, there is no official assessment of the current value of currency. Of the 86 per cent of notes banned, what percentage has been replaced?

Obviously, the Modi government does not want to reveal the figures, leaving no other explanation that the deficit is substantial. This is despite the earlier government claim that 27,500 metric tonne were being imported some 2-3 months ago.

Minister of State Arjun Meghwal in fact publicly stated that "lower denomination" currency notes would be printed to make up the currency deficit. Nothing on that front either.

Black money was to be targeted by the noteban as the Prime Minister repeated. But there is no official estimate on how amount of black money been unearthed.

Surely, getting an estimate of the black money exposed and deposited is not all that difficult. The fact that such figures are not available despite PM Modi's promise that all would be fine and transparent in 50 days, is surely unusual and worrying.

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The fact that there is no new Rs 1,000 currency note, though there are Rs 2,000 and Rs 500 currency notes is surely odd. The economy is still not back to the pre-November level.

Some statistical trends from the Central Statistics Office (CSO) are worrying. From the third quarter (Q3) of the financial year, October-December 2016, where GDP grew at 7 per cent, growth in the fourth quarter (Q4) in January-March 2017 dropped to 6.1 per cent, the slowest in at least four quarters.

Similarly, manufacturing in the same period was down from 8.2 per cent to 5.3 per cent. Construction fell from 3.4 per cent to -3.7 per cent, a steep descent. Agriculture fell from 6.9 per cent to 5.2 per cent.

Gross fixed capital formation fell from 29.5 per cent to 28.5 per cent, and private final consumption expenditure (an indicator for household consumption) fell from 58.6 per cent to 57.3 per cent, while gross value added (GDP-minus net taxes) fell from 6.7 per cent to 5.6 per cent.

Taken as a whole, these are disturbing indicators of the state of the Indian economy. The Economist (May 13-19, 2017) has warned that government bonds are now rated BBB, which the magazine states is "one notch above 'junk'".

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It has warned that stagnating revenues and higher spending have pushed the states' combined deficits to their highest in 13 years. For example, net amounts borrowed by states increased from Rs 154 billion in 2006 ($3.5 billion then), to the end of this fiscal year to Rs 3.9 trillion ($60.4 billion now).

State borrowing in the last financial year, which increased by 25 per cent, rose in the current financial year to 32 per cent. All these figures taken together clearly indicate that the Indian economy is in trouble.

The real problem is that the government is running more on promises and rhetoric, rather than on sound economic policies. Statistics and data which may be embarrassing are not being highlighted, often not even in comparison with other similar figures.

The situation certainly is worrying. But is the Modi government listening? It should do so before things get worse.

Last updated: June 03, 2017 | 21:31
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