Audacity of hope

The 50-day transition towards digital transactions will be a unique feat for an economy sustained by cash dealings

By Mohan Sule

There might be two views on the short-, medium- and long-term impact on the economy of the sudden withdrawal of old high denomination notes from 9 November. Projections of the dent in the GDP growth rate for the current fiscal have ranged from 0.1% (according to some brokers) to 2% (according to economist-turned-politician Manmohan Singh). The confusion stems from the fact that there is no track record to rely on, no esoteric research papers to latch on to. India has become the first growing economy to undertake the exercise. So far, only a handful of autocratic, poor and financially-devastated nations have resorted to such a drastic step. Demonetization carried out in India in January 1978 was before liberalization, Internet, mobile telephony and Jan Dhan accounts. Hence, there is neither a road map nor any serious studies to draw conclusions of the salutary or adverse impact of demonetization. As such all the estimates have to be taken with a big dose of skepticism. The market has not been of much help either. As the announcement coincided with the results of the US presidential election and indication by the US Federal Reserve about a second hike in interest rate since the credit crunch of September 2008, there is uncertainty about the weight to assign for the causes of the flight of foreign portfolio investors. The diving of the Indian rupee has to be seen in tandem with the weakening of other emerging market currencies against a soaring dollar. The move, at hindsight, could not have been timed better. The kharif season was over and so also festive buying courtesy some of the disbursements recommended by the Seventh Pay Commission. Most rabi-crop growers had bought fertilizers and seeds to begin sowing. Some state elections are due early next year.

Almost all the downward revisions in targets for the equity market are based on two assumptions. First, the informal sector is dependent on the cash economy and drying up of the flow will lead to diminished purchasing power. Second, discretionary spend is largely financed by unaccounted wealth. What is ignored is the fact that cash is merely a medium and plugging of this mode does not mean legitimate stakeholders will be denied their dues. The disruption will lead many to utilize their Jan Dhan accounts, so far the receptacles of subsidies. The telecom revolution is not merely fueled by urban areas. Even rural areas have embraced the communication technology. The question that should be posed is if a 50-day window adequate to effect mass-scale switch-over from physical to digital payments. The concern that consumption sectors will take a hit has to be viewed in the context that the new buyers that urbanization will create and the shepherding of the informal segment into tax-paying players will boost volumes of mid- and low-level products and services to balancing out the decline in demand for high-end output. There will be correction in prices of some of the supplies that banked on scarcity rather than any innovative appeal. Investors might prefer players catering to a larger market at sensible and realistic margins. As their earnings will depend on number of units sold, the demand for manpower and inputs, too, will increase.

In the transition to a cashless society, Prime Minister Narendra Modi will be demolishing many myths. First, only an economist can understand the economy. This is a generic assertion. Rather the differentiation should be made between a mediocre and an out-of-box thinker. A leader is not afraid to take a stand that might cause pain in the short term but packages it so attractively that followers are willing to make the small sacrifices called of them. On this criterion, the prime minister has passed with distinction, modifying the implementation as per feedback without losing sight of the objective of sucking out the excessive cash from the system. Second, firmness is a disadvantage. Instead, it can turn out be a virtue when the going gets tough. There is already optimism that the next big move to stimulate the economy will come early next year or in the budget for the next fiscal to be presented on 1 February. Third, a government-mandated changeover to a new environment cannot be achieved in a limited time frame. Sudden disruption can lead to chaos but there are times when beginnings have to be abrupt so that the old system is discarded fully. Though the switch to de-mat trading was achieved in phases by the stock exchanges presiding over a universe of one of the largest listed equity markets in the world, there was a timeline to adhere. If the current turmoil results in India achieving a state where only about 8% of the transactions in value are in cash as in many developed economies as against more than 65% in value in India, the daring experiment will be emulated and examined by historians in the years to come.