Management of the shortage has once again become a major headache for the state due to the cash crunch after the withdrawal of high-value notes in the most unanticipated manner. It was definitely a policy shock. The decision of Prime Minister Narendra Modi was far beyond the rational expectation of an average Indian, but they had expected a recovery from the disequilibrium in a much faster pace.
The withdrawal of 85 per cent of currency is like oozing out of the same percentage of blood from the body. Needless to say, the delay in infusion can be fatal. If the Reserve Bank of India (RBI) had replaced the currencies within two to three days even with the support of armed forces, the whole process might have been unnoticed in the market as in the case of change of design for `500 in 2005.
But the PM needed a high drama in the historically important monetary policy shock. The question whether demonetisation is right or wrong is just like asking whether a particular medicine, say insulin, is good or bad. Insulin is good for a diabetic patient, but is fatal for others. Diagnosing the status of health of Indian economy, one can easily find that the macroeconomic indicators of our country are much better than before and needs no surgical strike.
The monetary policy report (October 2016) presented by the RBI paints a better picture of our economy. This was the first report after RBI was empowered by the amendments of the Reserve Bank of India Act, which came into force on June 27, 2016. The inflation expectation for long run and short run (CPI) are better and stays below
5 per cent. Consumer confidence is much higher compared to 2013-14. Business assessment expectations are good. Crude oil prices will remain low. Monsoons are normal. Projected growth in gross value added (GVA) is quite healthy and expected to touch 8 per cent in 2017-18. The report says, “Liquidity conditions have eased significantly, consistent with the accommodative stance of monetary policy.”
The RBI adds that the Indian rupee turned out to be the most stable currencies not withstanding the fears about FCNR (B) (Foreign Currency Non Resident (Bank’ Account) redemptions commencing in September. In the money markets, interest rates have eased in the first half of 2016-17 propelled by comfortable liquidity conditions and volatility has fallen.
Unfortunately, the demonetisation or the withdrawal of high denomination notes has been pushing the economy into a state-induced deflationary condition. Production in the primary sector is at stake. Farmers are forced to sell their produce for a throw-away price. They have no money to commence the next cultivation. Mandis are closed. Fishermen are not braving the sea. Milk is poured on the street.
According to the economic census 2016, we have 58.7 million establishments across our country and most of them are managed by one or two persons in a proprietorship mode. The rural economy and the petty trades in the town are depending upon hard currency. The policy makers forgot the realities of “Bharat” and made calculations for an urbanised “India” living in gated communities.
The cooperative movement in India is facing a tough situation due to the currency crisis. The credit cooperatives are not able to conduct their business. Agricultural cooperative societies are finding it very difficult to cater to their customers who are demanding their money deposited in the co-ops. The RBI and the government had to make use of the millions of cooperative outlets to ease the situation of currency crunch, but instead they are using the moment for arm-twisting the co-ops. The right medicine in the wrong time will hurt the patient.
The writer is a former member of Kerala State Planning Board.
cpjohn.kerala@gmail.com