One of the propositions we take for granted is that post-demonetisation, the GDP growth rate will fall. Former Prime Minister Manmohan Singh said it could take a knock of 2 per cent; Ambit Capital thinks the fall could be as much as 3.3 per cent; other rating agencies and brokerage houses have indicated a fall in the range of 0.5-1 per cent in 2016-17.
While the wilder predictions about dramatic declines in GDP growth rates will probably be wrong, everybody believes that growth will be impacted to some extent, since it has been anecdotally noted that daily wage workers, kirana and vegetable vendors, restaurants, small businesses and the transport industry have reported a steep fall in business after November 8.
However, we also need to reckon with the reality that consumption demand has not fallen; it has only been postponed. People are holding back now due to fears of cash shortage, but demand will bounce back when this feeling subsides, probably some time in the January-March quarter of 2017. By April, the economy will bounce back, for the cash crisis will then be truly over. Right now, the early signals of a slowdown are barely noticeable in the data.
On the contrary, few signals are pointing in the other direction. The Nikkei India Purchasing Managers’ Index for the manufacturing sector has declined from 54.4 in October to 52.3 in November, but any number above 50 still signals an expansion, not a contraction. Take a look at car sales data. In November, Maruti Suzuki reported a 14 per cent jump (not fall) in domestic sales and Toyota, 10 per cent.
While M&M and Tata Motors registered drops and two-wheeler companies like TVS Motor saw a temporary collapse in sales, the overall outlook is not bleak at all. Footfalls at dealerships, which crashed 80 per cent soon after the notes ban, were near normal by the month-end.
The tyre industry also saw sales zoom in November, with Apollo, Ceat and JK Tyres reporting rising sales. Also consider the other big gainers of November. The Centre’s move to allow petrol bunks and airlines to accept old notes saw sales booming at both counters; companies like Indian Oil, HPCL and BPCL will thus report high growth in the month.
Big retailers like Big Bazaar, thanks to their ability to accept card payments, reported good footfalls; digital finance vendors saw business and transaction volumes hit the sky.
Telecom revenues hit a downtrend, but customer numbers soared with Jio’s entry. Transporters were hit by the drop in business volumes, but those that did have business saw costs go down due to the abolition of highway tolls and detention in November. Or consider what is actually happening after demonetisation to small business revenues.
Transactions may be down, but as at the end of November 27, bank deposits had soared to `8.44 lakh crore, according to data released by the Reserve Bank of India. This money did not come only from individuals, but substantially from small and big companies. It is more than likely that businesses that get a lot of their revenues in cash, made huge deposits to avoid losses.
This means their balance-sheets will show a jump in revenues, figures that were earlier concealed through cash deals. Even businesses which saw a drop will report higher sales to convert the black cash in their cupboards into white. The Gross Value Added method of calculating GDP will surely note some jump when such companies report their numbers to the Ministry of Corporate Affairs’ database, which is used for GDP calculations. If more revenues are passing through the books of small companies, what is the chance that there will be huge drop in GDP even assuming physical sales are down? The big ‘cash earning’ professions — doctors, chartered accountants, lawyers, architects, consultants, et al — are all doyens of the middle and upper middle classes. But they are also big tax evaders or avoiders.
They earn much of their consulting fees in cash, and it would not be surprising if they put all this in banks this year, which means they will report higher incomes. All this adds to GDP growth. Agriculture has been a runaway growth area this year, thanks to a good monsoon. Temporary slack in manufacturing or small businesses will increased with gains in agriculture.
As on December 1, Punjab and Haryana, which account for two-thirds of the paddy procured in the country, had more than exceeded their targets for the year. This means farm incomes will see the jump, adding to GDP. One should not also forget the ingenuity of the Indian street vendor. Many of those who were accepting cash until two weeks ago are suddenly putting up boards saying they accept PayTM money.
Vendors who can’t give change for the `2,000 note are telling customers they will accept it and deduct future purchases from the same note. Some even accept orders on credit. Banks, which will be hard hit by any slowdown, are likely to witness a higher demand for short-term working capital, now that cash is in short supply. Their cost of deposits has already crashed due to the huge jump in deposits, which means interest rates in the economy are bound to fall.
They will also make a packet from rising treasury profits due to drop in bond yields. I am not saying demonetisation is going to make no difference to people’s lives. Nor am I saying that there will be no impact on GDP. But it will probably be very hard to pin down any GDP impact from the actual numbers. In fact, there is a good chance that actual numbers may be higher than what the doomsayers project. There is absolutely no reason to think there is going to be a crash in growth; what we may never know is whether without demonetisation, GDP could have grown faster.