Some weeks ago when the official “quick estimates” of GDP for the third quarter of 2016-17 (October-December) had been released, putting the GDP growth in this quarter (over the corresponding quarter of 2015-16) at 7 percent, which broadly conformed to the CSO’s prediction before demonetisation, a veritable chorus had gone up that the critics of demonetisation had been proved wrong, that the measure did not have the recessionary effect they had claimed it would.

The fact that this growth estimate was spurious, produced at the behest of the BJP government which specialises in “post-truths”, was pointed out by many (see People’s Democracy, March 13). One particularly bizarre element in that estimate had been the growth rate of manufacturing output at 7.7 percent, when according to the index of industrial production, the manufacturing sector had grown only by 0.2 percent in that quarter. We now have fresh figures for industrial production for the month of February 2017, and they only confirm what the critics have been arguing, viz. that demonetisation has had a seriously recessionary effect on the economy.

It should of course be made clear that the Indian economy has witnessed an absolute industrial stagnation for several years now which has to do with a stagnation in domestic demand combined with sluggish net exports owing to the ongoing world capitalist crisis. But as if this was not enough, the Modi government chose to impose upon the economy a massive demonetisation for no rhyme or reason; and this has compounded the industrial recession even further. February 2017 had an index of industrial production that was 1.2 percent below that of February 2016; and for manufacturing the index was a full 2 percent below a year ago. February 2016 itself had witnessed a 0.6 percent growth compared to the preceding February, so that the decline in growth rate is 2.6 percent.

Within manufacturing, the consumer goods sector, which is where the impounding of people’s purchasing power through demonetisation is likely to have the maximum impact, registered a -5.6 percent growth rate, compared to 0.6 percent in February 2016. For the entire April-February period, the growth rate of consumer goods industries has been 0.1 percent in 2016-17 compared to 3.2 percent in 2015-16. And the manufacturing sector as a whole has witnessed, for the April-February period of 2016-17, a growth rate of -0.3 percent compared to 2.3 percent for the corresponding period of 2015-16. Not surprisingly, even bourgeois “experts” belonging to various “think-tanks”, who are taken aback by these poor figures, are now beginning to attribute them to the persistent effects of demonetisation.

It may however be argued that simply showing a fall in growth rate in manufacturing or in consumer goods compared to a year ago is insufficient for establishing the recessionary effects of demonetisation. What is needed is a finer analysis, comparing the trend before November 2016 when demonetisation occurred with the trend after November 2016. Only if there is an observed break in the trend around the time of demonetisation can we say with some degree of confidence that demonetisation did have a recessionary impact.

It is obvious, as already mentioned, that the impact of demonetisation is likely to be felt most strongly on consumer goods output. The other segments, such as basic industries, capital goods industries and intermediate goods industries, typically represent purchases not by households or even petty producers so much as by corporate, or generally larger, enterprises, and in their case the shortage of currency does  not constitute a major hurdle to effecting a purchase, because payments are usually made through non-cash means. Of course, if the demand for consumer goods, and therefore the output of consumer goods, is adversely affected by the shortage of purchasing power owing to demonetisation, then this will also affect the demand for producer goods; but this effect will occur only with a time-lag. The immediate impact of demonetisation will be felt primarily on consumer goods, which are purchased by households and in whose purchase cash payments play a major role.

In fact one can go even further. The demand for consumer durables is likely to be less affected by a cash shortage than the demand for consumer non-durables. This is so for two reasons. First, because the purchase of consumer durables, as it involves relatively lumpy payments, is effected to a greater degree through non-cash means than through cash, so that the direct effect of a withdrawal of cash from the economy upon the demand for consumer durables is likely to be less than upon the demand for consumer non-durables. And secondly, with regard to the indirect effect, arising from the loss of incomes of people who are hit by the direct effects of cash-shortage and therefore reduce their demand for consumer durables, this typically would take time to manifest itself. For both these reasons if the short-term impact of demonetisation is to be investigated then the sector to look at is the consumer non-durables sector.

Accordingly I have calculated the growth rate of output of the consumer non-durables sector, from the index of industrial production, separately for two sub-periods: April-October 2016-17 and November-February 2016-17, over the corresponding months of the preceding year. For both sub-periods there is an absolute decline in 2016-17, but while the drop is 2.47 percent for the first sub-period of seven months, it increases to 3.62 percent for the next four months.

There is a further point to be noted here. When there is a fall in demand for consumer goods, it is not as if the output of the sector is curtailed immediately. The fall in demand typically entails an increase in inventories with the sellers, and only when this happens do they cut down on their orders from the producers and the latter in turn cut back on production in response to the curtailment of orders. There is therefore a necessary time-lag between the reduction in demand and the reduction in output.

Keeping this in mind if we calculate the growth in the index of industrial production for consumer non-durables for the months December-February 2016-17 (over the corresponding months of 2015-16), ie, leave out November itself when the effect of demonetisation on output could not have been felt in view of the time-lags, we obtain a growth rate of -5.3 percent. While the growth rate was -1.85 percent for the period April-November 2016-17, it fell to -5.3 percent for the next three months, which shows a decisive break in the trend. This trend was negative for the year as a whole, but it became even more negative for the three months December-February 2016-17 when the effect of demonetisation got further superimposed on the already negative trend.

The index of industrial production, it must be remembered, is extremely inadequate for capturing developments in the small-scale sector where the impact of demonetisation has been the most pronounced. It is prepared by compiling data from 15 sources which are mainly government ministries and official departments. They do not include any source that can provide data on what is happening to the small-scale sector.

The IIP of course is still much better than the GDP estimates which of late have started relying on company statistics to arrive at production data, which is absurd because of the existence of a vast non-company sector. This absurdity gets further heightened when we look at the quick estimate of GDP, such as the one that came out recently and the government used for debunking its critics. This is because in arriving at these quick estimates only some company data are looked at, and not even comprehensive data for all companies. But even the IIP which is much better than these various GDP estimates in giving an indication of industrial growth, is also flawed, in the sense of not taking cognizance of developments in the small-scale sector. If, despite this flaw, the IIP shows such a sharp break in trend, and a sharp curtailment in industrial output in the post-demonetisation months, then the real impact of demonetisation can be easily imagined, when we also take into account the sector which is its primary victim, namely the sector of small-scale and petty production.

Needless to say, the impact of demonetisation has not been confined to the manufacturing sector. Its impact on services and other tertiary activities, especially in the small-scale sector, has been quite profoundly adverse. We have looked only at the manufacturing sector because some data on it have become available recently. Our query in other words has been the following: can we find any evidence of an adverse impact of demonetisation in data pertaining to just one particular sector that have come out recently? And the answer is overwhelmingly in the positive, which should dispel all the lies that government propaganda has been peddling of late about demonetisation having had no recessionary effect.
 

Prime Minister Modi’s demonetisation seems to be pushing India to the brink of recession. With the slow pace of remonetisation, day to day transactions have been severely affected, leading to a contraction in the economy. Despite Prime Minister’s exhortations to go cashless, and shift fromcash to electronic transactions, the shift has not happened. RBI data on electronic payments show that contrary to Prime Minister’s claim that even beggars are taking electronic alms, there has been no significant jump in electronic payments.

Rs. 14.8 lakh crore was taken out of circulation through demonetisation, not even half this amount has been put back into circulation so far.  Additionally, much of the fresh currency that has been issued,is in the form of Rs. 2,000 notes.The public are unable to use these notes for day to day transactions, due to the shortage of smaller denominations,which are required to change the larger value notes.

Despite the shrill propaganda of the government asking people to go cashless and use Paytm, debit cards, credit cards etc., there has not been a substantial jump in the electronic payments to compensate for the withdrawal of the currency notes. RBI’s own data on payments made through debit and credit cards at Points of sale (PoS), shows that such payments fell from Rs. 44 thousand crore in October to Rs. 35 thousand in November, which is a steep 20% fall. Not only payments through credit and debit cards have not picked up, butthey have actually fallen down. Transactions made through mobile wallets, like Paytm, have not compensated for this fall. The value of transactions through mobile wallets was only Rs. 1.3 thousand crore in November, or less than 3% of the debit and credit card amount for October. Even if we assume that there were no mobile wallet transactions in October, this amount isnot enough to compensate for a fall Rs. 9,000 crore in card payments at PoS.

There is an obvious fall in overall economic activityas a whole. People have reduced their spending. There can be very little doubt that Modi’s demonetization has put the economy in recession.
According to McKinsey, 95% of all retail transactions in India take place in cash . Newsclick’s analysis shows that the economy has been deprived of at leasthalf the cashin this period. Obviously, this will cut down transactions in the retail sector. It will also create inventory in the manufacturing sector, finally leading to layoffs and shutdowns in the manufacturing sector. This is particularly true for the small scale sector.If there are not enough sales bringing in revenue, small scale business unitsquickly go into losses.They are unable to paywages to their workersand areunable to get short term business loans from banks.

There are also other strong indications that the economy has indeed contracted. Purchasing Managers Index (PMI), which is a good measure of economic activity, has fallen for services steeply from 54.5 in October to 46.7 in November . Anything, below 50 of PMI, indicates a contraction.

Clearly, service sector, which is a lot more dependent on cash transactions, has been adversely affected.If service sector is affected, the manufacturing sector cannot remain immune either. This is indicated in the PMI for manufacturing, which has gone down from 54 to 52.3 between October and November. The impact on manufacturing is likely to be higher in December.

It was estimated that if the effect was limited only to the informal sector, this will push economic growth down to 4% in the Q3 (third quarter) of this year . Taking in to account the impact on other sectors, a more realistic estimate is that the economic growth in the Q3 could be as low as 1% or could even be negative .

The growth will not pick up in the next quarter as well. The shortage of cash is likely to continue for at least next threemore months, by some estimates, up to May, 2017.It is going to take time for small scale industries and small service providers to recover from their losses and get back to normal production; if they manage to do so at all. Considering all this, we are probably looking at a recessionary environment that may last longer than a single quarter. Instead of being the faster growing economy in 2016-17, we are looking at almost zero growth in the second half of this financial year.