Time to take stock

We are now well in the ‘post demonetisation’ era, a monetary sector reform to clean up black money and corruption. It is thus a good time to take stock.

It needs recognition that the country has so far stoically cooperated though the devastation has been considerable and more so in the unorganised sector and our far flung remote areas. This support was given despite severe, sudden and unforeseen hardship in a land of ‘a million mutinies’ and’ argumentative Indians’. The underlying reason has been a sense of trust, across states and communities that tangible benefits will flow in the ‘post’ period.

The remonetisation exercise would have revealed to the authorities the agonising inefficiency in the ‘real sector’ - in the form of printing capacities, transportation systems and management reflexes — which make most parts of the country akin to ‘far flung/remote’ for cash resupply, regardless of physical distances. As authorities battle to speed up remonetisation by tackling ‘real sector‘ issues, they could also pause to reflect on the equally undeniable fact that similar daily challenges are faced by those ‘not in authority’, in areas as diverse as ramshackle schooling/hospital care or even basic issues such as safety and cleanliness or employment.

While the jury is still out on whether demonetisation will or will not prove beneficial, it needs recognition that individual assessments of the currently quasi-enfranchised majority would be based on whether their life prospects have improved in the ‘post’ period via more and better quality jobs and life quality.

Ironically, however, these future trajectories of life prospects will be defined not by what was announced on November 8 in India but because of what was declared on November 9 in the USA and a few weeks earlier in UK or what could occur in Italy etc. The emerging markets had hugely benefited.

To illustrate, in the emerging market economies (EMEs), growth rose from 3.8% during 1989 to 1998 to 6.4% in 1999 to 2008, even as advanced economies (AE) grew steadily at around 2.7%. In 1990, the combined share of EMEs in global GDP was 20% at market exchange rates and 30.7% in PPP terms.

By 2013, these share ratios were 39.3-50.9%. In large part, this occurred as EME trade/worker remittance growth exceeded AE rates. The Indian growth story post the 1991-92 liberalisation thus was not unique but in a way, rode the globalisation induced growth.

The world has however slowed down in the past 2-3 years. The Brexit, Trump election and Italian referendum results are occurring due to perceptions that ‘better days’ could again be witnessed in AEs by closing or reducing access to their product and labour markets.
The AEs are not only the main dem­and centres but also occupy the best ra­nks in any real sector measurement index. India, though an important demand centre, features amongst the world’s lowest in these indices. The implications of the likely retreat of globalisation of future Indian growth and employment potential therefore require careful thought.

It would further assist though, if international studies on black money or shadow economies are examined. India has always been quoted to be a high black money country and one of the important contributing factors is the very high usage of cash in transactions. While formal studies evaluating the percentage share of cash to cheque/electronic transactions or cash to GDP are not easily accessible, it is undoubtedly true that Indian ratio of above 12% is amongst the highest in the world and has increased over time.

Our peer group EMEs like Brazil, Me­xico and South Africa do have much lower dependence on cash but going by Sch­neider (2010), also have a higher share of black money in relation to their GDPs. These countries are also significantly higher in the literacy, urbanisation and labour productivity indices which also have a bearing on lower need for cash.

It thus needs dispassionate analysis whether the governing force for currency demand lies in increasing ‘black intent’ or is due to growth in peripheral areas in a differently structured economy. We thus need to examine whether, post demonetisation, we should debate currency to GDP ratios or focus more on ‘real’ sector issues.

Labour markets

Undoubdtedly, governmental announcements of intent regarding the ‘real’ sector have repeatedly been witnessed. It is testified by the Make in India, Swacch Bharat, Minimum government–Maximum governance initiatives.

Admittedly, pronouncements are made on these initiatives on a near continuous basis. However, the labour markets are yet to follow suit. The real sector indices are also yet to improve. Could this be because actually no real answer has so far been offered to the question asked as far back as ancient Rome — ‘who guards the guardians?’

The ’real’ sector reforms consist not only of substantial upgradation of infrastructure but equally significant administrative reform to permit increased levels of autonomy, rule based rather than discretionary decision making and individual focussed accountability. The main challenge to ground based movement on real sector reform comes from the fact that it is easier said than done.

This is because it carries the prospect of real loss of authority as also altered behaviour and skill requirements on the part of legacy players not excluding those in authority. Resultantly, attempts to delay change occur. However, only these reforms can ward off the adverse impact of possible de-globalisation of a slowing world economy vitiating the expectations of a ‘post demonetised’ society.

This could well require substituting the long standing ‘absentee landlord’ form of departmental control of hospitals, schools, industrial estates, cities with true autonomy by creation of ‘trust systems and effective mechanisms to punish abuse of trust’.

Only then will these departments be able to govern by becoming impartial in performance evaluation and concurrently the ‘individual operating’ units, no lon­ger sheltered in the cloak of anonymity, be forced to perform by competing. This process would need the support of clearly understood internationally relevant standards of quality. This road is neither as easy nor as glamorous compared to monetary sector reform. Will it be taken?

(The writer is former chairman, Exim Bank of India)
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