Currency scrapping slows down economy

It is now acknowledged even by the Narendra Modi government that the demonetisation of Rs 500 and Rs 1,000 banknotes has created a severe liquidity crunch across the country. Probably, Modi and others who took the decision did not foresee that the impact of the sudden withdrawal of the legal tender status of the two high-denomination banknotes would have such a sweeping impact on currency liquidity. However, there is no going back on the decision as an about-turn will cause a huge embarrassment to the government, besides further compounding an already chaotic monetary situation. The government, therefore, wants people to endure the pains of currency shortage for a few weeks for a better tomorrow.

But the ground realities present a different picture. There is a bigger shock unfolding and it has begun to bite almost every segment of the economy with maximum injury being inflicted on agriculture, trade, construction, hotels and restaurants, goods transport and the small industries. Millions of casual labourers, sales boys and girls, waiters, loaders and above all farmers have been pushed to the brink without cash. The cash-to-GDP ratio in the Indian economy may be 12%, but the currency circulation in both black and white channels leads to a huge multiplier since it passes through many hands in the entire value chain to create what is now called the Gross Value Addition (GVA). The cash crunch following demonetisation and the immediate economic disruption caused to the cash-dominated sectors mentioned above as a consequence are hurting the growth numbers.

According to estimates, taking the daily GVA of Rs 36,261 crore, based on the first quarter GDP numbers (current prices base, more relevant in this scenario), the daily loss to the economy works out to Rs 21,756 crore, assuming a conservative 60% shaving off due to currency evaporation. For 15 days since November 8, it amounts to Rs 3,26,340 crore and the bleeding continues. If the disruption persists for a month or the rub-off stays, the loss would be in excess of Rs 6,50,000 crore. On the other hand, on an optimistic note, the gains from demonetisation is pegged at Rs 3,00,000 crore-4,00,000 crore. Hence, the currency note scrapping, billed as the biggest ever crack down on black money and corruption, has begun to hurt the economy more than the benefits it is assumed to bring. As it will take months before the monetary situation returns to normalcy, the economy will also have to contend with a loss of consumer confidence which is unlikely to be restored by a possible reduction in the bank lending rates.