It’s work in progress. Three events dominated India’s economic landscape last year, but whether they can be described as “progress” is debatable. One definitely isn’t: the unseemly brawl that broke out over control of the Tata group with Ratan Tata returning as interim chairman after ousting incumbent Cyrus Mistry. A lot of dirty linen is being washed in public, putting partly in the shade the political charges being traded elsewhere.



The second is the goods and services tax (GST), whose objective is to replace all taxes levied by the federal government and the states with one central tax. The GST is scheduled to come into effect by April or — at the latest — by September. Although the bill has been approved by both houses of Parliament and has received the President’s assent, a GST Council is now squabbling over the details, which could delay implementation.

“The timing is not right for implementation,” says West Bengal finance minister Amit Mitra, who is also chairman of the empowered committee of state finance ministers. He lays the blame squarely on the center’s move to demonetize Rs500 ($7.4) and Rs1,000 notes. “We all supported the GST under the premise that this would be the only destabilization factor,” Mitra told a TV channel. “We did not know that there would be a much bigger destabilization in the form of demonetization that would be let loose on the country.”

According to Wharton emeritus professor of management Jitendra Singh, while it is too early to assess the impact of demonetization, the move raises long-term questions. “What will have been gained from this step, and at what cost and mostly borne by whom?” he asks. He notes that rival political parties that have protested against demonetization could “broaden their tactical agenda to harm or even derail the GST implementation.” It also remains to be seen how the negative sentiment against demonetization could hurt the BJP and its allies in assembly elections in Uttar Pradesh in February-March, he adds.

“What will have been gained from [demonetization], and at what cost, and mostly borne by whom?” –Jitendra Singh

Demonetization represents much more than destabilization; critics argue that it has struck a body blow on economic activity in India. The decision – which was entirely unsuspected – was announced on 8 November 2016. While the pros and cons of the measure still continue to be debated, the consensus of opinion appears to be that while the proponents of demonetization may have had good intentions, the suffering it has caused to millions of Indians is unwarranted. Since some 86% of transactions in India are conducted in cash, especially in the vast rural areas, one economist compared the pain to what individuals might experience if 86% of their blood was removed from their bodies.

To be sure, demonetization has its supporters. While industrialists and corporate chiefs (Ratan Tata, Mukesh Ambani, K.V. Kamath and Deepak Parekh, to mention a few) favor the move, economists (including Nobel laureates Amaryta Sen and Paul Krugman, among others) are critical. “The clan of economists has spoiled the party [with] their estimates of how output will be affected as spending has stopped, manufacturing hit and several workers laid off. The net result can be a fall of between 0.5% and 2% in GDP,” says online news channel Firstpost. “The debate still goes on.”

According to Singh, Modi took “a bold, even visionary, step” with demonetization in attempting to combat the black economy and counterfeiting, and cutting financial support to terrorism. “What was always key, however, was how well the implementation process would unfold,” he notes. “Even supporters of the decision would say that the implementation was far from perfect.”

Kartik Hosanagar, a professor in Wharton’s department of operations, information and decisions, views demonetization against the backdrop of other economic gains. The year 2016 has overall been “a good year” for India, he notes, listing the highlights:

  • The GDP growth rate has held up at more than 7%.
  • Foreign direct investment went up significantly during the year. (It rose 30% on a year-on-year basis to $21.6 billion between April and September 2016, according to public data published by the India Brand Equity Foundation, a government-sponsored trust.)
  • Initiatives such as the ‘Make in India’ program “have borne early fruits.” Many MNCs including Panasonic and Pepsi set up manufacturing facilities in India during the year.
  • “The startup world has seen a drop in investment activity, but I see that as a return to sanity rather than a worrisome contraction,” Hosanagar adds.

“The biggest wild card in all of this, of course, is demonetization,” notes Hosanagar. “It’s unclear how it will all play out.” He hopes that “any impact on economic activity and GDP will be temporary, and the long-term benefits such as an increase in cashless activity will be more permanent.” He adds that “this is the India optimist in me speaking.”

“The biggest wild card in all of this, of course, is demonetization.” –Kartik Hosanagar

Part of the problem with demonetization was that it came as a bolt from the blue; the government claimed giving advance notice would have the defeated its purpose. But not everyone agrees with that view. “There was no need for secrecy,” counters Jayati Ghosh, a professor of social sciences at Jawaharlal Nehru University. “All demonetizations through history have been done with some advance warning. This reduces the damage to innocent people. The government could monitor suspicious transactions after the announcement, just as it is doing now. In any case, I would not have demonetized Rs500 notes. If high-value notes like Rs1,000 are the problem, why replace them with even higher value notes?” (A Rs2,000 note has been introduced as part of the package.)

Moving Goalposts

The government, meanwhile, seems to have moved the goalposts: The claimed objective of the exercise has apparently changed from rooting out black money to promoting cashless transactions. Several measures have been introduced, among them a 0.75% discount on digital payments made for buying petrol and diesel and a 0.5% cut in the price of railway season tickets bought using digital technology.

In another twist, the government appears to be no longer pushing demonetization as a “cashless” plan. It has now become a “less-cash” strategy. That is as it should be; the world doesn’t have a cashless economy so far. In India, Bloomberg data shows the share of cash in the volume of consumer transactions is 98% (against 55% in the U.S. and 48% in the U.K.). It is 90% in China and 86% in Japan. Much of the cash transactions are in rural India. So, expectedly, life came to a near standstill and much misery ensued when people found themselves unable to use their own money. Even when the money was in a bank account, limits on ATM withdrawals compounded the problem further.

But India is also a country where finding novel, workable solutions to problems – commonly known as jugaad — is par for the course. While long lines multiplied in front of banks and ATMs (several people claimed to have had heart attacks while standing in them), ways were found to deal with the situation. By December 31, the visible impact was a Parliament at near paralysis as politicians

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