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Delhi-based Tarun discusses the far-reaching consequences of demonetisation, in the weekly column, exclusively in Different Truths.
As I have said before, demonetisation really changed a lot of my thinking. For one, I realised that I was a bad analyst, since I tried to analyse demonetisation at that time without any data.
Later on, as many of my fears proved unfounded about supply chain disruptions, consumption patterns, and so many other things, I learned to base my conclusions on solid data, for that helps to keep one logically grounded. And thus, I learned the tenets of economic writing, which is based on data.
Recently, demonetisation was again in the limelight. One year on, TV channels and newspapers were again rife with various opinions regarding the pros and cons of demonetisation. As I watched and read, I thought, how could I contribute to this? And lo, the answer was data of course. Of all the debates, not one piece of objective data was put forward by either the protagonists or the antagonists. That is why, I originally started to write – to present an objective view, away from politics, and through the eyes of a common man.
The most important thing to keep in mind while writing such an article is to remain as bias-free as possible. As I write, I must not let any personal preferences influence the tone or conclusion. Let the data speak.
Why do we need to analyse the demonetisation one year after it happened? That is because, any major 
policy decision would only show economic results some time down the line, as people adjust to new realities, which is a slow process.
My analysis about demonetisation won’t talk about black or white money, or banks, or any other things normal to such a discussion. I would analyse in terms of consumer behaviour, private and public debt levels, investment activity, and other such things. So, let’s see how data helps us in coming to a conclusion.
Investment activity quarterly as a percentage of GDP as of June 2017 was 32.5%, according to ceicdata.com. This compares lower than the average of 35.2% from 2004 to 2017. The investment activity was at a high of 41.2% in 2011, and a low of 28.6% in March 2017. Also, in 2014, the activity was at 36%, and since then, it has continuously declined, with the March 2017 quarter recording the lowest level of 28%. So, investment activity has been on a downtrend since 2011, and demonetisation only proved a one-quarter blip here. The more important thing is, that investment activity has been on a secular downtrend since 2011.
India’s private consumption expenditure as a percentage of GDP was 57.3% in the quarter ending June 2017. The average consumption from 1996 to 2017 has been at 59.2%. In the December 2016 quarter, it was 62%, when demonetisation did some strange things to the Indians. This is important. While everyone at that time thought that economy would dip for some time, and then move up, in fact, economy moved up in the aftermath of demonetisation, and is going down after that. In fact, private consumption is below the 20-year average and has not been going up for the last 3 years on an average. So, Indians are not really ramping up consumption, even though we seem to be spending more on electronics, cars, and travel and tourism. Indians seem to have changed their consumption patterns while keeping their consumption levels the same, or slightly less than before.
The famed Indian savings rate has been steadily going down. At the height of financial crisis in 2007-2008, it was at 41% of GDP, according to the World Bank. Since then, it has steadily gone down and is nearly at 30% as of June 2017.
Now, comes the catch. If consumption has not been going up, and in fact, is going down, and also investment activity is going down, and the savings rate is down, where is the money going?
Let’s look at the taxation. The tax from 2011 to 2017, has gone up from 10% to 18% of GDP. This is due to various policy measures, demonetisation being one of them.
Now, look at the government debt. The most important measure of government debt is the fiscal deficit. The fiscal deficit has gone down from 6.7% in 2011 to 3.2% in 2017. Also, the government expenditure as the percentage of GDP has gone up from 13% to 17%.
All of this indicates that demonetisation was a small part of the overall government plan. It had an impact of merely a quarter on the economy. The larger picture has remained stable. And that larger picture is that of improving government finance, the stability of macroeconomic indicators, and increasing intervention by the government in the economy. I was surprised when I looked at the data. Demonetisation, deemed to be such a big step, with the virulent debate for and against it, was no more an impact than a quarter. The larger picture has remained the same, that of increasing government intervention.
This government increase is coming at the cost of private enterprise. We are moving more to the centrist posture in a mixed economy. This is a far-reaching change, one which alters the trajectory India has so far followed. Let’s be aware of the underlying trend, among the whole noise and din of various measures, like demonetisation, which data says had a temporary, one-quarter impact.
©Tarun Gupta
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