by Meera Sanyal
The growth in non-food credit extended by scheduled commercial banks (SCBs) reached a low of 5.8 per cent at end-March 2017, the lowest since 1994–95 (10.9 per cent in the previous year). Banks typically build up credit portfolios at the end of the year for balance sheet considerations. Excluding this window-dressing, non-food credit growth as on 17 March 2017 was even lower at 5.1 per cent vis-à-vis 10.9 per cent on the corresponding day in the previous year.
Real credit growth showed a sharp deceleration to 1.8 per cent from 5.8 per cent a year ago.
Credit to all major sectors, barring services, decelerated/contracted during 2016–17.
Credit to agriculture slowed down to 12.4 per cent from 15.3 per cent in the previous year.
Credit to industry contracted by 1.9 per cent during 2016–17, in contrast to a growth of 2.7 per cent in the previous year.
Credit to infrastructure (which accounts for about one-third of the outstanding bank credit to industry) contracted by 6.1 per cent in 2016–17 on top of a low growth of 4.4 per cent in the previous year. Within infrastructure, credit growth contracted/decelerated in respect of all major segments such as power, telecommunication and roads.
Credit to textiles and engineering goods also declined.
Worse still, the impact of demonetization persisted well into 2017.
During 2017–18 (up to June 2017), overall credit slowdown has persisted with most sectors witnessing deceleration or contraction. While credit to industry continued to contract, credit growth to agriculture slowed down significantly to 7.5 per cent in June 2017 from 13.8 per cent in the corresponding period of the previous year. Credit to the services sector decelerated sharply, reflecting slowdown across all its sub-components, barring trade and other services.
The Economic Review went on to candidly explain the reasons for lower credit offtake:
A combination of factors drove down credit growth despite softening of lending rates.
The subdued state of economic activity;
risk aversion in the banking sector with a legacy of NPAs and capital adequacy requirements acting as a binding constraint on banks;
one-off/statistical factors such as loan write-offs; and
banks’ pre-occupation with exchange of notes/deposits following demonetization.
The simple truth is that Indians, like honest people everywhere, borrow when they feel confident about the future and their ability to sell their goods and services profitably and repay their loans; they do not borrow just because interest rates are slightly lower.
Equally important, Indian banks, reeling under a mountain of NPAs and struggling to meet capital adequacy norms, were not overenthusiastic about further lending. Demonetization compounded their problems – as their borrowers got hit by its economic impact, and they themselves got buried under the extra load of exchange and counting of notes.
Ignoring both the data and all of the above, Shaktikanta Das announced at the Asian Development Bank (ADB) Conference in Yokohama in May 2017,48 ‘The impact of demonetization was very, very transient and has not spilled over to the current financial year... Post-demonetization, the rates have come down, there is scope for further transmission of rates. I would expect that to happen. We see signs of revival in credit cycle.’
The prevarication and obfuscation of data on demonetization were not confined to India. Unfortunately, this was carried to international audiences too.
To Bring Down Real Estate Prices
Given the high real estate prices in India, this objective was widely welcomed, especially amongst aspiring homebuyers. The Housing and Urban Affairs Minister, Hardeep Singh Puri, claimed success on this score a year after demonetization.
In an interview with The Times of India on 9 November 201749, he stated that post-demonetization, the real estate sector had seen a drop in prices by up to 5–10 per cent. In addition, many developers had offered freebies during the past one year, in the range of 5–7 per cent. According to the Housing and Urban Affairs Ministry, the effective discount/correction was, therefore, expected to be up to 15 per cent.
The minister also said, ‘The data also showed that the average resale price of properties witnessed a dip of 10–15 per cent immediately after demonetization… In fact, there could be further price correction and the Ministry is optimistic most of the non-serious and fly-by-night players will vanish soon.’
However, when asked in the Rajya Sabha for the data that supported the claim that demonetization had brought down realty prices, the Minister was forced to admit in a written reply50 to the Parliament that ‘No such study has been carried out by the Ministry of Housing and Urban Affairs.’
In fact, data shows that real estate prices actually increased across the country, both during and immediately after demonetization. The RBI publishes an all India House Price Index (HPI) on its website each quarter.
As shown below, house prices increased every quarter between June 2016 and December 2017, showing that demonetization failed in this objective as well.
Table 15: Change in Housing Prices Post Demonetization
Quarter Year on Year Growth Sequential Increase
Per cent (Q on Q)
July–September 2016 7.7 %
October–December 2016 8.3 % 2.3 %
January–March 2017 10.4 % 2.2 %
April–June 2017 8.7 % 3.8 %
July–September 2017 7.3 % 0.4 %
Source: RBI web site (https://www.rbi.org.in), on the Database of Indian Economy (DBIE) portal, quarterly Press Releases. (Base: 2010–11=100).
The HPI is based on transactions data received from housing registration authorities in 10 major cities (viz., Mumbai, Delhi, Chennai, Kolkata, Bengaluru, Lucknow, Ahmedabad, Jaipur, Kanpur and Kochi).
My Perspective
As report cards go, the demonetization Report Card is an important one.
Notwithstanding numerous claims of success by various ministers and bureaucrats, factual data shows that the Modi government failed to achieve any of the eight major stated objectives of demonetization.
The 2016 demonetization was not just a complete failure, but given the crippling economic costs and the debilitating human impact of the move, also an unmitigated disaster.
Hopefully, this report card will give future governments pause to reflect on the policy measures that can and should be taken to achieve important objectives such as tackling black money, corruption, and counterfeiting, as also on measures that they should not take.
To paraphrase the words of former Governor of the RBI I.G. Patel ‘We should beware of gestures that produce much work, great pain, and little gain.’51
Conclusion
A nation cannot suffer, it cannot feel pain, it cannot feel fear, it has no consciousness… civilians suffer, but the nation cannot suffer...
It’s not such a good idea to cause suffering to real entities in the service of fictional stories.
– Yuval Noah Harari, author of Sapiens
India’s 2016 demonetization evokes strong feelings, both amongst its critics and its supporters.
When asked my views, during the roller-coaster demonetization period, I summarized them as follows:
Every Indian will agree with the stated objectives of demonetization, namely, removing black money and corruption and tackling fake notes and terrorism.
Only time will tell whether demonetization was the correct policy to achieve these objectives.
Personally, I do not believe it was.
But there can be no disagreement that the 2016 demonetization was extremely poorly executed, causing untold hardship to millions across the India especially the poorest.
I believe it will set the Indian economy back and has also shaken the faith of the common man in the banking system and the RBI – our central bank.1
The economic data, and views of the majority of economists, in the period since demonetization seem to support these views.
While the opposition parties have roundly criticized it as a disas
trous failure, spokespersons of the government have tried to showcase the demonetization exercise as a grand success that will have manifold long-term benefits for the Indian economy.
Stepping back and rising above politics, the basic issue confronting each one of us who cares about the future of India, is what that future holds for our children and grandchildren.
Prime Minister Modi received a record mandate in 2014 as the people of India voted for ‘Achhe Din’. More jobs, greater ease of doing business, more transparency, more opportunities, more prosperity, and more wealth – this was the vision. His speeches went to the heart of the dreams and aspirations of every Indian, and this is why India voted for him.
I believe that our country is poised at a critical point in history. In the next few decades, we can create the enabling circumstances to empower our people to rise from poverty into prosperity. If we can capitalize on the demographic dividend of our millennial generation, and harness the talent and entrepreneurial skills of our people, this could be the dawn of a golden age for India.
However, this is also a period fraught with great challenges.
Every day, almost 33,000 young Indians enter the workforce. Many of them are ill-equipped with the skills needed for the twenty-first century. Growing unemployment, low economic growth, and declining investment levels are leading to a situation where these young people are not being provided with opportunities for gainful employment. As traditional occupations like farming are no longer able to provide a viable livelihood or satisfy their aspirations, protests are growing across the country by farmers, demanding higher prices for their produce and reservations for their children. The increasing incidents of violence by aimless and unemployed youngsters against ‘others’, be they women, Dalits, or members of minority communities, point to a future where our demographic dividend could well turn into a demographic disaster.
The global scenario has also turned unfavourable. Rising oil prices and falling exports have put pressure on the rupee. Increasing protectionism and the very real possibility of reciprocal trade wars do not bode well for India. As robotics and Artificial Intelligence become more ubiquitous, we will start to lose the advantages of low-cost manpower.
There are also the challenges of pollution and climate change and their impact on the health, livelihoods, and homes of millions of Indians. This is increasingly evident from rising health costs across the country and the human and financial costs of recent droughts and floods.
Gazing at the future, a range of questions confront us. The 10 most important ones in my view are:
How will we create opportunities for gainful occupation and/or employment for the 12 million young Indians who are entering the workforce each year?
Will our path to development be characterized by large-scale migrations from rural to urban areas and if so, do our cities have the governance structures and infrastructure to cope?
Can we find ways to make farming and agrarian activities not just sustainable, but attractive to young people?
Will industries create enough jobs or does the advent of automation, robotics and Artificial Intelligence curtail these possibilities?
Can we grow and develop our economy without fatally polluting our air, water and land, while protecting the precious bio-diversity of flora and fauna that India is blessed with in the face of a changing climate and its consequences?
How do we tackle the menace of corruption, cronyism and black money?
How will we cope with the growing polarization of views that threaten to divide the country on grounds of religion, caste and community?
How do we ensure justice is fair and speedy and that the rule of law is applicable to all irrespective of political, money and social power?
How will we finance and build the physical (e.g., roads, electricity generation, etc.) and social (e.g., education and health) infrastructure, which will enable and empower our citizens to maximize their potential?
How will we deal with geo-political challenges that confront us and deal with the growing threat of terrorism?
In short, what do we need to do to ensure ‘Achhe Din’ for our children?
These are the challenges that have confronted every government in India, since Independence, and indeed it can be argued, depending on which side of the political spectrum one is, that progress has been made on many fronts. However, it is equally true that much remains to be done.
As an optimist on the future of India, I believe the next few decades could be the golden years for India. Our people have the entrepreneurial skills and innovativeness to help our economy prosper. We have a consumer market of such size and depth that there is room for a billion entrepreneurs, ranging from the tiny solo-preneur to the global-scale titans of Indian industry, to coexist and flourish. Given our high propensity to save, domestic savings can both help propel this growth and finance our infrastructural deficits. The list of India’s competitive advantages is a long one, and, I believe, more than adequate to overcome all the challenges we face.
What we need, however, is honest and competent leadership. Leaders who genuinely pursue the maxim of ‘Maximum Governance, Minimum government’.2 Who provide a safe and secure environment for citizens to lead their lives and where the rule of law and justice prevail. Who invest in the infrastructure needed to skill Indians and develop India. And who create a level playing field for every Indian to maximize her potential, without having to battle the obstacles of corruption and cronyism that stifle creativity, innovation and enterprise.
The tragedy of our present-day politics is that in their quest to win elections, many of our politicians and political parties have lost sight of the fact that winning or losing is not the objective – creating a better future for Indians is.
Their slogans have captivated our imagination for 70 years. Sadly, we wait in vain for them to deliver, and, in the meanwhile, suffer the consequences of ill thought-out policies that are badly implemented, ranging from nasbandi to notebandi.
One can only hope that as we journey into the future, our political leaders pay heed to the wise words of Milton Friedman who said, ‘The government solution to a problem is usually as bad as the problem and very often makes the problem worse.’
Had those who made the decision and ‘planned’ for India’s 2016 demonetization reflected on this sage advice, they would not have gone ahead.
Appendix 1
Text of Demonetization Announcement by Prime Minister Narendra Modi, 8 November 2016
My dear citizens,
I hope you ended the festive season of Diwali with joy and new hope. Today, I will be speaking to you about some critical issues and important decisions. Today, I want to make a special request to all of you. You may recall the economic situation in May 2014 when you entrusted us with an onerous responsibility. In the context of BRICS, it was being said that the ‘I’ in BRICS was shaky. Since then, we have had two years of severe drought. Yet, in the last two and a half years with the support of 125 crore Indians, India has become the “bright spot” in the global economy. It is not just we who are saying this; it is being stated by the International Monetary Fund and the World Bank.
Source: www.narendramodi.in
In this effort for development, our motto has been ‘Sab Ka Saath Sab Ka Vikas’: We are with all citizens and for development of all citizens. This Government is dedicated to the poor. It will remain dedicated to them. In our fight against poverty, our main thrust has been to empower the poor, and make them active participants in the benefits of economic progress.
The Pradhan Mantri Jan Dhan Yojana,
the Jan Suraksha Yojana,
the Pradhan Mantri Mudra Yojana for small enterprises,
the Stand-up India programme for Dalits, Adivasis and Women,
the Pradhan Mantri Ujjwala Scheme for gas connections in the homes of the poor,
the Pradhan Mantri Fasal Beema Yojana and Pradhan Mantri Krishi Sinchai Yojana to protect the income of farmers,
the So
il Health Card Scheme to ensure the best possible yield from farmers’ fields,
and the e-NAM National Market Place scheme to ensure farmers get the right price for their produce
– these are all reflections of this approach.
In the past decades, the spectre of corruption and black money has grown. It has weakened the effort to remove poverty. On the one hand, we are now No. 1 in the rate of economic growth. But on the other hand, we were ranked close to one hundred in the global corruption perceptions ranking two years back. In spite of many steps taken, we have only been able to reach a ranking of seventy-six now. Of course, there is improvement. This shows the extent to which corruption and black money have spread their tentacles.
The evil of corruption has been spread by certain sections of society for their selfish interest. They have ignored the poor and cornered benefits. Some people have misused their office for personal gain. On the other hand, honest people have fought against this evil. Crores of common men and women have lived lives of integrity. We hear about poor auto-rickshaw drivers returning gold ornaments left in the vehicles to their rightful owners. We hear about taxi drivers who take pains to locate the owners of cell phones left behind. We hear of vegetable vendors who return excess money given by customers.
There comes a time in the history of a country’s development when a need is felt for a strong and decisive step. For years, this country has felt that corruption, black money, and terrorism are festering sores, holding us back in the race towards development.
Terrorism is a frightening threat. So many have lost their lives because of it. But have you ever thought about how these terrorists get their money? Enemies from across the border run their operations using fake currency notes. This has been going on for years. Many times, those using fake five hundred and thousand rupee notes have been caught and many such notes have been seized.
Brothers and sisters,
On the one hand is the problem of terrorism; on the other is the challenge posed by corruption and black money. We began our battle against corruption by setting up an SIT headed by a retired Supreme Court judge, immediately upon taking office. Since then