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First Article : How demonetization affect India's economy 

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First Article : How demonetization affect India's economy 

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Summary:
High-value bank notes were no longer accepted in payment of a debt (legal tender)

Economic Cost
- Rural & informal economy where most transactions are cash-based --> Suffered
1. Wholesales markets
- Immediate aftermath: Sharp decline in wholesale price index (WPI - measures inflation/basket of wholsale goods) of fruits & vegetables
2. Domestic sales of transportation
- Sales of 2-wheelers plunge sharply
- Cars sales decline but less severe
3. Slowdown in economy
- Very less new projects launching
4. On Reserve Bank of India (central bank)
- Dividend from Reserve Bank of India to government is lower
- Domestic earnings declined
- Printing costs went up

Uncertain benefits (promises that are not fulfilling)
1. Rapid expansion in tax base
- Tax base contributes only 0.1% to India's GDP
2. Detect and eliminate counterfeit (fake) notes
- Growth in detected fake nots have not been significantly large
3. Boost to non cash payments
- Which is uncertain because of increasing Cash-GDP ratio (ratio of debt-GDP by the gov, to see if the country is generating enuf products (GDP) to cover debt (cash))

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New Delhi: A year ago, Prime Minister Narendra Modi announced the scrapping of high-value banknotes which amounted to 86% of currency in circulation. The demonetisation of currency notes was supposed to be an attack on black money, on counterfeit notes, and projected as part of a broader push to promote digitization and non-cash payments. A year later, progress on all these counts appears to be very modest, and should make us question whether this exercise was needed at all to fulfil its stated aims.

The costs imposed by the currency-scrapping exercise were, however, quite severe, at least in the short term, disrupting ordinary life across the country for several weeks. The hardest-hit were those in rural areas, where access to banking and the internet are quite low. A 2016 Reserve Bank of India (RBI) report on branch authorization policy classified 93% of rural centres in the country as unbanked, with the population dependent on roving banking correspondents and on distant urban or semi-urban branches. Access to the internet is equally patchy, with only 3% of households in underdeveloped rural areas reporting access to internet in a 2016 consumer economy survey.
Economic costs
The rural and informal economy suffered disproportionately because most transactions are cash-based. The liquidity squeeze led to a pile-up at wholesale markets, leading to a sharp decline in the Wholesale Price Index (WPI) of perishables such as fruits and vegetables in the immediate aftermath of demonetisation. By turning farm markets into buyers' markets, demonetisation may have also contributed to the decline in prices of pulses. Rural consumer sentiment too took a hit, with domestic sales of two-wheelers plunging sharply. Car sales also declined but the decline was less severe than in the case of two-wheelers.

The slowdown in the economy, which started before demonetisation, also seems to have been exacerbated by demonetisation. New project announcements declined sharply in the wake of demonetisation, a Centre for Monitoring Indian Economy (CMIE) analysis showed, hurting the capex cycle.

Contrary to what some economists predicted, the dividend from RBI to the government was lower because of demonetisation. RBI's domestic earnings declined as it had to pay interest of Rs17,426 crore after it mopped up excess liquidity in the banking system following demonetisation. The previous year, the central bank had earned interest of Rs506 crore in its liquidity management operations. RBI's printing costs also went up because of the move.
Uncertain benefits
The one big promise of demonetisation was a rapid expansion in the tax base but the actual results have been quite modest. According to the finance ministry's estimates published in the latest Economic Survey, the tax base expansion attributable to demonetisation was Rs10,600 crore, lower than what RBI spent on interest expenses, and equivalent to only 0.1% of India's gross domestic product (GDP). The full effect on tax collections "will materialize gradually" as reported income of new taxpayers grows, said the survey. How far such gains materialize remains to be seen.

Another stated aim of demonetisation was to detect and eliminate counterfeit notes. The growth in detected counterfeit notes after demonetisation has not been unusually large, shows RBI data, even as counterfeits of the freshly issued notes have already emerged in the system.

Demonetisation did provide a boost to non-cash payments in the short term but that effect may be waning, with the cash-to-GDP ratio back to double-digits. There seems to have been some impact on the stock of black money (rather than the flow), given that the construction sector has been hit hard. But this may also have led to large-scale job losses. The proportion of high-value notes (Rs500 and above)-often viewed as conduits of black money-has also been rising as new notes have entered the system. At the end of fiscal year 2017 (FY17), the proportion of high-value notes stood at 74%, considerably lower than that in FY16. But this figure may rise significantly by the end of FY18.
This is the first of a two-part data series on demonetisation. The second part will examine the impact of demonetisation on cashless payments.

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How demonetisation affected the Indian economy, in 10 charts

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New Delhi: A year ago, Prime Minister Narendra Modi announced the scrapping of high-value banknotes which amounted to 86% of currency in circulation. The demonetisation of currency notes was supposed to be an attack on black money, on counterfeit notes, and projected as part of a broader push to promote digitization and non-cash payments.

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Summary:
Lack of data, demonetisation, crippling of GST are the reasons for unemployment.

Small and medium enterprise (SMEs) are impacted the most in the unorganised sector, by demonetisation.
Crippling impact of GST caused employment problems in intensive sectors.

40% of the workforce in India is employed in non-agricultural jobs and such jobs are changed frequently hence the high volatility in unemployment rates.

Mahesh Vyas estimated 404.7 million people were employed in January to April in 2017. With the previous estimation by CMIE according to National Sample Survey Organisation's Employment and Unemployment survey in India and Census 2011 data, 303.5 million people were employed. Hence, the increase was only 101.2 million.
This leads to the next point where there are possibilities that the high unemployment rate in India may not be due to the demonetisation for the last 12 months.
- NITI Aayog said the data are lacking a lot and that they have to increase the sample sizes from several government agencies so as to have better data collection.
Hence, unemployment has always been a problem in India but with the recent demonetisation, it worsens the issue and accentuate the job crisis.
- the unemployment rate continues to increase even after one year of demonetisation
- October has the highest unemployment rate in the 11 months.
- from 5% on the week before 8 October to 5.8%
- predict to see recovery only after a year

Employment growth has affected the GDP growth too. Madan Sabnavis, Chief Economist at Care Ratings said that corporate sector's employment growth does not correspond to GDP growth. Overall employment bulks in banking, IT, textile and healthcare sectors which if they were to exclude them the employment growth in 2016-2017 is negative.

The implementation of GST from July this year adds on to the job crisis in many more sectors too. No matter how it seems that there will still be job losses in 2017 even if the economy is slowly improving.
- An increase in the employed workforce from 401 million to 406.5 million in April 2016 to December 2016, but dropped back to 405 million between January to April in 2017.

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New Delhi: As we near the first anniversary of demonetisation later this week, there remains a large void as far as data regarding jobs or employment are concerned. There is enough anecdotal evidence to suggest that demonetisation impacted the unorganised sector, the small and medium enterprises, the most. Job creation has been Modi government's biggest headache, even before the shock announcement of withdrawing over 80 percent of the currency in circulation on 8 November last year dealt a crippling blow to employment in India. This single decision pulled the plug for employment prospects of millions of contract workers, daily wagers and others employed in temporary jobs in the unorganised sector across the country. Added to demonetisation now is the crippling impact of GST rollout on employment intensive sectors like textiles, construction and real estate.

India Inc has been demanding job creation opportunities through policy framework for some time now. The latest Economic Outlook Survey of by business chamber FICCI says there was a broad consensus among the respondents that one of the primary objectives of the new industrial policy should be job creation. "Lack of employment opportunities remains a key challenge as India has a huge young and aspirational workforce. It was felt that though the government has initiated key campaigns like 'Make in India', 'Skill India', these should be made an integral part of industrial policy with clear provisions for their assessment."

Remember, only about 40 percent of the workforce in India is employed in non-agricultural jobs. Here too, the majority is earning wages in the unorganised sector, which bypasses taxes and usually manages not come under the radar of any data collection exercise. Such unorganised sector workers change jobs frequently and therefore even where data are available, they show high volatility in unemployment rates. Mahesh Vyas, MD and CEO of CMIE, has quoted the Economic Review of the Directorate General of Employment and Training, Ministry of Labour to say earlier that the total number of people employed in the organised sector was 29.6 million in 2011-12.

In the same year, using the National Sample Survey Organisation's Employment and Unemployment survey in India and the Census 2011 data, CMIE estimated that the total persons employed was 303.5 million. Put simply, this means less than 10 percent of the total number of people at all employed in India were working in the organized sector or 90 percent were in jobs which were likely not permanent and definitely not under the radar of most employment data collections.

Vyas further said that an estimated 404.7 million persons were employed during January-April 2017. This means, in the five year period, the rise in total number of people employed was only 101.2 million or just about 20 million on an average each year. This shows India's looming jobs crisis, demonetisation or no demonetisation. On an average, anywhere between 10-15 million new job seekers arrive in India every month.

Vyas' analysis further said that of the 404.7 million total employed in January-April of this year, only 21 percent were employed in what can be called as jobs in a proper sense. These are white collar workers, industrial workers, support staff in factories and offices, managers, etc. There were 86 million people with such jobs. This means only every fifth person had a regular job.

Given these complexities, is it any wonder that not one official estimate on unemployment till now has linked job losses to demonetisation in the last 12 months? In fact, by the middle of the current calendar year, government's own think tank NITI Aayog began emphasizing painful lack of data, saying there was urgent need to improve the sample sizes being used by various government agencies to collect data on employment.

So as India continues to be in the midst of a jobs crisis, accentuated further by demonetisation, it also continues to close its eyes to an integrated approach to solve the jobs muddle. Vyas noted in a post on 10 October that unemployment is inching up even one year after the massive economic disruption caused by demonetisation. The rate of unemployment in urban India was the highest in 11 months in October.

"In the week ended 8 October, it was 5.8 percent compared to 5 percent in the preceding week. In urban India, unemployment was 8.2 percent. This is the highest unemployment rate in urban India in the past 11 months. Urban labour participation rate has recovered to its level during the last December-January period. The rise in labour participation rate and the unemployment rate shows that labour is returning back to the labour markets but, it isn't finding jobs. The fall in labour participation rate began soon after demonetisation. We are probably seeing a recovery after about a year."

According to the BSE-CMIE month wise unemployment data, November and December last year were the worst months for jobs in the entire 12-month period, with overall unemployment highest in November at 6.55 percent followed by 6.42 percent in December. Then it kept fluctuating, fell to 3.39 percent in July before rising to well beyond 5 percent in October this year (5.68 percent). In another subsequent post, Vyas said that the post-demonetisation period "did see a substantial increase in the volatility of monthly unemployment rate. The coefficient of variation increased from 8.8 percent (pre) to 23.5 percent (post)".

It is the high proportion of these workers in India that makes the unemployment time-series volatile.

Not just unorganised sector, employment growth even in the corporate sector has been lagging GDP growth. Madan Sabnavis, Chief Economist at Care Ratings said "Growth in employment in corporate sector is not commensurate with GDP growth. In terms of overall employment, the bulk happens in banking, IT, textiles and healthcare. Growth was only seen in these four sectors, if we exclude them then there was negative employment growth in 2016-17". On an average, job growth rates were 1.5-2 percent versus about 7 percent GDP growth rate.

Let us look at another sample of data but this time, released by a government agency. The National Sample Survey Organisation (NSSO) released data for 2015-16 in the non-agricultural, non-construction, non registered segment in July, showing that this sector and its job creation potential failed to keep up with the country's economic growth. This survey showed that in five years till 2015-16, the number of Indians engaged in non-farm employment (excluding construction sector) rose by a mere three percent even when the number of such enterprises grew by almost 10 percent and wages for people working in this sector rose by over 86 percent.

In 2010-11, about 10.8 crore workers were engaged in unincorporated non-agricultural enterprise activities (excluding construction) and this number rose to just 11.13 crore by June 2016, according to the NSSO's 'Key Indicators of Unincorporated Non-agricultural Enterprises (Excluding Construction) in India (73rd round)'. That means just 33 lakh people were added to this segment of India's informal workforce in five years or an average of 6.6 lakh each year. The total number of enterprises in such category rose from 5.77crore to 6.34 crore by 2016 and the average annual wage increased from Rs 47,016 to Rs 87,544.

Meanwhile, there were some random admissions by the government over job losses, like in this Lok Sabha written reply by the Minister of State for Textiles Ajay Tamta on 10 August this year.

When two of his colleagues wanted to know whether a large number of textile workers became jobless due to closure of textile units or due to some other reasons, Tamta said "As per Office of the Textile Commissioner, 610 cotton/ man- made fibre textile mills (Non-SSI) were closed having 3,00,697 numbers of workers on their payroll as on 30.6.2017." Again, there was no reference to demonetisation and the reply did not even specify the period within which these closures have happened.

This piece in Scroll outlines the blow to job creation after the implementation of GST from July this year. It says not just manufacturing, jobs in the service sector too have been hit. It invokes the NDA's poll promise of creation of 25 million jobs per year over 10 years. "But every indicator suggests that 2017 will see net job losses. CMIE started estimating employment trends in January 2016 when it reckoned that around 39 million people were looking for work. Between April and December last year, the employed workforce grew from 401 million to 406.5 million. The workforce had fallen to 405 million by April this year. That implies a net 5.5 million jobs were generated between January to December 2016 but a net 1.5 million jobs were lost between January to April this year." How are we going to tackle this demographic disaster?

Published Date: Nov 06, 2017 02:33 pm | Updated Date: Nov 06, 2017 02:33 pm

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First demonetisation and then GST dealt crippling blows to India's already dismal job creation record

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New Delhi: As we near the first anniversary of demonetisation later this week, there remains a large void as far as data regarding jobs or employment are concerned. There is enough anecdotal evidence to suggest that demonetisation impacted the unorganised sector, the small and medium enterprises, the most.

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India's Retail Inflation Rises in Oct. Led By Higher Vegetable Prices

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India's Retail Inflation Rises in Oct. Led By Higher Vegetable Prices

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Higher inflation driven by rising vegetable prices which rose 7.5% due to tight supplies.
Government allowed state-owned agencies to import onions to boost domestic supply. Tomato price firmed up due to supply disruption from one of the leading producers.
The elevated prices expected to normalize and recover from major disinflation during June.

Reserve Bank of India (Central Bank) decision in cutting interest rate (which would increase consumption) or not
- Even though inflation rate recovers, not enough for it to decide to cut rates
- Recent rise in oil prices
- Economy gathering momentum
--> Better to not add further monetary ease and prepare to raise interest rates if drivers of inflation strengthened further

Oil Price Concerns
- Recovery in global oil prices
(Example and further elaboration in article)
- Petrol and diesel combined weight of 2.3 % in CPI
- Indirect impact on production & transportation cost
--> Upward pressure on inflation rate

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A recovery in the global oil prices primarily due to the production cuts triggered by exporting countries to reduce oversupply is also expected to impact inflation. Brent crude rebound 41 percent from the year's low in June to trade above $60 per barrel. Fuel inflation in India is expected to increase 120 basis points for the remaining fiscal 2018 owing to higher crude prices, according to Soumya Kanti Ghosh, chief economic adviser at the State Bank of India.

Petrol and diesel have a combined weight of 2.3 percent in the consumer price inflation basket. A 10 percent rise in crude oil prices could increase the CPI inflation by around 25 basis points, if the government chose to pass on the full hike to consumers, wrote Tanvee Gupta Jain, economist at UBS Global Research, in a prior note.

Moreover, rising oil prices also have an indirect impact through higher production and transportation costs which may exert upward pressure on food inflation, according to Japanese brokerage Nomura.

The RBI will also factor in economic growth data for the July-September period which is due on November 30.

Key Highlights

Consumer food prices went up 1.9 percent over last year compared to a 1.25 percent rise in September.

Prices of pulses and products fell 23.1 percent year-on-year. Prices continued to soften after having declined 22.5 percent in September, and 24 percent in August and July.

Fuel and light inflation stood at 6.36 percent, compared to 5.56 percent in September

Housing inflation stood at 6.7 percent compared to 6.1 percent in September

Prices of clothing and footwear went up 4.76 percent compared to 4.63 percent in September

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India's Retail Inflation Rises In Oct. Led By Higher Vegetable Prices

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A recovery in the global oil prices primarily due to the production cuts triggered by exporting countries to reduce oversupply is also expected to impact inflation. Brent crude rebound 41 percent from the year's low in June to trade above $60 per barrel.