0.5% tragedy and DeMo confession

Arvind Subramanian

TT, New Delhi, Jan. 31: The Demonetisation Demon will gouge India's economic growth in 2016-17 by at least half a percentage point, chief economic adviser Arvind Subramanian told reporters after presenting the Economic Survey a day before the budget.

Subramanian, who was voicing his views for the first time on the deeply polarising subject of demonetisation, rejected the dire prophecies of other Oracles, including his former employer, the International Monetary Fund, that projected a full percentage point decline in India's growth rate to 6.6 per cent.

Without actually putting out a figure for growth rate this fiscal, the chief economic adviser said India's economic growth would be between one-quarter and half a percentage point below the official baseline forecast of 7 per cent.

The Survey is perhaps the first official acceptance that Modi's decision to ban high denomination notes has hit both the Indian economy and the common man.

"Short-term costs have taken the form of inconvenience and hardship, especially those in the informal and cash-intensive sectors of the economy who have lost income and employment," the report admitted.

Growth is expected to return to normal next fiscal when it is expected to range between 6.75 and 7.5 per cent as the amount of cash that circulates through the economy returns to near-normal levels.

Earlier this month, the Central Statistics Office (CSO) had trimmed its growth forecast to 7.1 per cent this year but had not baked the impact of demonetisation into its projection. Former Prime Minister Manmohan Singh had projected a 2 per cent slowdown in growth.

The Survey advocated rapid, demand-driven remonetisation, easier tax rules and lower tax rates - serving up a range of suggestions that could feed into tomorrow's budget. "These actions would allow growth to return to trend in 2017-18, following a temporary decline in 2016-17," the report said.

The report said the risks that the economy faced would come from a rising trend of global protectionism and surging crude oil prices that Subramanian felt was unlikely to top $65 per barrel.

"The faster that re-monetisation takes place, the shorter and less severe will be the impact of demonetisation," Subramanian told a media conference. However, the Survey suggests that "in the new equilibrium, cash holdings (as a share of banking deposits and GDP) are likely to be lower than before."

In his preface to the 335-page report which he described as the first instalment with a second due in the summer, Subramanian said the Survey had wrestled with a difficult Hamletesque question whether "to deify or demonise demonetisation" which it characterised as a radical governance-cum-social engineering measure.

"Balancing the jealous, demanding gods of demonetisation and other short-term challenges such as over-indebted balance sheets, on the one hand, and India's medium term economic future on the other, is the special challenge for the Survey," Subramanian said.

The Survey and its key architect tried to balance conflicting positions on a range of divisive issues ranging from a fully digitalised economy to the need to embrace the idea of a universal basic income programme designed to transfer cash to poor households as an effective way to achieve Mahatma Gandhi's objective of "wiping every tear from every eye."

The Survey said that the universal basic income scheme could be the fastest way to reduce poverty in the country but admitted that the flipside was that "it reduces the incentive to work" - a flaw that Gandhi had also recognised while cautioning against the idea of a free meal as it "encouraged laziness, idleness, hypocrisy and even crime."

The budget is, however, not expected to have any such hugely costly populist scheme, simply because India cannot afford one. Neverthless, North Block's thinkers want the country to debate such a scheme and, if possible, adopt one in the years ahead.

Quoting Keynes, the chief economic adviser said the Survey "must try and do everything... it must be purposeful and objective. And its authors must be as aloof and incorruptible as artists, yet like grubby politicians."

He also tried to spice up the appeal of the heavy and, at times, turgid tome by saying: Amitabh Bachchan more colourfully says isme drama hona chahiye, tragedy hona chahiye, comedy hona chahiye... sab kuch hona chahiye and that's what this Survey tries to do."

Subramanian wasn't fully in favour of a cashless economy - a utopian ideal that the Narendra Modi government has set for itself.

"The transition has to be gradual. It must be inclusive because there are a lot of people who are not digitally connected. I have preference for doing it through incentives rather than controls," the chief economic adviser said.

The Survey itself said: "Digitalisation is not a panacea, nor is cash all bad. Public policy must balance benefits and costs of both forms of payments. Second, the transition to digitalisation must be gradual, take full account of the digitally deprived, respect rather than dictate choice and be inclusive rather than controlled."

Said Dr Pronab Sen, former chairman of the National Statistical Commission: "Under the circumstances, Arvind has done a good tight-rope walk with his Survey... as for the growth projections of 7.5 per cent that is just that - a projection - especially as none of us really know what this kind of a demonetisation will impact us."

Subramanian also seemed to advocate a cautious, growth-oriented budget, by stating that fiscal activism does not help while fiscal prudence does.

India was supposed to bring down its fiscal deficit by half-a-percentage point, which means India was supposed to borrow less for its grand schemes to build rail and road networks or to provide affordable housing for the poor.

An expert committee headed by former revenue secretary and present MP, NK Singh, is believed to have suggested a relaxation in the fiscal targets.

"Silence on fiscal deficit target of 3 per cent for financial year 2017-18 perhaps indicates the government's desire to loosen the purse strings for spurring growth and demand," said Mukesh Butani, Managing Partner, BMR Legal.

Subramanian also took a sideswipe at the "poor standards" of global rating agencies and included a fact box in the report that slapped Standard & Poor's, the rating agency, for upgrading China despite its slowing growth and deteriorating debt metrics while ignoring India's achievements on the same parameters.

"We call these poor standards because S&P had said last year that there was no way they could upgrade India because of GDP and fiscal deficit," Subramanian said.