The Narendra Modi government must heed President Pranab Mukherjee’s warnings about demonetisation leading to a “temporary slowdown” of the economy. While growth may eventually return, the poor cannot, however, possibly “wait that long” and they need to “get succour here and now”. Mukherjee’s observations might have echoes of former Prime Minister Manmohan Singh’s barbs about demonetisation being good in the long run when “we are all dead”, but clearly are not intended at scoring any political brownie points.
Moreover, the Reserve Bank of India’s recent directive to banks to ensure at least 40 per cent of supply of new currency notes to rural areas is an indirect official admission of re-monetisation not happening to the required extent, especially in the hinterland economy where transactions are largely cash-based and the transition to digital payments is going to take some time.
There are two reasons why people in rural areas are likely to have borne a disproportionate burden of demonetisation. The first has to do with agriculture, where there is enough evidence from the ground now of farmers having to make distress sales on account of liquidity suddenly getting sucked out of produce markets. Lack of cash has made it equally difficult for farmers to engage agricultural labourers. The second is linked to construction, which is one of the most employment-intensive industries. This sector, according to official GDP estimates released on Friday, is expected to record a growth of just 2.9 per cent in 2016-16. Together with the shutdowns and large-scale layoffs in informal manufacturing units — again a major source of employment for the rural migrant workforce — the effects of demonetisation on incomes, both internally generated and through remittances, would undoubtedly be far more in Bharat than in India.
It only reinforces Mukherjee’s primary point: While demonetisation per se has not discriminated between the notes held by the rich and the poor, the same cannot be said at all about its negative impacts. The president is right that while poverty alleviation is far better and more sustainably addressed through an entrepreneurial approach (growth and job creation) rather than entitlements (subsidies and doles), the fact is we have an extraordinary situation now caused by demonetisation. It calls for responses that are focused and immediate. At the top of the chart would be according priority in reaching the new notes to areas where the liquidity crisis is most serious. This, along with incentives in the forthcoming Union budget to revive investment — the real story in the latest GDP data is not of overall growth slowing to 7.1 per cent, but of gross fixed capital formation falling by 0.2 per cent this fiscal — is what the country’s poor require today.
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