Last week, the International Monetary Fund estimated that India’s GDP in 2016-17 would be 1% less than earlier expected, thanks to the disruptions to demand and supply caused by demon etization (henceforth DM). This was double the earlier estimate of RBI Governor Urjit Patel, who thought GDP might be 0.5% of GDP below expectations, of which no more than 0.15% might be due to DM. Patel expected DM to have just a temporary impact, whereas the IMF sees longer-term effects, leading it to cut its GDP growth estimate for the next year too by 0.5%.
Earlier, the IMF predicted India would be the fastest growing major economy for years to come. Its revised estimates suggest India will fall below China in 2016-17, but overtake China again next year, as the pain of DM eases.
The IMF is not the best predictor in the world, but it is independent of the government. Hence, its estimates carry weight. Casual labour, agriculture, auto and housing have been badly affected. The hit to GDP this year and the next adds up to a massive Rs 230,000 crore of income lost. CMIE estimates that the cost of printing transporting and distributing new notes was an additional Rs 16,800 crore. All this adds up to almost 10 years of wage spending via MNREGA.
Modi always knew the cost would be high, and called on voters to bear it for the greater good of tackling black money . Initially, there were high hopes that 10-20% of high value notes would remain uncashed, costing black holders Rs 150,000-300,000 crore. The RBI could write off this liability and pay the sum as a special dividend to the government, enabling it to put Rs 50,000-100,000 into the 26 million Jan Dhan accounts, and have cash to spare for public investment.
Alas, recent reports suggest that the laundering of old notes has been very successful, so barely 3% of old notes will be uncashed and written off. The RBI says it is too early to say: notes are still being counted. But even 3% means a windfall of Rs 45,000 crore. Add taxes paid by those declaring old notes as black income, and the government may have Rs 75,000 crore to re-distribute. That’s much less than expected, yet enough to put Rs 3,000 into each JDY account. This may seem a partial success to many voters. Modi may look the first politician to redistribute black money to the masses. Besides, he will surely promise follow-up measures against black money yielding additional distributable money next year.
Only 15 million of the 26 million JDY accounts have been seeded with Aadhar, raising questions whether the government can really reach all the masses. But since voters expect very little of politicians, even partial successes can win votes. The disastrous 2008 Kosi floods looked fatal for Nitishi Kumar in the coming state election. Yet he won in most flood-affected areas since even his limited flood relief was more than voters expected.
Neither the cost of nor goodies from demonetisation will decide the coming state elections. Far more important is the image Modi projects as a moral crusader who will transform India. He won the 2014 general election by selling dreams that no other politician had the credibility to purvey . One dream was of rising jobs for all, arising from rapid economic growth. The second was of much cleaner government, ending the old corrupt politics.
Till now, Modi has not delivered enough on either count. GDP growth is below expectations, agitations for job reservations highlight the lack of employment, private investment has plummeted and exports -the mainspring of fast growth for every miracle economy in history–remain weak. Modi has ended big corruption in New Delhi, but small corruption is endemic in state governments (including Gujarat) and the lower bureaucracy . The Akali Dal in Punjab has a terrible reputation for corruption, yet Modi dares not dump this coalition partner.
Whatever DM’s economic ill-effects and bungled implementation, it carries a ring of credibility in moral purpose. Now, moral purpose can yield electoral returns for a time, but is soon overtaken by outcomes.Indira Gandhi’s `Garibi Hatao’ platform and VP Singh’s anti-Bofors crusade in 1989 yielded big temporary electoral gains followed by a crash. Modi is a better marketer of dreams, and a better implementer than these two. But he could yet lose the UP election for not doing enough to convert dreams into reality .