Demonetisation Had Its Flaws, But Modinomics Is Taking India To New Places

Posted by Sumit kumar in Business and Economy, Politics
December 15, 2017

This November, Moody’s upgraded India’s sovereign bond rating after a long 13 years. It cited the reform measures that have been taken and the reforms that are in the pipeline. It praised initiatives like demonetization and G.S.T and asked the government to continue with its reform ideas.

The rise in credit rating comes at a time when the World Bank, in its recently released Index of the Ease of Doing Business, laddered up India’s ranking by 30 points, testifying to the fundamental changes that the Indian Economy is witnessing. The economy is a highly complicated issue. The more you understand it, the more complicated it gets. There is no doubt that disagreements and dissent have grown regarding the position of the Indian economy, in a general debatable perception, but one thing that holds together all this talk is the idea of reforms.

Demonetization, one could argue, was an absolute failure. Loss of jobs, reverse migration, a decrease in demand, lump in growth, massive inconvenience, and other tangible and intangible damages to the economy, could be the arguments coming from the pessimist side. Transfer of money from the rich to the poor, the increase in the base of taxation, the closure of shell companies that were running illegally and being used to hoard loads of black money, cleansing of the parallel cash economy, junking of the duplicate currency, massive surrender of Naxalites at the end of last year, increase in cashless transaction, or at least, a rise in awareness and knowledge about cashless transactions could be the counterarguments that could be put forth by the optimist side. The plan and motive were good, but the implementation was shoddy, could be the argument from the neutral side. The decision was objective but the effects or the intent will always be subjective, depending upon the perception of an individual. But, the fact remains that from a macroeconomic point of view, demonetization was lauded by many, including (albeit cautiously) Richard Thaler, the Nobel laureate in Economics. Moody’s also mentioned the act of demonetization as a reformative move.

Non-Performing Assets (NPA), the menace of the Indian banking system (which I often call the Economic Ebola, as it is spreading its wings and ruining economics just like what Ebola does to a human body), have been on a continuous rise, plaguing the balance sheets of banks. NPA cuts down the profit of banks, reduces their ability to lend, creates a slowdown in the economy, downgrades the shares of banks, and make it difficult for the corporate sector to take loans. To fight this, there have been three gradual and serious attempts, which, in the medium run, could fetch huge dividends in the form of resolution of the stressed assets.

Photo by Mark Wilson/Getty Images

The Insolvency and Bankruptcy Code, that fixes a time frame for the resolution of assets, is one of the most important reforms that was needed. As the Economic Survey 2015-2016 pointed out about the Chakravyuh in the corporate sector – where entering the arena was easy, but exiting was difficult – the I&B code offers a solution. It fixes the time limit, and calls for recruitment of special appointees known as Insolvency and Bankruptcy professionals, to aid the process of resolution. The board is still at a nascent stage and its success would purely depend on the resolution of assets in the given time, as mandated by the act. If successful, it could be a path-breaking economic reform, akin to the vaccination that cures Ebola.

The government has recently announced the recapitalization of the banks to the tune of ₹2.11 lakh crores. This will do two things in parallel: boost growth, and allow banks to take large haircuts to deal with the NPA mess. The good thing is that most of the money that would be infused will come through the recapitalization bonds, that will not put pressure on the fiscal target of the government.

The inflation is in control. Forex reserves have crossed the $400 billion mark. The share market has set a record this year by touching an all-time high of 31,000. The fiscal deficit is in control and in target and the infrastructure allocation is up to the mark. The improved credit rating is important for India as it could translate into cheap and easy loans to the country, as we need more and more resources for all sort of things. A good ranking in the Ease of Doing Business Index will ensure a greater flow of technology and investment in India, and will aid growth and employment.

Modinomics, despite some glitches, has performed well, and one hopes that the reforms undertaken by PM Modi continue so that a prosperous, better, inclusive and robust economy can be built.


A version of this post was originally published on the author’s blog.