What growth? The GDP numbers don't account for the first-hand accounts of pain and suffering

The latest salvo from the Centre on the shock and awe demonetisation excercise is that the move did not have an adverse impact on India’s buoyant economic growth story. This is contrary to the pessimistic expectations of economists, statisticians and bankers the world over – and not just those from the Left – that the sudden withdrawal of 86% of the currency in circulation before November 8 would cripple the country’s economy.

According to estimates of the Central Statistical Organisation, India’s Gross Domestic Product was a respectable 7.1% in the October-December quarter – the period that was expected to show starkly the impact of possibly the most disruptive economic policy decision in the Indian republic’s history. The official figures, released last week, suggested that India grew entirely according to pre-demonetisation expectations and faster than even China.

In his election speeches in the later phases of the prestigious Uttar Pradesh polls, Prime Minister Narendra Modi and his closest lieutenant, Bharatiya Janta Party Chief Amit Shah, were conspicuously silent about the note ban, presumably based on ground reports of widespread discontent and disaffection among the poor and the enormous human and economic costs of demonetisation.

But after these growth estimates were announced on February 28, Modi was quick to taunt his critics for their gloomy prophesies. At a rally in the state on March 1, Modi said that “hard work is more powerful than Harvard”, targeting globally respected economists like Amartya Sen and his predecessor Manmohan Singh who had strongly criticised the note ban – although Singh’s alma mater was Cambridge. Characteristically wearing his modest origins on his sleeve, Modi declared that he was a humble son of an impoverished mother who had studied instead in the school of hard work and was proved right when his learned critics were demonstrated to be wrong.

Where’s the informal sector?

The upbeat government growth statistics have met with celebration on one side and scepticism and puzzlement on the other. Even before this, there was distrust of official figures, especially those pertaining to economic growth. Many observers greeted the announcement of this latest calculation with disbelief, and suggested that these had been massaged. Senior journalist MK Venu declared in an acerbic tweet that India had now entered the era of post-truth economics. Others compared it to the opaque and exaggerated economic data put out by erstwhile socialist countries.

But even if we wish to desist from challenging the integrity of India’s economic reporting, a less uncharitable interpretation of the figures would be that the very method of calculating GDP and economic growth is deeply flawed.

An approximate nine out of 10 workers form the country’s informal work force and they contribute almost half the country’s GDP. That the massive lay-offs of informal workers, the closing of petty and small businesses and a huge crunching of spending by the poor because of demonetisation does not create even a ripple in the GDP estimate does not negate the huge distress and suffering of millions of India’s poor. Instead, it comes as a long-delayed wake-up call for us. It begs us to examine closely the ways we calculate GDP and economic growth, to understand if these are by design biased against informal workers and the vast countryside, especially agriculture which still employs nearly six out of 10 workers.

Tracking the toll

In the second month after the note-ban was announced, the Centre for Equity Studies organised a survey of its impact in rural India, studying villages in Bundelkhand, Western Uttar Pradesh, Odisha, Gujarat and Assam. We found that among the worst hit everywhere were landless agricultural workers. Villagers said wage rates – abysmal even otherwise – had fallen to half and employment was much harder to find. Many said that they were paid in old notes; they wasted several days in queues in distant banks but still could not convert their notes and finally exchanged them at a discount through moneylenders.

Retrenched migrants were returning home empty-handed from distant states because work opportunities had collapsed in every part of the country. Small units were being shut down as employers had no cash to pay their workers. In Odisha, labour contractors who would recruit workers after the harvesting season every year to toil in distant brick kilns, for the first time in living memory, had not come to villages this year because they did not have the cash to pay to them advances. The workers’ employment in semi-bonded conditions in brick kilns every year was extremely exploitative, but far worse than even exploitative employment was no employment, because only hunger would stalk their homes and families.

Farmers in every state we surveyed talked about being forced to sell their produce at distress rates because people had too little cash to buy: paddy, wheat, maize, chilli, vegetables sold at a third, sometimes even a tenth of their regular price. Dairy producers in Anand were earlier paid daily in cash when they sold milk to their cooperatives, but weekly payments are now made to their banks. They have to wait sometimes two weeks before they can draw this cash, because bankers insist that their dues must rise to Rs 2,000 as they will not issue cash to them in smaller denominations.

Farmers in all these states too said they could not draw the cash they needed from their banks to buy seeds and fertilisers or pay farm workers, and instead were forced to run up huge private loans at usurious interest rates.

Petty village shopkeepers spoke despondently of sales falling sharply to a half or a third. Their customers were denying themselves all but the most essential purchases and everyone wanted to buy on credit because they have no cash to spare. But how much credit can the shopkeeper give? They too have to replenish their stocks.

Small weavers in Shamli in Uttar Pradesh were shutting down their looms. A truck driver said that for long stretches of driving on the highway he could not buy food as he had only some old notes and no plastic card.

Villagers in the precarious char or river islands in Assam always survive at the edge, but demonetisation has tipped them over. To reach the nearest bank branch, they would have to cross the river by boat, then wait for hours for road transport, but bankers would most often refuse them. They could neither buy nor sell their produce, nor get remittances from the young men in their families who migrated.

In all the states, few people had ATM cards, fewer knew how to use these, and the ATMs were distant and rarely had money to dispense. So the only option was long bus rides and endless bank queues day after day, and being turned away because the banks had run out of cash. Or they were given Rs 2,000 notes, which were nearly useless because their daily purchases were for much smaller amounts and no one could give them smaller change.

Old and disabled people were hardest hit. They had to wheedle and depend upon younger and able-bodied relatives or neighbours to take them to the bank, but no one had time for them as they were all struggling with problems of their own. Women often did not have their own bank accounts, and if they did had no experience in operating these, therefore they had to depend on their husbands and sons. Single women had no one to turn to.

Holes in the story

In the early weeks after the note ban, the prime minister, his senior ministers, party colleagues and senior officials continued to defend the policy vigorously. Yet, there were clues that they were aware of both the failures as well as the disruption and pain the policy had caused. This was seen in the changing language of their public discourse and announcements and their shifting goalposts and metaphors.

The prime minister’s initial speeches after the note ban were triumphalist and he spoke of his unprecedented attack (and it was always his personal attack rather than that of his government or central bank) on black money and terror funding. In their initial proclamations about demonetisation, Prime Minister Modi and his supporters often described it as a “surgical strike”. This dramatic medical and military metaphor implied that the intervention would be swift, targeted, effective and relatively painless, tactically achieving its goals with minimal collateral damage.

Within the first weeks, as the attack on black money and terror funding gradually receded from their discourse, we were told instead the goal was a shock and awe thrust of the country towards a cashless economy. There were of course no answers about the fairness and equity of a policy coercion towards cashlessness in a country in which millions were educationally, digitally and financially excluded. There was also no discussion on how people and small businesses could be forced into forms of financial transaction that impose costs on them and translate into windfall profits for private companies.

When there was growing public discontent about the measure, Prime Minister Modi asked the people of the country to give him 50 days. In this time, the suffering of the people would ebb, and he would demonstrate the great public gains from this policy.

But as it became increasingly evident that demonetisation had instead unleashed mammoth suffering to millions across the country, Modi chose a different metaphor during his New Year Eve address to the nation, that marked the end of the 50-day window to exchange old currency notes.

He no longer spoke of a surgical strike – instead, drawing on emotive Hindu Vedic imagery, he described demonetisation as a yagna, suggesting sacrifice, devotion and worship. In a yagna, devotees give up something of value for the gods. But demonetisation could not be legitimately compared to a yagna, as Modi did. Firstly, it was not a voluntary act of sacrifice. It is also unclear for whom – which god – this sacrifice was extracted. It was endlessly touted that this pain was imposed on the Indian people for the cleansing of the nation, as though the nation was somehow above and separate from the mass of its poorer citizens. And it is now clear that little of this claimed cleansing was ultimately accomplished.

‘Despotic’ act

The stories from everywhere of intense distress reminded me of the early stages of creeping famine conditions that I have encountered over the years in drought-stricken regions. Except this time, it is not nature that has afflicted the people but reckless, heartless and arrogant public policy. People everywhere spoke of cutting down on food consumption, especially of vegetables and pulses, and surviving on two meals or even one meal a day. They were increasingly forced to depend on sky-high interest loans from private moneylenders.

The union government has carefully avoided disclosing so far how much cash was finally deposited into bank accounts after demonetisation. It is still being counted, we are told! Even Prime Minister Modi has remained eloquently silent about this. Indeed, he has little to say about any concrete benefits from his high-shock dose.

As a result of this excercise, the way we run our economy as well as how we measure its performance has been shown up to be nearly blind to this enormous disruption and suffering of millions of India’s poorer people.

Credible reports estimate that 90% to 97% cash has returned to the banks. This means that this enormously painful economic measure has failed spectacularly in mopping up and eliminating black money from the economy.

After more than twice the 50 that the prime minister sought for the positive impacts of his measure to become visible, there is no evidence that this measure has had any demonstrable impact on the black economy or on counterfeit currency.

The optimistic official growth figures that the prime minister celebrated in an election rally in Uttar Pradesh cannot erase the evidence from around the country. This affirms Sen’s description of demonetisation by one of India’s most insightful economists (who also teaches at Harvard): that it is a “despotic” act. It is one that has unleashed untold travails on already long-suffering people and is a callous and pointless journey of sorrow with no early end in sight.