What was the impact of demonetisation and the Goods and Services Tax on the psychology of Indians? Have Indians changed their pattern of spending to the detriment of the economy? Is it possible to ignore the plight of Micro, Small and Medium Enterprises, or MSMEs, or even celebrate their decline, to root for big corporates, as is being done now? Have we turned a wee bit pessimistic about our future?
In an interview with Scroll.in, India’s first chief statistician, the renowned economist Pronab Sen, answers these questions with statistics and insights.
The owner of the kiosk from whom I buy cigarettes says the volume of his business has not gone back to what it was before demonetisation. Another vendor in Gurugram said those who would earlier purchase a carton of cigarettes now buy a couple of packets every time they come to him. Why has smokers’ psychology changed?
I am not sure if it is entirely psychology. It has to do with the fact that roughly Rs 3 lakh crore has not got back into the system [after 86% of the currency in circulation in India was sucked out of the system overnight because of demonetisation on November 8, 2016].
Why hasn’t it got back?
These are the Reserve Bank of India figures. There are two reasons for it. Reason number 1 is that during demonetisation there was a transfer of cash from those who held it to another set of people through the deposit process.
What do you mean by the term “held”?
Suppose I had Rs 2 lakh in cash, and I got four guys to put Rs 50,000 each in their account. [After demonetisation, Rs 50,000 was the maximum amount of cash in old currency that could be deposited in Jan Dhan accounts. These accounts came under income tax scrutiny after their deposits doubled to Rs 87,000 crore 45 days after the demonetisation announcement.] The deal was that each got to keep Rs 10,000 and return the remaining amount. My cash holding therefore went down by Rs 40,000 and theirs went up by Rs 10,000 each. With my cash holding down, whatever activities I did with it were scaled down by the same factor. Those four guys would not be spending the money on cigarettes. For all you know, they’d be spending it on cellphones.
Why?
That is because Rs 10,000 is not his flow of regular income. You buy cigarettes from your regular income, not from a lottery you have won.
Reason number 2?
I have money in the bank, but I know the government is keeping tabs on bank withdrawals. I am therefore not going to take the money out except in driblets. That is because I want to stay under the [tax] radar. So relative to the amount the RBI has put back into the system, the return flow of cash is likely to be much slower.
Are these two factors why people are not spending as they used to, a crib common to every trader with whom I speak?
Well, if we believe that the informal sector has been hit [by demonetisation], then livelihoods and wages too would have been [hit]. Those whose livelihoods have been hit will naturally scale down their expenditure, particularly on non-essentials.
In this context, the government recently reversed a rule that required people to furnish their Permanent Account Number when purchasing jewellery costing Rs 50,000 and above. Isn’t this a belated realisation on the government’s part that the rule had adversely affected individual spending?
Yes, but I can’t make sense of this reversal of rule. Black money traditionally used to go into gold and real estate. The real estate market is now more or less dead. This makes the gold market look most attractive to me for putting my black money in. In that case, why would the government take away the need for me to furnish my identity proof? I can now go into a shop, buy gold, and remain anonymous.
Yes, but isn’t this a tacit admission on the government’s part that its economic surveillance scared people to the point they stopped spending?
Yes, only that spending on gold is not going to help the economy grow. It is a dead asset. If they were putting money into working capital or trade finance, it would have helped the economy to revive. In fact, the government should have been doing everything to discourage people from putting their money into gold.
Why do you think the government still reversed the rule?
If you do a negative spin, it would mean that their [the ruling party] guys have a lot of cash lying around and they therefore pressured the government to let them put their money in gold.
Both demonetisation and Goods and Services Tax have been sold popularly as measures to curb tax evasion. How has that had an impact on the psychology of people?
It is too early to tell. On GST, we will see the impact quicker. This is because GST is a self-policing mechanism. I will demand a tax certificate when I am buying from you. I will do this to claim input credit. A lot of trading activities in which tax was not being paid will now pay. This is going to happen fast. Many will opt to come into the tax net.
What about demonetisation?
Demonetisation is linked to the evasion of income tax. Much here will depend on how quickly the Income Tax authorities will crack a few cases and really put the fear of god in the evaders. It is only then that they will start to submit income tax returns. If nothing happens, then it will be back to the old ways.
But wouldn’t tracking of expenditure discourage big individual spending? Isn’t that a problem?
It is discouraging, but it is a problem only to a point. There are two kinds of spending. One is through cheques and drafts. The other is through cash. The latter has certainly been impacted, in fact very severely. The question then is: will people in the latter category shift to the other form of spending?
These two types of spending are very different. Nobody used cash to buy, say, a car. Cash would be used for other things. But now I have cash in the bank and I am scared of withdrawing it [because the government is keeping close tabs on expenditure]. So I will issue a cheque to buy a car. As a result, my pattern of spending will change very dramatically.
Do you see signs of a change in the pattern of spending?
It is this factor that is partly behind the huge surge in the sale of cars and two-wheelers.
Is this good for the economy in the long run?
It all depends whether it is a one-off thing. If it is, then it is just a blip that wouldn’t do anything sustained for the economy. If I am taking money away from lifestyle expenditure [going to a restaurant for instance], which is of an ongoing nature, then this type of change in the pattern of spending will actually have a negative effect. This is because the multiplier on ongoing expenditure is much higher than it is on a one-off spend.
Has the decision to sell demonetisation and GST as anti-tax measures stigmatised business people?
Yes, and I think it has affected the small ones more.
When you say small ones, whom do you include in this category?
The non-corporate sector has been stigmatised, particularly the trading community.
Yes, members of the trading community throw a counter – how can politicians who use black money to finance their elections gun for us?
It is going to cause them a problem as their ability to fund elections has also got impaired.
Why would politicians, particularly those in the ruling party, bother – they have corporate fat cats to bankroll them?
Earlier, small businesspeople used to have a particular political voice because they could fund politicians. But now that they don’t have the funds, their voice is getting silenced. It is the big guys whose voice dominates. That is something to fear.
Why?
We need to fear because the entire economic policy discourse will shift from small enterprises to large entities.
I suppose it means shifting to, say, the model represented by the United States.
Yes.
Many business people I spoke to say they are going to be extremely conservative in their economic decisions, and that they won’t expand or diversify until 2019. They say that a government that can implement demonetisation and GST in quick succession can do just about anything.
I can understand their saying that they will be very, very cautious with their plans. This is because the demand base of the MSME [Micro, Small and Medium Enterprises] sector has been affected. This is the sector that caters to Bharat, not to you and me, not to India. If Bharat is hurting – we know there is rural distress and there is unemployment in the lower strata – then so is the MSME’s essential client base. These are the people who are not competing with Hindustan Lever, Godrej or whoever, for your spend and mine. But the guys who spend on their products don’t have the money. That is why small enterprises are scaling down their operations, their expectations. I, therefore, do not think it necessarily has to do with the apprehension of what the government will do next.
Given that the informal sector accounts for like…
If you include agriculture, it accounts for a little over 45% of GDP [gross domestic product – the total value of goods and services produced in a country in a year].
What kind of precise impact has GST and demonetisation had on the informal sector?
We don’t know.
Why aren’t we able to calculate the performance of the informal sector?
For a very simple reason that, unlike the formal sector, where there is a fair degree of assurance that a unit is going to be around for several years, in the MSME [Micro, Small and Medium Enterprises] sector, particularly in the informal one, there is no such guarantee. I can’t apply the same statistical technique to the informal sector as I do for the formal sector. For the latter, I select a set of firms and I get a regular set of data from them.
There is tremendous churn in the informal sector even in normal times. Ask any bank and it will tell you that the normal shelf life of a small business is two to three years. If my sample keeps changing every two to three years, my estimates become complete garbage.
So the only way I can generate reliable data is to do surveys. I can do a survey and get an estimate. After sometime, I again do a survey and get an estimate. I can’t have an ongoing system as I have for the corporates.
I am told proxies are used to gauge the performance of the informal sector. What are these proxies?
One of the best proxies is employment. Unfortunately, we don’t do employment surveys often enough. We do them just once in five years. The thing is that while small-scale enterprises may not be stable, households are. If you are working in a small unit that closes down, and I come to you during my survey, you will tell me that you were employed last year but you are unemployed now. Through surveys, therefore, I can get a feel of the informal sector.
However, data collection on employment has been started from July this year. It will take them a year to gather data and around six months to process it.
Would it be right to say then that the informal sector has taken a hit?
It has certainly taken a hit.
Severely?
Well, what we do know is that agriculture has been hit. The CSO [Central Statistics Office] has said that agriculture growth has been 2.3%. But this growth has been in the volume of output, which is [calculated] in tonnage. What this figure doesn’t tell us is what has happened to livelihood. Tonnage multiplied by price is his [farmer’s] income. You divide income by cost of living and that would be zero or negative.
You mean there has been no growth in agriculture, and it might even be negative?
Yes, in terms of the farmer’s purchasing power, the growth in agriculture has been zero or negative.
Psychologically, this must be very debilitating.
That is why you are seeing so much of rural discontent. The point is that zero or negative growth is for agriculture, for which we have hard data. For the rest of the informal sector, we have no data.
So if we don’t know the magnitude of the hit that the Micro, Small and Medium Enterprises have taken, we cannot come up with policy prescriptions, right?
You have one of two choices. Either you wait for the data to come…
But you say that will take one-and-a-half-years to come.
Yes, you say you will wait till then to do something. The other thing to do is to say, look, I don’t have data, but I do get the sense that these are the areas in which there are genuine problems, which I need to address now. Otherwise the problems will fester and can get worse. Everything depends on which position will be taken.
Which position do you think the government is taking?
It isn’t clear. I think there is blowing hot, blowing cold taking place. On the one hand, at least in terms of public announcements, there is a sense of complete denial – they think the economy is doing fine. They say, look, the sales of cars are growing so you guys aren’t doing as badly as you think you are. On the other hand, there is a genuine worry in sections of the government.
There are clearly two competing voices in the government over what do with the economy. For instance, you have Rajiv Kumar, vice-chairman of Niti Ayog, who said a fiscal expansion should be undertaken. Then, you have Bibek Debroy, chairman of the Economic Advisory Council, who opposes the idea of fiscal expansion.
Someone has to take a call between these two competing voices. In economics, as in illnesses, the earlier you diagnose the better you are as a patient and the earlier you go for treatment.
Journalist R Jagannathan recently wrote a piece that was published with the following headline, ‘Why Modinomics will cull the weak and the unviable, leaving India stronger’. The weak, the unviable, in his piece was the informal sector. How do you respond to his analysis?
Unfortunately, I think Jagannathan belongs to the strong. The choice of the word culling is extremely unfortunate. This is because culling is done to maintain the health of the larger [set]. The ones he wants to cull is part of the larger [set].
R Jagannathan has made an insensitive statement. This is because unless you give assurance to the people that the corporate sector will begin to hire to the extent they should have been [hiring], you have no choice…
But how can anyone give such an assurance.
They will not, they cannot. The fact is that given the pressure on the corporates, they will increasingly move to automation and capital-intensive mode of production. So where are jobs going to come from? Jobs are not just about livelihood, but ultimately about self-respect and pride.
Why is it insensitive of Jagannathan to speak of culling without the assurance from the corporate sector that it will grow jobs?
Think of the situation where MSMEs [Micro, Small and Medium Enterprises] are culled.
That is precisely what Jagannathan wants.
Leaving aside agriculture, MSMEs contribute about 28% to the GDP. That 28% supports roughly 50% of India’s population. Suppose this 28% disappears and the entire space is taken over by the organised sector, then what you are going to see is an unemployment rate of 30%. That is a lot of culling.
Those culled will not stay mute, so to speak.
Obviously not.
What kind of message was Union Minister Piyush Goyal sending when he said that it was a very good thing that “companies [were] bringing down their employment…The fact [is] that today, the youth of tomorrow is not looking to be a job-seeker alone. He wants to be a job-creator”. Was he trying to give a psychological boost to people anxious at the economic slowdown?
Goyal is merely echoing the prime minister, who in one of his speeches told people that their children will be job creators, not job seekers.
The real issue is contextual. We have a situation as of now where, according to the economic census, there are nearly 56 million non-agriculture enterprises, right from, say, cobblers onwards. Add to this 72 million farmers. You get 128 million economic entities. In a country where there are 270 million households, it means you have virtually one economic entity for every two households. Our people are already job creators.
How many job creators do you want? Today, the average size of a firm in India is 1.9 workers per firm. If you have more job creators, a whole bunch of people would be one-person entities. They won’t be adding jobs. They will just be able to take care of their own work time. Entrepreneurially, we are already quite vibrant.
Does it mean…
What needs to be done is to ensure that companies move from employing two people to 10, from 10 people to 50. Our emphasis should be as to how these 128 million economic entities improve their performance to become job creators. This is where the weeding should be done. We have 56 million non-agriculture enterprises. So maybe what we want is half of these enterprises but each employing five people.
Job growth is not going to happen from the corporates. It is going to happen from this lot [of 56 million] of MSMEs [Micro, Small and Medium Enterprises]. The questions to ask are: what holds up or blocks the growth of MSMEs? What can be done to grow each MSME unit? In this process, some will be knocked – that is not culling, that is competition.
Newspapers are full of reports and analyses on the economic slowdown. How does this affect the salaried class? I ask this question because a mental health startup, YourDost, conducted a survey in which over three days, it received inquiries from 1,000 professionals, 62.5% of whom claimed they suffer from anxiety and depression regarding job and financial insecurity. What do we have here?
What you have is essentially that corporate India is under pressure to go for technology improvement and automation to improve efficiency. The insecurity is coming because the workers think they have their jobs at the moment, but if there is a downturn, the axe is going to fall on who knows whom.
On top of it, new jobs are simply not being created because the small and medium enterprises are in trouble. As long as these enterprises were growing, people had the option of taking a cut in their salary and not being on the street. Since the SMEs [Small and Medium Enterprises] are not growing, what then is the worker’s fallback? His only option is then self-employment – to become an Uber driver for instance.
Wouldn’t this insecurity have an impact on expenditure?
Well, yes.
That would be because people would want to save as much as they can?
Yes. It will particularly [have an] impact on your improvement in lifestyle consumption. For instance, you won’t be going to a restaurant as often you did.
On balance, have we Indians become economically more insecure?
In a society like India, a person’s insecurity arising from his fear of losing his job is less than his insecurity about his children getting jobs. If jobs are not being created, not only will he not get old age insurance that his children were to provide, he will have to provide for them in the future. The level of insecurity, in a sense, is doubled. This happens every time there is a slowdown in job creation.
It happened in the late 1990s, when too jobs were not being created. Then we were out of it for a long time. People were very bullish on their children and, therefore, they believed they did not need to save as much. They ended up spending and that led to our economic boom. When that turns and people become insecure about their children, they spend less and that has its impact on the economy. That is why the issue of employment is not just about employment, it is also about how people think of their future.
As things are, would you say our outlook on the future is dark?
I’d say our outlook on the future is much more uncertain than what it was.
