What to trust on demonetisation: Official data or grim reports in media?

One was reading the Economic Survey chapter on demonetisation which as expected makes a rosy case of the exercise. Infact, this is the one of those rare instances when an official report has called the currency withdrawal exercise a demonetisation one.

Prof Arun Kumar looks at this puzzle. The official data/reports continue to show demon to be not as evil whereas there are media reports showing otherwise. Who to believe? He says (and rightly so), both sides need to wait for more data to come:

Agriculture sowing should not be compared with last year’s sowing but that in 2013—14, when the monsoon was normal. Compared to that, there is no rise. Further, there are reports that there was delay in sowing and applying inputs which would imply a decline in productivity compared to the past.

Tax collection could be higher for many reasons, and also perhaps because people used the old notes to pay taxes and arrears, like in the case of property tax. In the next quarter, there could be deceleration; one needs to wait. In the case of VAT, traders showed higher sales to recycle their cash holdings. This would also lead to higher direct tax collections. In brief, while sales may have fallen for different reasons, tax paid may have increased in the quarter for unrelated reasons, but this may not continue in the next quarter.

Stock markets initially declined but of late have gone up. The foreign investors have pulled out about Rs 70,000 crore not only due to the uncertainty introduced by demonetisation but also because of the rise in interest rates in the US. So, why has the market risen? It is not because the uncertainty has ended but because the financial institutions have intervened just as they do at the time of the budget to boost sentiment. But how long can they sustain the market in the face of lack of investment by individuals and foreign institutional investors pulling out?

Thus, positive data presented by the government needs to be reinterpreted to take demonetisation into account. And it could take a year for official data to reflect reality.

Demonetisation was a big shock to the economy and the government itself admitted that there would be pain. Ground reports seem to suggest that the pain persists. Should limited and preliminary data be allowed to trump reality on the ground?

All these positive Government reports are paradoxical as well. If the purpose was indeed demonetisation then it should imply pains not just over a short term but a longer term. You cannot have it both the ways.

It is also interesting that the Survey chapter on demon does not even mention Prof Arun Kumar’s work! He is the foremost authority on the topic.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: