Demonetisation may have temporarily dislocated one's life. But the economic roadmap is clear and robust. The country’s GDP growth will rebound, and soon
Recently, President Pranab Mukherjee said that the demonetisation may lead to a temporary slowdown of the Indian economy. Indeed, the Reserve Bank of India has cut its economic growth (GDP) forecasts for the fiscal year 2016-17, to 7.1 per cent, down from the earlier target of 7.6 per cent.
A consensus seems to be emerging among the experts that demonetisation will adversely affect India's economic growth in the short run while the long-term growth prospects remain intact, if not made better. However, in this discussion on economic growth, the quality aspect of the growth — that is, what causes this growth — is not getting as much attention as the speed of economic growth. After all, demonetisation is expected to improve the quality of economic growth too. let me explain this.
If you dig a hole in earth and then fill it up, it will be considered as ‘value addition’ as it will generate income for somebody. It will show up in the country's growth calculations even though no meaningful economic activity happened. like empty calories of a fizzy drink, it produces empty or vacuous growth. On the other hand, if you dig earth for mining which leads to the production of steel that is used for building a bridge that propels economic activity across a river, a real and meaningful growth is considered to have occurred. So, what matters is not just the fact of economic activity but also the type of economic activity that takes place. Corruption and black money tend to promote wasteful consumption and also generate vacuous growth. The Modi Government has attempted to halt this by cracking down on corruption and black money.
The quality of economic growth actually has many dimensions. Another important aspect of the quality is how broad-based the economic growth is. A given level of economic growth could be concentrated in a few sectors and in a few hands or it could be diffused over a large number of sectors that generate incomes more widely across the working population. A broad-based or ‘inclusive’ growth that leads to more even distribution of incomes, is anytime better than the one concentrated in a few sectors and hands. The Modi Government's thrust at achieving broad-based growth is an attempt at having better quality growth.
What is true of the broad-based growth, is also true of demonetisation. It is an attempt at producing better quality growth even if it means relatively lower rate of economic growth in the short run. Those who are paying close attention to the Union Government's economic policies will recognise the Government's focus on not just higher growth but also quality growth.
Will demonetisation not dampen entrepreneurial spiritIJ Demonetisation is a clear signal that the ground rules of doing business in India are getting redefined. Adaptable entrepreneurs will soon recognise that playing by the rules is a superior strategy in the longer term. Further, new economic opportunities that are getting opened are attractive enough for the entrepreneurs to partake in the growth process. Admittedly, some old-fashioned entrepreneurs who are accustomed to ‘different’ ways of doing things and who find it difficult to change, may withdraw. But given India's young population, the Modi's Government’s commitment to ushering sound economic policies is bound to rekindle entrepreneurial spirit, especially among the Indian youth.
Talking about quality growth, is not the Government's focus on the defence sector — expenditure on which is not considered very productive — suggestive of a misplaced focusIJ Well, the nature of expenditure on defence is no different from expenditure on maintaining internal law and order. Public expenditure on both are considered as ‘regrettable necessities’. But the Modi Government's take on the defence industry is very different. Being one of the core sectors under Make in India, the defence sector is aimed not only in progressively meeting the country's own needs but also exporting equipment.
Demonetisation may have temporarily dislocated one's life. But paying close attention to the economic reforms being pursued by the Modi Government, all one can say is that our economy seems to be in safe hands.
(The writer is a development economist, and was with the Bill and Melinda Gates Foundation)