A year after demonetisation, it’s still not clear what’s happenings to SMEs, believes Pronab Sen, Country Director for the IGC’s India Central Programme and former Chief Statistician of India. In an interview with BusinessLine , he said GST would be more effective in combating black money. Excerpts:

Has the use of cash come down post demonetisation?

The currency with the public is down by ₹3 lakh crore. The positive spin is that Indians are getting out of the cash habit and are moving to non-cash payment. The negative spin is that the reason the cash has not come back is that the cash economy is in such bad shape that they can’t absorb that money.

What has happened to black money?

There is total confusion. Black money is not kept under the pillow or in bank lockers. It is almost always put to some use. It is either used to buy valuables like real estate and gold or is anonymously invested in stocks or sent abroad. A bulk of it goes into financing the informal sector. All this is black money because it is not taxed. All this came back into the banking system and all of it except ₹3 lakh crore has again been withdrawn. GST will make a lot of impact on black money as it will help generate a paper trail.

One year later, what has been the impact of the note-ban on the economy?

Agriculture has suffered quite significantly and, in effect, there have now been three successive years of agriculture distress — two because of droughts and one because of demonetisation. Last year’s kharif crops were partially compensated and were reasonable but the full impact of demonetisation was on this year’s rabi crop. There has also been slackening of demand for corporate India.

The rupee appreciated significantly and imports shot up. So domestic companies have been unable to expand their exports and are having a hard time maintaining their market share in India through import competition.

How demonetisation and exchange rate effect are playing out is very difficult to segregate. More importantly, we still don’t know anything about the state of the non-agriculture, non-corporate sector and we have to wait for data.

What data would that be?

What is happening to SMEs, especially those in the manufacturing sector, will be available when the Annual Survey of Industries is released. But the problem there is that the data come with a lag of one year.

Are there chances of a revival in the economy from the second quarter?

I think the entire year is going to be bad. In the second quarter, there will be two conflicting influences operating. The positive effect will be that the de-stocking before GST will be reversed.

The negative effect is that supply chain problems arising out of GST will start playing out. But, from the third quarter, we will only be left with the GST effect, which will be negative.

The impact of demonetisation on demand will also continue until the rural sector picks up. We have to carefully watch what’s happening at the mandi level to the kharif crop which comes in now. If there is another price crash, we are in deep trouble.

Related Topics