post demonitisation

As the queues in front of urban banks are getting reduced and opposition parties have just geared up for the confrontation for a discussion, demonetization process has now entered into a crucial stage of its second phase of implementation. Some of the pros and cons that are emerging in India with far reaching consequences may be

1. Prime minister Modi’s image as a leader who can take big risk may have gone up, but the chaos and unpreparedness followed after 8th November, certainly has severely eroded his image as an able administrator, a claim on which he came to power . As the day go by, even if one assume the lines are coming down in urban India the rural distress has only have made the beginning. This leaves a serious erosion of faith of rural people in the ability of government and Mr. Modi in particular. This will have a long term consequence with cascading effect on future plans of government, including the provisioning of NPAs in banking sector. People will not be in a position to understand, when the government is holding their valid money back, the banks are writing off the industrialist’s loans in hundreds of thousands of crores, although it is an important necessity as far as economy is concerned. It is a catch 22 situation. If government doesn’t do the write off or make provision for NPAs as RBI guidelines mandate, the economy is doomed, if the they do, they will be branded as corrupt and the public angst will rise and government is doomed.

2. Even if one ignores the government’s claim on black money, with banking transaction control that has dried up the liquidity in market, the nation is going to be affected very badly in coming days. Going by Chamber of Indian Industry's (CII) a group always stood by Modi, projections, a contraction of 50% in organized retail and 75% unorganized retail sector is expected as immediate fallout with long term cascading effect This also will lead to a sharp rise in loan defaults, business failures, decline in national and rural economic activities and rise of unemployment, eroding all the benefits banks are reaping with the current flood of deposits.

3. Also these large-scale deposit accumulations in banks are not cost free. These deposits are required to generate the necessary income to meet the interest payment. Unless and until a massive re-monitisation program is in place to generate demand for credit and pacify the economic contraction, banks will be forced to cut interest rate and that in turn will further deflate the already curtailed currency holding of common man and their income. Add to that, during the upcoming harvest season, if the liquidity crunch due to this banking restriction is not addressed with sufficient liquidity in market, one can only fear the worst agrarian crisis in the country including the subsequent food shortage.

4. The worst blunder now government has committed is the restriction brought upon the cooperative sector. In India, there are no comparison between cooperative sector and nationalized banks when it comes to the rural economic credit and support systems are concerned. The contribution of nationalized banks with their urban corporate focus, on rural credit front their performance have always been pathetic. So It has always been cooperative sectors that have sustained the efficacy of rural economy, if not vibrant but at least active. Now with this new stricture, it is going to collapse this alternate economic model completely, that too at a time when currency withdrawal and banking restrictions are crippling liquidity of rural economy. On one side farmers and unorganised sectors will find it difficult to draw their own money from banks on the other side they will also loose the benefit of their next best option- cooperative banking credits. This is one act that is going to create serious damage to Indian economy.

5. In every state in this country, cooperative sector remains a vital life line for its economy. If government cripples it with their utopian ideas of hundred percentage zero black money program, state after state will start building their confrontation with central government for their basic economic life line. Unlike earlier, there are no planning commission exist today to address state’s economic problems vis. Central government. This will further collapse, not only federal system but also the economic activities of the country. Also in all probability this will lead to the stifling of the movement towards GST implementation. Already Kerala is up in arms to protect their cooperative sector.

6. Small scale industries, informal and unorganised sectors that contribute to 82% of rural and 72 % urban employment are already hard hit by this demonetisation program. Post November 8th, most of these sectors from across the country have already shut or are in the process of shutting down thier shop due to liquidity crisis and subsequent payment problems.

7. When the demonetisation program was declared, a large majority of the people in the country have trusted the government with its intentions but as the day go by and without any clear road map and daily dilly dallying with policy issues and its knee jerk implementations, the government is fast loosing out on public trust factor front.

8. These are only few minor problems, but banks with heavy deposits, markets with heavy liquidity crunch and government with no clear policy road map, the country is now heading for massive economic crisis. It is high time the government with immediate effect declares and disseminates a clear policy framework to reassure the nation why should they be patient.

A government that withdrew 82% currency from market affecting entire nation and every individual, it should have been better prepared with policy frame works, road maps and effective communication in place. Unfortunately it is the rumours and chaos that are flying thick and fast than the reassurance about the government’s abilities to control the situation. This is certainly not a good sign. Government should immediately come out with a road map for re- monetising the economy by declaring large scale infrastructure projects that would re-energise economy and above all convince the nation about their ability for administration. Otherwise not only an economy but also a nation will breakdown with liquidity crisis in market and money stashed away in banks. That scenario will be a sudden death for the government for sure.