Thursday, March 02, 2017

Daylight robbery masqueraded as progress

The GDP growth numbers from India's CSO are quite interesting.

Like most people, I expected to see an immediate decline in GDP due to demonetization but the opposite has happened.

I think I know where I went wrong. I forgot that this is India's GDP we are talking about and not that of a first world nation. India's GDP does not directly capture effects on its informal economy at all.

As the demonetization was put into place, cash in the informal economy was funneled into the formal economy. The end result was a destruction of productivity in the informal sector and an apparent rise in productivity in the formal sector.

For example, a businessman had Rs. 1 Million sitting around from tax evasion. He didn't want to lose it all, so he converted his cash into Rs. 100,000 bonuses and advanced salaries he paid to 10 of his employees.His employees didn't want to have this cash sitting around either, they in turn went and bought cars, fridges, TVs etc... The Consumer electronics retailer, the car company etc... all showed a rise in sales revenue. The raised revenue was deposited into a bank which reports all transactions to the RBI. The RBI will then lend this money out to private banks, these private banks will in turn lend the money to India's super rich.

The CSO surveillance captured the rise in money flows as seen by the RBI, but it cannot capture the fact that the 10 employees will not be getting  a raise next next three years.

If there had been no demonetization, the $ 1 Million would have gone into more directly increasing the size of the business itself. This would normally have led to increased staffing. The new staff in turn would not have bought cars or fridges or TVs but they would have bought clothes, food, shoes, etc... things that are typically bought only with small amounts of cash - you know that kind of revenue that 100s of millions of poor people in India rely on... that stuff.

The loss in the productivity of these large numbers of people is also not captured by the CSO as they never pay taxes, and they don't have a bank account.

Now it could be as these poor people come to realize they have all been shafted, and they are going deeper into debt - they may become angry and the Govt. will have to pay to contain that anger. It can ignore it for a while, but eventually it will have to pay to deal with it.

The CSO will record any such expenses in a different quarter, and again the impact will appear to be uncorrelated from the Great Event.

This is the way the world works. The unscrupulous rich can dress their money grabs as "anti-corruption" and rob the poor. And this entire affair can be made to look like economic progress.

The one paradoxical but good side of this is that the absence of an immediate GDP decline will embolden the Modi machine to attempt stupider things. So an Electronic Property Pass Book and a Gold Ownership Certificate are almost certainly going to happen now.

I am strongly in favor of these new schemes that are likely to emerge from the same group of people that pushed for demonetization in the PMO. These people will feel strongly vindicated and their belief in their own invincibility will rise.

The higher they fly - the closer they will get to the sun and then the inevitable will happen.

2 Comments:

At 12:38 AM, Blogger Wise_Ass said...

The only people who are flying close to the sun,are the people who were wrong about everything from Brexit,Trump and demonetization...and refuse to admit they are wrong even though it is staring at their face :D :D :D

 
At 5:08 AM, Blogger maverick said...

Dear Wise_Ass,

Do you have to gaslight about things that so obviously false?

If you actually read the second line of my post it says

"Like most people, I expected to see an immediate decline in GDP due to demonetization but the opposite has happened.

I think I know where I went wrong. I forgot that this is India's GDP we are talking about and not that of a first world nation. India's GDP does not directly capture effects on its informal economy at all."

I have admitted I was wrong about how the GDP numbers in India capture impacts on the informal economy.

Based on my understanding of things, I can't say that demonetization had a positive impact on India.

If you think this demonetization is a good idea- you should propose to Modiji that he do it every quarter since it is clear that the impact on the GDP numbers is muted and per your logic it is a runaway success. So then have it - do more demonetization, EPPB and Gold Ownership Certificate schemes too.

You are always welcome to run around the country driving Raths with the words "India Shining" on them and see where that takes you.

The economic impact of Brexit, Trump and Demonetization is counter-intuitive but it seems to all rely on a rise in consumer spending. That phenomena occurs from time to time for a variety of reasons but this is not real growth, you don't see a real impact in terms of deficits. The rally peters out after a few months and reality sinks in.

In the US we are seeing an extraordinarily inflated market that seems to be based purely on the notion that Trump will make substantial improvement that will benefit the economy. That will come crashing down when Trump quite predictably stumbles. All it will take is one crisis of the Caterpillar variety and a bank run somewhere in the Midwest and the house of cards will come down.

 

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