Monday, November 14, 2016

Demonetization "cost" would reach Rs 40,000 crore, loss to working days 300 million, plus GDP loss: CARE

By Our Representative
One of India’s topmost rating agencies, Credit Analysis and Research (CARE) Ltd, has predicted that the total cost of the Narendra Modi government move to demonetize Rs 500 and 1000 notes would go up to Rs 40,000 crore, wondering whether the pain it is causing to the common people worth it.
Earlier, Union finance minister P Chidambaram in a statement had predicted that the loss to the economy pay go up to Rs 20,000 crore – half of what Sabnavis now says the loss India would suffer because of demonetization. Chidambaram,,taking a line similar to the top rating agency, had wondered if the risk was worth taking cost-wise.
Calculating the huge cost, Madan Sabnavis, chief economist of India’s top rating agency, says in an in-depth analysis, an imputation into the cost involved in the exercise suggests that there are around 290 million households, of which two-thirds would be affected fully, “assuming the balance are very poor.”
According to his calculation, “Each household would spend at least 12 hours standing in queues for exchanging, depositing and withdrawing money in the period up to December end. It could be higher too.”
Pointing out that would be “around 300 million working days assuming that a working day is 8 hours and one spends one-and-half days of time”, Sabnavis says, “At the most basic level the per capita income of Rs 8,000 per month for the country implies a daily salary of Rs 360, which work s to Rs 540 for one-and-half days which comes to Rs 540x30 or around Rs 16,200 crore.”
“To this”, says the rating agency’s chief economist, “should be added the cost for banks where the pure salary bill is around Rs 400 crore a day (annual wage bill of Rs 1.2 lakh crore, which implies Rs 10,000 crore a month, or Rs 416 crore a day, assuming 24 working days), where a multiple of one-and-half days can be added for other expenses that go with operations.”
Sabnavis further says, “Assuming again that altogether banks will be working for at least 10 additional days the value will be between Rs 4,000 crore and Rs 6,000 crore”, adding, “Hence, the total imputed cost of operations would be a minimum of Rs 20,000-22,000 crore at the minimum.”
On the basis of all this, he calculates, “Add to this the cost of realigning ATMs, transportation of cash, security, besides the printing of new notes and destruction of old mites, the overall cost could run to anywhere between Rs 30,000 crore and Rs 40,000 crore.”
Pointing out that “this excludes the loss of Gross Domestic Product (GDP) which cannot be made up like in services”, Sabnavis insists, one should remember, “Consumer goods would always see a revival once things settle down. Therefore, unearthing black money through demonetization can be an expensive exercise if birth direct and direct costs are included.”
Kaushik Basu
Sabnavis’ barbs come amidst increasing number of experts doubting if the move would help the Indian economy. Kaushik Basu, former World Bank chief economist, believes the potential economic damage of such “shock therapy” has been underestimated, as India could see significant quantities of both black and white money taken out of circulation.
Calling it bad economics, Basu says, it’s “a very risky correction of money supply”, adding, “Ordinary salaried people, retirees and small farmers who store their legitimate incomes in cash for future durable and rainy-day purchases, will not be able to change all their money for fear of harassment and not being able to explain how they got it.”
“This can be very disruptive, increasing the costs of small business and trade and causing a drop in aggregate demand in the economy, thereby slowing growth”, he says.

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