Maverick's World

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.

posted by maverick @ 5:46 AM