As I said on Facebook, I'm secretly in love with Modi.. My jaws can be found dropped for the duration of his well prepared speeches. It happened 3-4 times since 2010. So, like any confused lover, since 15th August 2014, I keep myself away from him, so that I can concentrate on work and life. Hope my rationality prevails <<blush>> <<blush>>.
Its been sufficient time since the announcement, and we seem to have reached a temporary equilibrium. Data is very hard to come by, and will continue to do so till permanent equilibrium comes in another month or two. I'm eagerly awaiting RBI figures on supply of M3 money after the disruption. The latest weekly statistics are still reporting data from October 28th. Apart from these, one should keep an eye on advance tax numbers on 15th December and currency situation in field around beginning of month, when a lot of people transact in cash. In the mean time, let us see where the pain lies.
I wanted to start with GDP numbers floating around, but I'll save it for the end. Let us first discuss qualitatively what losses the economy is bearing.
Productivity - Since much of my network is salaried, one thing people have been talking about is the man-hours lost in queues outside banks and ATMs. Many of them are using personal time, and some smartypants are using work time. In both cases, the client billing is still on and office work or shop floor work hasn't suffered much. Then comes the countless hours spent on discussing the move. Even that hasn't impacted real productivity. If this wasn't there, people would have discussed Deepika Padukone! In fact such topics bring a wave of energy in organizations, as everyone turns an economic advisor.
While absenteeism of regular employees has an upper limit that is planned in annual plans, the absenteeism of casual labour or contract employees affects the plans, when there is a shortage. In other words, the contract workers do not take the ownership of work for the period on which they are not on premises, whereas regular employees are held responsible for work even in absence. Now, wherever the shortage was so high that production was suspended, one can say that we lost out! For instance, there are daily wage workers in construction sector, who prefer to be money mules rather than "backbreaking work". Some persons I know are claiming demand side issues, where factories are unable to pay to laborers in cash and therefore not hiring them. In many units the regular economic activity has come to a grinding halt. Loss of production to the principal, yes. Loss of productivity of labour, probably not (because there is already a market for such labour. In fact I'm not seeing daily wage earners in their regular spot of hire lately.).
Supply Chain - Barring the temporary shortage of salt earlier, there have not been any reports of unavailability of any goods or services. If the situation prevails for more than 2 months, then maybe we'll see telltale signs of shortages and rationing spreading to areas other than currency. As I write, reports of reduced movement at toll plaza and logistics hubs are emerging. Is it to avoid getting caught in transit or due to operational difficulties is not known. One can imagine that a trucker from Punjab may not want to pick up goods from Andhra Pradesh without some advance and deposit in Maharashtra on credit. Advance is usually smaller amount, and many transporters are likely to be stuck at destinations for want of cash payments. The party receiving goods is at a loss due to demurrage charges, economy is losing for want of right goods at right place and transporters should be unaffected.
Yet, if some reports are to be believed, then new bookings have slowed significantly. In cargo business, less than 500 kms trips are managed by local players and beyond that by national players who usually do a multi-city long haul before returning to base. The local players shouldn't mind accepting credit as they're in the same city as one of the consignor or consignee. Long haul players deal with tariffs upwards of 10,000. For this ticket size, the payments can be made through cheques and other means. However, the crew may find it difficult to live with limited cash in hand. Usually, during such times, the truckers start their movement towards base. We could see a disproportionate number of empty hauls then. The situation is serious if it stays beyond 2 weeks. Toll data should be closely monitored by authorities. Supply of 2000 rupee notes could ease some pressure.
Agriculture - Contrary to media reports, I do not believe that sowing or harvesting would be affected much. On sowing front, private sector is known to offer credit (and many other perks); whereas public sector offers seeds at almost 75% subsidy. Besides, every seller knows that the shelf life of seeds is limited, so offering credit is the best way to tide over the currency shortage. Similar argument can hold for other inputs - except labor. Hopefully farm labor would see अच्छे दिन now, on the back of a good monsoon and demonetization !
On harvesting front, there are problems (opportunities), particularly for perishable goods. A producer may want to sell, but the buyer (trader) may not have currency. So, they either buy on credit, or in white (Jan Dhan transfer). Farmer may not mind this, as farm income is largely tax free; but the trader would not want to get exposed. If there are any honest traders (and societies), then they may come forward at such times and be happy. I've seen honest manufacturers sharing this sentiment, but haven't come across an honest trader till date :-|
Transactions - That brings us to the most crucial element in any economy and this exercise. Wholesale and retail trade has reduced in all places, and in some places there is no trade. A quantitative discussion comes up in the penultimate paragraph, but here, I want to check what are the real barriers to trade. Currency cannot be the only reason, because most business is on credit, except for very small value purchases and for walk-in customers. It could be either the fear of getting caught or lack of trust in counter-parties (we don't know who is going to get caught next, and our money may get stuck).
Other reason could be that traders (and other businessmen) always took such schemes with a pinch of salt. The community memory among traders is terrific! So, perhaps the community sees this as temporary phase that shall pass too. One core competence of a trader is to maintain deep pockets (not necessarily with own money), and then have resilience to tide over tough market conditions, such as new entrants, unfavourable pricing, regulations, etc. If traders adopt this approach, then volumes may fall drastically. Although that would show up in prices, and prices have not changed much - barring salt. It remains to be seen whether Modi can think ahead of the traders! Hopefully the government's focus areas like National Market for Agriculture are materializing soon, which could substitute the old generation traders along with organized players.
Overall economy:
So, there are estimates that GDP will shrink by 0.5% to 3.3%. Estimation of official GDP is done using three inputs - 1) MCA21 database for registered companies, 2) tax collection when (1) is not available, 3) effective labour input for unincorporated enterprise (such as a barber), where even (2) is not available. The third part, which probably contributes 25-30% to GDP doesn't measure GDP, but assumes that people working in certain sectors are producing certain GDP. Official estimates for the third part will not change in coming days at all. Among the remaining two, the first one - corporate GDP is calculated using income reported from MCA21, which is completely white in both parties - buyer and seller. A company doesn't report whenever any cash income is received, as it can be easily pocketed by individuals (promoters or others). Many companies prefer a distribution partner to take care of the black (cash) part of the business, and stay fully white themselves. Thus, neither corporate GDP nor GDP of unincorporated entities will not shrink due to inconvenience - unless there is a drop in demand for goods. Both these account for about half of GDP estimate.
Now, let us look at the other half, which is calculated using tax collection. It includes entities that are not Companies, such as restaurants, builders, professional services, shops, C&F agents, etc. It is widely expected by Indian and foreign media that demand would fall because of lower risk appetite, tendency to postpone purchases, and drying up of cash incomes (black) - which tends to be spent more than white. The second contributor is the inability to transact due to availability of currency notes. Both these are likely to stay for another month. Albeit, shortage of currency notes can be mitigated by transacting on credit; and postponed purchases will take place eventually.. these could be omitted to keep fewer variables in discussion. Being responsible for half of GDP, this component affects the overall GDP linearly or perhaps more - a 20% fall in this sector would reduce GDP by at least 10%. Further, a 20% fall for one month would reduce the annual GDP by 0.83% Thus, for 1% shrinking to happen, the market demand should be lower by about 24% for next one month. If the demand generated by black money is indeed 24%, then I will be happy to take my words back and happy to see a lower growth rate in the short run. Reason for the happiness is that the 24% black transaction can be caught now! (Assuming we have a vigilant system that also has the capacity.) In my view from ivory towers of Banjara Hills, the demand has NOT fallen by 24%. It has indeed fallen in traditional cash only marketplaces - usually biggest market in a city. My good friends are emphatic about fall in their locality, and some are emphatic about no fall in demand or trade. My hunch is that for every 100 Rs loss in cash revenue, points of sale have seen a 50 Rs increase in non-cash (electronic) payments. Thus, the net white sales (tax collection) haven't fallen, barring sectors like real estate. Thus, the impact on true GDP from trade would be roughly 1/24th of the drop in trade numbers, and 1/48th if my hunch about electronic transition is right. If one looks at markets around us, then the B2C trade hasn't fallen by so much as to drop GDP by what analysts have forecast.
Even then, at a personal level, everyone is in pain, everyone is spending time in arranging money and energy on discussing money. Yet, a vast majority of my network is happy and ready to slog for the move. A very small fraction is the opposing intellectuals who do not have faith in our machinery. For me its anyway a sweet pain ;-), which can be understood only by those who have been in love !
Its been sufficient time since the announcement, and we seem to have reached a temporary equilibrium. Data is very hard to come by, and will continue to do so till permanent equilibrium comes in another month or two. I'm eagerly awaiting RBI figures on supply of M3 money after the disruption. The latest weekly statistics are still reporting data from October 28th. Apart from these, one should keep an eye on advance tax numbers on 15th December and currency situation in field around beginning of month, when a lot of people transact in cash. In the mean time, let us see where the pain lies.
I wanted to start with GDP numbers floating around, but I'll save it for the end. Let us first discuss qualitatively what losses the economy is bearing.
Productivity - Since much of my network is salaried, one thing people have been talking about is the man-hours lost in queues outside banks and ATMs. Many of them are using personal time, and some smartypants are using work time. In both cases, the client billing is still on and office work or shop floor work hasn't suffered much. Then comes the countless hours spent on discussing the move. Even that hasn't impacted real productivity. If this wasn't there, people would have discussed Deepika Padukone! In fact such topics bring a wave of energy in organizations, as everyone turns an economic advisor.
While absenteeism of regular employees has an upper limit that is planned in annual plans, the absenteeism of casual labour or contract employees affects the plans, when there is a shortage. In other words, the contract workers do not take the ownership of work for the period on which they are not on premises, whereas regular employees are held responsible for work even in absence. Now, wherever the shortage was so high that production was suspended, one can say that we lost out! For instance, there are daily wage workers in construction sector, who prefer to be money mules rather than "backbreaking work". Some persons I know are claiming demand side issues, where factories are unable to pay to laborers in cash and therefore not hiring them. In many units the regular economic activity has come to a grinding halt. Loss of production to the principal, yes. Loss of productivity of labour, probably not (because there is already a market for such labour. In fact I'm not seeing daily wage earners in their regular spot of hire lately.).
Supply Chain - Barring the temporary shortage of salt earlier, there have not been any reports of unavailability of any goods or services. If the situation prevails for more than 2 months, then maybe we'll see telltale signs of shortages and rationing spreading to areas other than currency. As I write, reports of reduced movement at toll plaza and logistics hubs are emerging. Is it to avoid getting caught in transit or due to operational difficulties is not known. One can imagine that a trucker from Punjab may not want to pick up goods from Andhra Pradesh without some advance and deposit in Maharashtra on credit. Advance is usually smaller amount, and many transporters are likely to be stuck at destinations for want of cash payments. The party receiving goods is at a loss due to demurrage charges, economy is losing for want of right goods at right place and transporters should be unaffected.
Yet, if some reports are to be believed, then new bookings have slowed significantly. In cargo business, less than 500 kms trips are managed by local players and beyond that by national players who usually do a multi-city long haul before returning to base. The local players shouldn't mind accepting credit as they're in the same city as one of the consignor or consignee. Long haul players deal with tariffs upwards of 10,000. For this ticket size, the payments can be made through cheques and other means. However, the crew may find it difficult to live with limited cash in hand. Usually, during such times, the truckers start their movement towards base. We could see a disproportionate number of empty hauls then. The situation is serious if it stays beyond 2 weeks. Toll data should be closely monitored by authorities. Supply of 2000 rupee notes could ease some pressure.
Agriculture - Contrary to media reports, I do not believe that sowing or harvesting would be affected much. On sowing front, private sector is known to offer credit (and many other perks); whereas public sector offers seeds at almost 75% subsidy. Besides, every seller knows that the shelf life of seeds is limited, so offering credit is the best way to tide over the currency shortage. Similar argument can hold for other inputs - except labor. Hopefully farm labor would see अच्छे दिन now, on the back of a good monsoon and demonetization !
On harvesting front, there are problems (opportunities), particularly for perishable goods. A producer may want to sell, but the buyer (trader) may not have currency. So, they either buy on credit, or in white (Jan Dhan transfer). Farmer may not mind this, as farm income is largely tax free; but the trader would not want to get exposed. If there are any honest traders (and societies), then they may come forward at such times and be happy. I've seen honest manufacturers sharing this sentiment, but haven't come across an honest trader till date :-|
Other reason could be that traders (and other businessmen) always took such schemes with a pinch of salt. The community memory among traders is terrific! So, perhaps the community sees this as temporary phase that shall pass too. One core competence of a trader is to maintain deep pockets (not necessarily with own money), and then have resilience to tide over tough market conditions, such as new entrants, unfavourable pricing, regulations, etc. If traders adopt this approach, then volumes may fall drastically. Although that would show up in prices, and prices have not changed much - barring salt. It remains to be seen whether Modi can think ahead of the traders! Hopefully the government's focus areas like National Market for Agriculture are materializing soon, which could substitute the old generation traders along with organized players.
Overall economy:
So, there are estimates that GDP will shrink by 0.5% to 3.3%. Estimation of official GDP is done using three inputs - 1) MCA21 database for registered companies, 2) tax collection when (1) is not available, 3) effective labour input for unincorporated enterprise (such as a barber), where even (2) is not available. The third part, which probably contributes 25-30% to GDP doesn't measure GDP, but assumes that people working in certain sectors are producing certain GDP. Official estimates for the third part will not change in coming days at all. Among the remaining two, the first one - corporate GDP is calculated using income reported from MCA21, which is completely white in both parties - buyer and seller. A company doesn't report whenever any cash income is received, as it can be easily pocketed by individuals (promoters or others). Many companies prefer a distribution partner to take care of the black (cash) part of the business, and stay fully white themselves. Thus, neither corporate GDP nor GDP of unincorporated entities will not shrink due to inconvenience - unless there is a drop in demand for goods. Both these account for about half of GDP estimate.
Now, let us look at the other half, which is calculated using tax collection. It includes entities that are not Companies, such as restaurants, builders, professional services, shops, C&F agents, etc. It is widely expected by Indian and foreign media that demand would fall because of lower risk appetite, tendency to postpone purchases, and drying up of cash incomes (black) - which tends to be spent more than white. The second contributor is the inability to transact due to availability of currency notes. Both these are likely to stay for another month. Albeit, shortage of currency notes can be mitigated by transacting on credit; and postponed purchases will take place eventually.. these could be omitted to keep fewer variables in discussion. Being responsible for half of GDP, this component affects the overall GDP linearly or perhaps more - a 20% fall in this sector would reduce GDP by at least 10%. Further, a 20% fall for one month would reduce the annual GDP by 0.83% Thus, for 1% shrinking to happen, the market demand should be lower by about 24% for next one month. If the demand generated by black money is indeed 24%, then I will be happy to take my words back and happy to see a lower growth rate in the short run. Reason for the happiness is that the 24% black transaction can be caught now! (Assuming we have a vigilant system that also has the capacity.) In my view from ivory towers of Banjara Hills, the demand has NOT fallen by 24%. It has indeed fallen in traditional cash only marketplaces - usually biggest market in a city. My good friends are emphatic about fall in their locality, and some are emphatic about no fall in demand or trade. My hunch is that for every 100 Rs loss in cash revenue, points of sale have seen a 50 Rs increase in non-cash (electronic) payments. Thus, the net white sales (tax collection) haven't fallen, barring sectors like real estate. Thus, the impact on true GDP from trade would be roughly 1/24th of the drop in trade numbers, and 1/48th if my hunch about electronic transition is right. If one looks at markets around us, then the B2C trade hasn't fallen by so much as to drop GDP by what analysts have forecast.
Even then, at a personal level, everyone is in pain, everyone is spending time in arranging money and energy on discussing money. Yet, a vast majority of my network is happy and ready to slog for the move. A very small fraction is the opposing intellectuals who do not have faith in our machinery. For me its anyway a sweet pain ;-), which can be understood only by those who have been in love !
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