Capacity, Accountability and Governance

After two accidents in quick succession, Suresh Prabhu resigned as railway minister taking moral responsibility. While the nation awaits a similar moral stand by some of our other leaders, I want to talk about another dimension. Are our institutions geared up for the challenges of running complex systems?

Time and again, the incompetence of our government shows up in  the form of avoidable tragedies, agony and deaths. The question is as much about ability to deliver as it is about proper allocation of resources. Uttar Pradesh has a health budget of rupees 17,181 crore, on which the interest per day is about 4 crores. If the state machinery becomes efficient to reduce lead time by one day, then half a dozen bills for essential supplies could be settled with the interest income alone! Further, how to get maximum out of scarce public funds is on nobody's KRA. Does any department in government prioritize which bills to pay first? Is it a surprise then no rational vendor likes to work with the government as a supplier!

Let me share another example showing limitations of government efficiency. India is the number one producer of milk today, thanks to the initiatives by Dr Verghese Kurien. For high productivity of milch animals, the females are routinely impregnated through artificial insemination. This insemination through state happens for free, but rarely achieves a success beyond 25%, in spite of supervision by highly knowledgeable veterinary officer. The same number through private means regularly crosses 33% and often 40%. The reason is simple, bureaucracy. Centralized procurement and fear of vigilance constrain the public functionaries severely. The ability to deliver a simple service, such as a park in a town, is marred with challenges in fund flow, recruitment, procurement, inability to negotiate with customers and suppliers, etc. A private operator would face similar challenges, but would enjoy considerable authority, when compared with a public servant.

Governments across the world have found four ways to overcome state limitations - take the decision making closer to the point of operation, get equipped to handle the complex bureaucracy, create space for private sector in non-essential activities, and finally stop providing certain services (the way most of us lived for ages).

In my view, all four need to be acted upon in India. With the status of our markets, I do not understand why the state needs to operate a dairy, an intercity transport, a commodity business or a power station. Instead, the state needs to concentrate on provision of public goods and better management of welfare outcomes. Decentralized decision making would naturally help, as the powers of most public functionaries are far less than the welfare responsibilities. A District Medical and Health Officer, who is responsible for hundreds of in-patients, has powers to sanction a few lakhs - barely sufficient for a day's worth of supplies.

Unless the state wants to stop providing the services altogether, the state needs to equip its employees and stakeholders with means to achieve the direction given in preceding paragraph. Today, there is no capacity within an employee or a citizen to understand the myriad public system. The acumen necessary to maneuver through the system is missing in most officials. Every year, I talk to hundreds of scientists from government, and their tendency is to shirk administrative parts of their work and concentrate on pure science. Perhaps the bureaucracy has become unwieldy. In my view, an average government employee interacts with many more people compared to a private sector employee doing the same job. A high volume of transactions per unit output is a hallmark of any inefficient operation. These need to be made efficient to stay competitive as a nation. Evolution of practices in banking sector over last two decades could teach us a lot.

Now, let's come back to the railway safety. Has the ministry identified which services it would not provide? I hope its not safety is not on that list. Has the government created space for private sector in non-essential activities? Is the ministry too complex? Is the decision making decentralized? These require a more elaborate assessment. Let me present only two facts before the audience - objectives of the ministry and participation in training.

Firstly, The results framework document of the railways ministry is disappointing on many counts. To begin with, the misplaced priorities of the ministry can be seen from the weights given for objectives that are passenger-centric (14%), freight-centric (20%) and environment-centric (8%). There is an entire ministry to take care of environment, let us not overburden ourselves and increase the already high transactions per output for railway employees. The importance given to passenger traffic volumes (5%) is far less than freight volumes (16%). Further, safety is given 8% weight, albeit it is smartly measured as investment in installations, and not actual record of accidents or near misses - which is the practice in transportation industry. Another misleading metric is the weight given to investments. The weight for capex (17%) and another 12% investments for safety and amenities are deceptively rewarding expenditure, which may or may not be helping the nation. Somewhat better aligned objectives would give a higher importance to safety and volume of business, esp passenger traffic. Clearly the results framework document isn't seeing the wood for the trees.

Secondly, Research Designs and Standards Organization appears to be the only organization within the ministry that can look at technical performance of the ministry and recommend changes to be brought about. I failed to find any document that performed a detailed analysis of an issue (such as role of level crossings in safety) and recommended counter-measures. In my view, the organization seriously lacks capacity to play its role in the vital lifeline of the nation. At Administrative Staff College of India, we organize about a dozen programmes every year aimed to help scientists and engineers link their work with organization objectives. In last 6 years, I have seen nearly 2000 senior professionals from reputed labs pass through ASCI portals. Not one of them was from RDSO, although this training is provided completely free!

I'm sad, but not surprised that people suffer and die during such failures of system. If one visits any public office randomly, then one would observe several inefficiencies that lead us to believe that our lives are just hanging by a thread. Do we continue to tolerate this structural invisible violence by state? As a nation, we do very little to find out systemic deficiencies in our public systems. No public functionary has heard of internal audit, and the Comptroller and Auditor General is reluctant to move beyond monetary measures. A system runs smoothly only when it receives feedback. In India, we like to manipulate and if necessary, trample feedback and put a facade of a welfare state.

Examples of Fake News

Yesterday, in a group of some of the brightest minds of our time; shutdown of Phoenix AZ airport was hotly debated on a 33 C day in England. Factually speaking, it wasn't a shut down, just a few aircrafts that can't generate enough thrust for take off were not taking off. Having spent half a decade in aviation industry, I know of airlines from middle east who order planes (engines) with capabilities to fly even at 50 C. My attempts to highlight these things fell on deaf ears. Soon, the discussion turned to climate change, and what not before I chose to move on with my life. Why could people be so stupid?

This morning, there was another WhatsApp forward claiming kiddle.co to be a kid friendly product from Google. Short Google search tells me that kiddle deliberately places emphasis on being powered by Google Custom Search. Again, fact of the matter is that 99% of websites I visit are powered by Google Custom Search. Half knowledge is really dangerous.

There's a fine line between knowing things and pseudo intellectuals. Often, in our zeal to be seen as ambassadors of positivity / knowledge / truth / God; we take very little effort to analyse. We end up doing more harm than good. Snopes, Hoax Slayer, That's Nonsense, and others including Facebook have been fighting an uneven battle against natural stupidity of median population. Sad part is that even intelligent people in top 1% of population fall for it.

In the specific case of Phoenix to climate change debate, the culprit was the heat wave is south Europe and England; due to which more people would have seen the news, trending it more than it deserved and snowball effect led the story to our conversation.

I wish the median citizen becomes analytical and smart before a super moon strikes the Earth. Hopefully then, we won't see any more shocking referenda and polls !

After Effects on Economy - 2

In an earlier post, I had stuck my neck out and said we'll become cashless, with higher tax compliance and a correspondingly higher estimate of GDP. With slightly better data available now, let us revisit these. To begin with, I'm disappointed with the currency being flooded back in to the system. As per latest figures, currency in circulation has now reached 12.6 trillion - 79% of 8th November value, or 70% if we remove secular trend to accommodate increasing economic activity every year. Its better than 16 trillion, but not where our peers keep their currency levels.

Now, did the shock in currency levels change the habits of people? RBI has been meticulously gathering data on digital transactions and publishes them as Payment System Indicators here and as ad-hoc report here. The trends are very interesting.



The charts above show how the digital transactions are growing compared to a year ago. Before demonetization, there was a healthy growth of 20-25% in both volume and value of transactions. This hinted that more and more people and organizations were adopting payments through traceable methods - online or cheque.

However, barring a spike in November 2016, the total value of digital transactions have slowed down significantly ! In last 2 months, they have grown at just about 10% - far less than the historical average. The number of transactions, on the other hand, have increased slightly to about 30% in last 2-3 months. Digging deeper, data shows that the increase in volume has come from retail transactions - NEFT / Card transactions / UPI; whereas B2B transactions (RTGS and cheques) have stagnated.

Adjoining chart shows that RTGS, popular among high value B2B transactions, has an average transaction value of a lakh. The businesses have adopted this for quite some time now, as the bubble has barely moved in last year and a half. Cheques, NEFT and other instruments used by individuals have an average size of about 50,000 - 70,000. Here, while cheques aren't moving much, electronic transfers have showed upward movement along with an increase in bubble size. Plastic money is used for purchases worth a few thousands each swipe and shows higher value per transaction. PrePaid Instruments like PayTM are used for transactions worth a few hundreds, and UPI (not shown in chart) has entered the market to in the same space as plastic money and PPI. Thus, the increase in volume of transactions is caused by slightly greater number of retail transactions, that are too small to bring about a growth in the value of transactions.

A stagnation in B2B digital transactions - RTGS and cheques could mean two things - 1) organized sector has not grown, or 2) businesses have found ways to absorb the taxes of their channel partners. Both should cause worry to the government. Stagnant organized sector is a worry, esp in times of firming commodity prices, low headroom for monetary action and protectionism from various countries. The second possibility of businesses purposefully suppressing RTGS transactions is even more complicated. Till December 31st, 2016; there could have been instances of cash being used in place of RTGS or cheques. After January 1st, currency sales could not have happened. Then what else could the businesses have used in place of RTGS to send / receive money? Credit ? Promissory notes? Parallel currency ?

Of course, all the data is still preliminary, and real picture may be different. Even reputed organizations like Niti Aayog have goofed up while understanding what is going on in this mayhem. But on other fronts, the numbers for tax collection have not jumped as anticipated, and there are reports of them having fallen Year on Year. So, I'm not sure if we'll have a growth in reported GDP this quarter. In fact, it appears that the demonetization of November 2016 has not given any great push to digital transactions either, as was believed some time back. That makes one wonder why would any investor want to quote a high valuation  for PayTm ? Maybe the investors know something which I don't !

Black Money and Real Estate

As the dust settles on demo, most sectors are coming out of sluggishness and official figures report a steady growth. Many experts have doubted the figures and suspect a downward revision. In my view, stable GDP was obvious to anyone with an understanding of estimation methodology. As the official figures consider only recorded transactions and formal economy, I had predicted a double digit growth within 1-2 quarters here (penultimate paragraph). Albeit, this is just due to a flaw in the methodology; and our country may be struggling in the informal sector if the formal growth has come at the expense of the informal sector. There is no scientific way to find out if the informal sector shrunk significantly.

The only sector that is still reeling under duress is the cash-heavy construction and real estate sector. The pages advertising sale of properties had nearly disappeared from leading newspapers. The number of transactions registered with Telangana government has dropped to about half of pre-demo levels, clearly indicating a slump. In Maharashtra, the value or volume of transactions registered this year is not likely to catch up with those seen about 5 years ago. Formal sector (listed companies / organized developers) are probably out of the woods, as the BSE Realty Index is back to pre-demonetization levels. Bulk of the construction business is still struggling to find buyers. Sensing an opportunity, many of my middle class friends are jumping to buy property :-) 

A problem faced by a young friend got me thinking whether owning a house has any more advantages than renting one. I did the math, subject to certain assumptions, and found that buying a flat as investment isn't any advantageous compared to renting. 

Assumptions: Property valued at INR 25 lakhs, requiring modifications / furniture worth about 5 lakhs. Home loan is available for 30 lakhs at 10% interest (give or take). Similar property can be availed at 4% annual rent (1 lakh per annum) - global and Indian benchmarks rarely cross this figure. Rental value increases at inflation rate (6%), which should also be the rate of growth of property value. Buyer (or renter) is in highest tax slab (30%) and tax laws do not change over the term of the loan (15 years). Rented property requires about 3 months deposit (national average) and furniture worth 1.5 lakhs. Buyer stays in the property for the entire term of loan.

Under the stated assumption, the buyer ends up paying about 400k EMI, 200k registration / connections / maintenance in the first year and gets a tax shield of about 90k. The tax benefit gradually drops to 0k over 15 years. For renter, the first year spend is 100k rent plus 200k furniture and deposit; on rent there is a tax benefit of 30k, which increases to 65k in 15th year. Its a no brainer that renter ends up spending lot less, but the buyer ends up owning the property. Are these two comparable? This gets answered by asking the following question. Could the renting person buy a similar property at that time with the saved money?

Let us start by checking the two options - rent vs buy, and check the future worth 15 years down the line of  the two. 

1) Money spent by buyer on the property: The total investment in to the property (EMI, furniture, etc. excluding maintenance) would be to the tune of 52 lakhs in nominal rupees, and 111 lakhs considering time value of money. Maintenance cost is ignored.

2) Money spent on rents: The renter would end up spending 18.3 lakhs in nominal rupees, and 38.8 lakhs considering time value of money.

To illustrate, two persons with same income choose different paths - rent / buy decide to park any surplus money (after rent / EMI) in to a fixed deposit giving 10% interest. After 15 years, the renter would be richer by 111 - 39 = 72.7 lakhs. If the renter decides to park money in more risky assets, then the benefits would be higher. With 72.7 lakhs, will one be able to buy a house then ?

It turns out, the property worth 30 lakhs would become worth about 76.2 lakhs (if it grows at the rate of inflation). If the buyer chooses to encash the 32 lakhs investment, he may get only about 45 lakhs after deductions on account of age, taxes, stamp duty, etc. As per data compiled by The Economist, in the long run (15+ years) property prices grow at nearly the rate of inflation, and very rarely a percent above the inflation rate. In the rare case, the replacement price of the property could hit 90 lakhs, giving back about 52 lakhs in cash to investor. 

Thus, a person renting property does not lose much (if any) in delaying the decision to purchase. If there is hope in the governance of the country, one can expect more level playing transactions in the real estate, lesser black money and fairly priced properties. In which case, one should delay any purchase decisions and benefit from more fair market.

All the above numbers have been checked for the sensitivity to estimation errors within reasonable limits, and the conclusion remains the same. One point of contention from ardent believers of real estate is that property appreciation is faster than inflation rate (which has happened in recent past, but there are no fundamental reasons to cause this. It can be explained by the expectation of the market that rental will grow eventually, which it never did). 

In case you have reasons to believe that inflation will be more than 6%, or real estate will appreciate better than 6%; then there is a case for investing early. But many people invest because real estate is a good investment. There is no such law of physics !! It is good only if you manage to time the markets or to identify opportunities before developers. Otherwise rental and buying are not very different, add to that the added flexibility of a rental space. Still for the sake of argument, let us see if investing in real estate helps your portfolio.

According to portfolio theory, if we don't understand an asset class, we can still blindly invest in it, provided 1) there is a liquid market for it and 2) it helps in achieving diversification. If these conditions are met, investing in real estate is desirable. According to crude calculations, the proportion of investment in real estate should not be more than 25% of one's net worth (all wealth minus all loans). People do stretch this to about 60% for short periods, but that's not advisable as real estate investments cannot be disposed off in short time, in event of a distress. 

Bottom line for upwardly mobile friends - use rented property to enjoy the real estate today. Buy property only if it diversifies your other investments. If REIT market picks up, one won't need to buy property to invest in real estate!

Data trickles in ...

Four weeks in to the demonetized world, we are still scrambling for data. With every passing day, one thing is becoming clearer - the replacement currency will not be exactly equal to the 15 lakh crore withdrawn currency. The talks and press releases are emphasizing on B2B and B2C transactions going online, and unless there is a major upheaval at grass roots; India will learn to live with fewer currency notes.

The amounts deposited have been higher than expectations, and half way in to the available time, more than half of currency notes have been deposited. Therefore, the brown scenario is now unlikely and we'll see nearly 100% of currency notes deposited. What this means is that individuals holding the currency notes have deposited it themselves, or laundered away and got 100s or 2000s.

An easy supply of 2000s and other currency notes would have made it easier for people to launder away the old notes. So, the current shortages faced by citizens were in a way necessary to limit the laundering as far as possible.

How are people managing without the cash? There have been reports of drop in trade, and in some cases drop in production (including production of services). In no reports, this drop is more than 40%. This is a good news, considering the fact that drop in currency is almost 75%. Thus, the pain in the system is not as high as the shortage in cash. It tells us that a large chunk of money was not getting used (except maybe during elections). It also tells us that people have learnt to live without currency notes - through use of credit or through use of other payment systems.

Latest data from RBI about electronic payment systems shows that there is a 40% jump in electronic payments compared to November 2015. Complete data is awaited, but in my judgment, this estimate should hold good even when we get the entire data. This jump was 26% in May 2016 and 27% in September 2016. It would be safe to assume that an additional 10% business has moved online. This figure is approximately 10% of GDP and approximately 100% the currency that was withdrawn (net of new issue). Available data shows that RTGS / NEFT transactions explain most of the jump, and a low increase in transactions using credit / debit cards or using prepaid instruments. One of the reasons behind this could be that the data for credit / debit cards and prepaid instruments is yet to arrive from several financial institutions.

If one had to judge the situation on the basis of available data, one could say that significant number of previously cash transactions have moved to white payments. Assuming everything else stayed the same, one can see about 10% annualized GDP growth for the month of November, especially if some of the panic transactions that have taken place showing a back-dated invoice (illegally). The story for December could turn out to be a little different, as businesses find new substitutes to cash and when there won't be any back-dated transactions. 

I still don't know whether this is going to affect either the stock or flow of black money. The movement to clean society is also dependent on moral stand taken by people and businesses; and the responsiveness and compliance by the state machinery - for instance the income tax department. Till such time, we have no choice but to face the "inconveniences". 

Only time will tell whether the cash crunch will continue in to January and force more people to move to white transactions. Indications from RBI about new 20 and 50 Rs notes imply that they are in no mood to increase the currency in circulation back to 8th November 2016 levels. Thus, I stand by my forecast of 10% GDP growth (official figures) within 1-2 quarters, until 15th December when we see the advance tax figures.

Indian Time Machine

Indians are short of time. Always impatient! You can easily spot an Indian guy in any queue at a foreign location, without looking at passports. He's fidgety! I think its a necessary side effect of raw processing power. Civility in western cultures has killed this restlessness in its people.

The smart Indian guy won't change himself, so he desperately wants the world around him to run a bit faster. At least when he's waiting for something. The smart guy has also found something which helps him achieve it - a time machine ! It has got a circular console with one useful button and a few decorative buttons.

He's totally sold to the idea that the time machine works. So, he uses it all the times when he wants others to move faster. That's during milliseconds after traffic light turns green, seconds after discovering that a vehicle ahead is stuck, or within a minute of waiting for a co-passenger to arrive. The machine is so simple that even an illiterate or a 2 year old can operate it!

Hope the bubble of belief is burst soon !

Whither pain?

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 !