After Farm Loans, Will Govts Waive Off Mudra Loans Next?

Farm_Life_Village_India

A few days back I suggested on Twitter that people with outstanding home loans should organise themselves and ask the government to waive off their loans.

This idea basically came from several state governments waiving off loans given to farmers. It was started by Andhra Pradesh and Telangana, the two states to come out of the erstwhile Andhra Pradesh.

Then it was followed in Uttar Pradesh, where the newly elected government decided to waive off farm loans of around Rs 36,359 crore. It was followed by Maharashtra.

There is a clear trend here. Maharashtra chief minister Devendra Fadnavis recently explained his decision to waive off loans to farm loans by saying:Neighbouring Telangana and Andhra did it first. It created pressure and then UP announced the waiver. The demand had been there but it became very strong after UP’s decision.”

The idea also came from the fact that banks were busy treating large corporates which had defaulted on their loans, with kids gloves, by restructuring their loans and giving them a longer time to repay. This was basically happening because the corporates owed a large amount of money to banks. And any default would hit them hard.

Now as a home loan borrower, try going to a bank and ask for the postponement of payment of EMI to repay the home loan and see how a bank reacts. Obviously, different kind of borrowers get treated differently.

What has helped the cause of the farmers is that they are numerous in number and the fact that they are organised, which helps them carry out protests at a level so that the government registers it. What has helped the corporates is that their average loan amounts are very large and any default would hit the banks hard.

These factors are missing in case of individuals who have taken on home loans. They are not many in number. They are spread across the length and breadth of India. And they are not organised. In 2013, the number of outstanding home loans stood at 46.43 lakh. I couldn’t find a more recent number. Over and above this, there would be home loans given by housing finance companies, as well.

Typically, the outstanding home loans (in value) are around 60:40 (scheduled commercial banks: housing finance companies). Taking the housing finance companies into account, as well as the fact that the total outstanding home loans may have gone up from where they were in 2013, it is safe to say that the total number of outstanding home loans will be still less than 1 crore.

Also, the individuals who have taken on these home loans would be spread across the length and breadth of the country. Hence, it is difficult for them to get together and protest that the government waive off their home loans, like has been the case with farm loans. The same stands for other kinds of retail loans which have smaller average ticket value, in comparison to the home loan, which is usually the largest loan that an individual ever takes on.

Over and above this, the average loan amount owed by them is very small and that ensures that they are likely to face the full legal wrath of the bank, if they default on their home loans, which is not the case with corporates.

Having said that, there is a precedent of a government waiving off home loans as well. In December 2016, the Telangana government had announced a waiver of home loans of around Rs 3,920 crore to individuals who had benefitted from the housing schemes for economically weaker sections of the society over the years.

So, if individuals with home loans, can get themselves organised they might also be able to get a loan waive off.

But there is one particular kind of borrower, who is in a position to organise himself, protest and ask for a loan waive off.

In 2016-2017 and 2015-2016, the total amount of loans extended under the Pradhan Mantri Mudra Yojana (PMMY or better known as Mudra loans) stood at Rs 3,17,977.81 crore. The total number of borrowers over the two-year period stood at around 7.46 crore. A bulk of these loans have been made to women.

Taking cue from farmers, if these borrowers can manage to organise themselves and protest and demand a waive off of their loans, there is a good chance that they might get it. Assuming that only one individual in one household has got a loan under PMMY, we are looking at 7.46 crore households. At five members per household, we are looking at more than 37 crore individuals, on whom these loans have had some impact. And that is a large vote bank.

If these individuals can get themselves organised they are in a very good position to demand and get a waive off on their PMMY loans. Also, the governments have already set a precedent and will find it very difficult to say no.

This will be especially true for states where elections are scheduled before the Lok Sabha election of 2019. On a totally different note, they might not even need to take it up as an issue, some lazy politician might just do the job for them, by promising a waive off.
And that is the problem with these waive offs. They are unlikely to stop in a hurry.

The column originally appeared on June 19, 2017, on Equitymaster.

 

Digital Transactions Were Growing Faster Before Demonetisation

The finance minister Arun Jaitley recently said: “Through demonetisation, the government created a new normal, with a big step in removing the earlier scenario of cash economy and shadow economy.”

If this is true then there should have been a substantial jump in digital transactions in the recent past. If people are not carrying transactions in the cash economy, then they should be carrying out transactions digitally. But is that true?

Let’s first look at the number of digital transactions (i.e. volume of digital transactions) that have happened every month between November 2016, when the demonetisation of Rs 500 and Rs 1,000 notes was announced, and May 2017, the latest monthly data available. All the digital data used in the column deducts the transactions carried out through Real Time Gross Settlement system simply because it is not a retail mode of digital transactions, which is primarily what we are looking at here. The minimum amount that can be transferred through this mode is Rs 2 lakh.

Take a look at Figure 1. This basically plots the total number of digital transactions that have happened between November 2016 and May 2017.

Figure 1: 

As is clear from Figure 1, the volume of digital transactions peaked in December 2016, when the impact of demonetisation was at its peak. With very little currency available to carry out transactions, people had no option but to use digital modes of settling transactions. In May 2017, the total number of digital transactions was down by 11.4 per cent in comparison to December 2017. This clearly tells us that fewer people are using digital modes of transactions in comparison to the period right after demonetisation.

Now take a look at Figure 2. In this we look at the total value of digital transactions carried out every month between November 2016 and May 2017.

Figure 2: 

From Figure 2, it is clear that the total value of digital transactions peaked in March 2017, and has fallen by 20.2 per cent since then. Past data shows that the digital transactions tend to increase in the last month of the financial year as people settle their dues and pay their taxes. Having said that, the total value of digital transactions in May 2017, was higher than that in December 2016. But with volume of transactions being lower, what this means that people who were already on the digital bandwagon are spending more digitally. And that is one piece of good news for a government looking to increase the proportion of digital transactions in the overall economy.

This comparison just tells us how things have evolved on the digital front after demonetisation. How do things look, if were to stretch the timeline a little more? Let’s compare May 2017 data with May 2016 data (In this case I have ignored the data for United Payments Interface and Unstructured Supplementary Service Data (USSD). I could not find this data for May 2016 and May 2015. This will not have any impact on the overall result because the USSD form of digital payment is close to zero and can be effectively ignored.

When it comes to UPI even in May 2017 with all the push and promotion by the government, it made up for 1.1 per cent of the total digital transactions by volume and 0.1 per cent by value (of course we have ignored RTGS here).

Take a look at Table 1. It has the total digital transactions both by volume and value, over the years.

Table 1:

Digital transactions May 2017 May 2016 May 2015
Volume (in millions) 831.5 726.3 491.2
Value (in Rs billion) 20,901.5 15,364.6 12,173.9

Source: Author calculations on Reserve Bank of India data 

What does Table 1 tell us? Between May 2016 and May 2017, the total number of digital transactions (i.e. volume) went up by 14.5 per cent. In value terms, the digital transactions jumped by 36 per cent. So, doesn’t this tell us that demonetisation had a positive impact on the digital transactions? Before we jump to that conclusion, let’s look at how the situation was between May 2016 and May 2015, when there was no demonetisation to contend with.

Between May 2015 and May 2016, the total number of digital transactions grew by 47.9 per cent in volume terms, which was significantly faster than the increase between May 2016 and May 2017. Of course, the low-base effect is at work, but even with that the jump in percentage terms was significantly more last year.

This also tells us clearly the negative effect that demonetisation has had on the overall economy, with the larger section of the economy going slow on spending. This ultimately reflects in the slower jump in digital transactions.

How do things look in terms of value? In terms of value, the jump between May 2015 and May 2016 stood at 26.2 per cent, which is lower than the jump between May 2016 and May 2017. (I did not look into data from May 2014 and before, because the structure of the digital data changes dramatically, with the importance of ECS increasing in comparison to NACH today).

What does this tell us? It tells us that demonetisation has led to those who were already on the digital mode to spend more digitally. It also tells us that the better-off haven’t been impacted much by demonetisation. Nevertheless, the main aim of demonetisation was to increase the total number of digital transactions (the dream of a cashless society i.e.), which was happening anyway and seems to have slowed down after demonetisation.

The fact that digital transactions in India were growing at fast pace even before demonetisation, isn’t surprising given that India is one of the youngest nations in the world. More than 54 per cent of India’s population is under 25 years of age. Youth take on to new technology faster than others. Hence, the digital transactions in India will continue to grow in the years to come, as they had before demonetisation.

This brings us back to the question was demonetisation necessary? The useful idiots of Narendra Modi (with due apologies to Thomas Sowell who coined the term for a different context) through their WhatsApp forwards and analysis in the media, would like us to believe that. But as more and more data comes out, it is becoming more and more clear that demonetisation was a more or less whimsical decision carried out without any due-diligence. Of course, it needs to be defended now.

The column originally appeared on Equitymaster on June 12, 2017.

This Govt Company Lost Rs 11.65 Crore Per Employee, and It’s Not Air India

Hindustan photo

The finance and defence minister Arun Jaitley, recently said: “India has a historic second chance, after nearly one-and-a-half decades, to disinvest in state-owned Air India Ltd and help propel the growth of aviation sector.”

Whether this happens remains to be seen given that the issue of disinvestment of Air India is a political hot potato, and any movement on this front is likely to lead to a lot of hungama, for the lack of a better word, from India’s professional trade union leaders, as well as the opposition parties, which have been in a rather moribund state of late.

Over and above this, the Modi government hasn’t really come up with any economic reform till date, which is likely to make it unpopular with a section of the population. The unpopular steps have typically been reserved to drive the so called cultural agenda of the Rashtriya Swayemsevak Sangh (RSS) and the Bhartiya Janata Party (BJP).

Having said that, before the government goes about disinvesting Air India there are several low hanging fruits that it can pluck, and save a lot of money in the process. One such company is the Hindustan Photo Films Manufacturing Co. Ltd. Take a look at Table 1.

Table 1: 10 Major Loss Making CPSEs during 2015-16 

As per Table 1, Hindustan Photo Films was the fourth largest loss maker among all public sector enterprises in 2015-2016. It made a loss of around Rs 2,528 crore. The three companies that made greater losses than Hindustan Photo, had some semblance of a business, though not a business model. The Steel Authority of India Ltd has steel plants all over the country and employs thousands of people, though it lost a lot of money in doing so, given that it can’t compete with the Chinese steel on the price front.

The Bharat Sanchar Nigam Ltd, offers telecom services across the country. And Air India, for whatever it is worth, is India’s national airline and flies people globally as well as locally. It also flies the prime minister whenever he takes an international trip.

But what about Hindustan Photo Films? What does the company do? Photo films went out of business a while back. The question is: Why is the government still running a photo film company? The photo film was killed first by the digital camera and then by the mobile phone. Actually, the company doesn’t make photo films any more.

During 2012-2013 (the latest annual report that I could find), the total production of the company had stood at Rs. 3.6 crore. The sales had stood at Rs. 3.7 crore. Now imagine who in their right minds would run a company with sales of under Rs. 4 crore and which ends up with losses of more than Rs. 1,500 crore, as it did during the course of 2012-2013. As mentioned earlier in 2015-2016, the company lost Rs 2,528 crore. It employed 217 individuals. This meant a loss of Rs 11.65 crore per employee. This number shows the ridiculousness of the entire exercise of keeping the company alive.

In fact, 2015-2016 wasn’t the first time that Hindustan Photo Films lost money. It has been losing money for over a decade. Between 2004-2005 and 2015-2016, the company has lost close to Rs 15,000 crore in total.

Table 2: Losses of Hindustan Photo Films 

As is clear from Table 2, the company hasn’t made any money in years. Given this, in order to continue to operate the company has borrowed money. As of March 31, 2016, the total long-term loans of the company stood at Rs 23,752 crore. Servicing these loans by paying interest on them, I guess is the major expense of the company now. I say guess because I don’t have access to the latest annual report of the company.

Banks keep giving loans to a dud company like Hindustan Photo Films because they know that they are ultimately lending to the central government, and what can be a more safer form of lending.

It is worth pointing out here that the government does not have an unlimited amount of money. Every rupee that goes towards funding the losses of companies like Hindustan Photo Films, is money that does not go towards more important things like education, health, or affordable housing, for that matter.

Also, a normal excuse offered on keeping a loss-making public sector enterprise going is that so many people are employed. Over and above the direct employment, there is a certain ecosystem that the public sector enterprise feeds into and helps that ecosystem as well. But in this case, this logic fails given that there are only 217 employees. They can be given a good voluntary retirement package and the company can be shutdown. Also, the physical assets of the company can be sold to repay the debt that has been accumulated. For starters, the company has 472 constructed homes in its township.

This is low hanging fruit that the Modi government can easily cash in on, if it wants to. Why this hasn’t happened up until now, on that your guess is as good as mine.

The column originally appeared on Equitymaster on May 30, 2017.

When It Comes to Creation of Jobs, We Agree and Disagree with Amit Shah

amit shah

The BJP president Amit Shah late last week said: “We have tried to give new perspective to employment as it is not possible to provide employment to everyone in a country of 125 crore people. We are promoting self-employment and the government has made eight crore people self-employed.”

Well it’s obvious that no government can create the huge number of jobs that India needs. But then politicians are not known to say the most obvious things. Hence, Shah deserves credit for saying what he did.

The number of jobs in central public sector enterprises has fallen over the years. Let’s take a look at Table 1.

Table 1: Employment and Average Annual Emoluments in CPSEs 

As can be seen from Table 1, the number of people employed by the central public sector enterprises has fallen over the last decade.

Now how do things look for the central government employees? On January 1, 2006, the central government had a sanctioned strength of 38.3 lakh. Against this, it had 32.7 lakh employees on its rolls. By January 1, 2010, the sanctioned strength had gone up to 38.9 lakh, while the number of employees had fallen to 32.3 lakh.

By January 1, 2014, the sanctioned strength had risen to 40.5 lakh, whereas the number of employees had risen marginally to 33 lakh. So, between 2006 and 2014, the central government basically added around 28,000 jobs.

Over and above this, the various state governments employ around 72 lakh individuals. Hence, the ability of the government to create jobs is limited. This does not help given that around one million Indians are entering the workforce every month. Hence, the economy needs to be creating 1.2 crore jobs every year, and that is clearly not happening.

In fact, the sad state of the Indian jobseeker can be made out from something I write in my new book India’s Big Government-The Intrusive State and How It is Hurting Us: “Only 60.6 per cent of the individuals who were available for work all through the year were able to get work for the entire year. In rural areas, this figure was at 52.7 per cent. This basically means that close to half of rural India cannot find work for all 12 months of the year.” These numbers were true for 2015-2016.

Further, the situation on this front is more or less the same since the last survey was carried out, in 2013-2014. As per the last survey, 60.5 per cent of individuals who were available for work all through the year had been able to find work for that entire year. In rural areas, this figure was at 53.2 per cent. The figures are more or less similar to those of the latest survey.

Last week Shah talked about self-employment and the government having made 8 crore people self-employed. In the next breath he also said: “There is no system to find out the exact availability of jobs in the country.” So that makes us wonder, where did the 8 crore number come from?

Also, Shah in his statement tried to pass-off self-employment as something unique to the current government. Self-employment is what almost every Indian who does not find a job, ends up with.

As Abhijit Banerjee and Esther Duflo write in Poor Economics: “The sheer number of business owners among the poor is impressive. After all, everything seems to militate against the poor being entrepreneurs. They have less capital of their own (almost by definition) and… little access to formal insurance, banks and other sources of inexpensive finance…. Another characteristic of the businesses of the poor and the near-poor is that, on average, they are not making much money.”

The point here is that a large part of the workforce is not self-employed by choice but are self-employed because they have no other option. Banerjee and Duflo call them ‘reluctant entrepreneurs’. This can be made out from the fact around 46-47 per cent of the Indian workforce is self- employed.

The fact that Indians are reluctant entrepreneurs also becomes clear from some data highlighted in the National Manufacturing Policy of 2011. It estimated that the number of Small and Medium Enterprises (SMEs) in India stood at over 26 million (2.6 crore) units. They employed around 59 million (5.9 crore) people.

This means that any SME, on an average, employed 2.27 individuals. The Boston Consulting Group estimated that 36 million (3.6 crore) SMEs (or what it calls micro-SMEs) employ over 80 million (8 crore) employees. This means that any SME, on an average, employs 2.22 individuals. These firms are responsible for 45 per cent of the manufacturing output of the country.

What this clearly tells us is that the size of the average Indian manufacturing firm is very small. This is a good proof of the fact that most Indians getting into entrepreneurship do so because they don’t get jobs. They start small and continue to remain small. One reason lies in the fact that their business does not generate enough capital to expand.

The second reason lies in the lack of ease of doing of business. Any firm looking to grow soon runs into a maze of rules and regulations and corrupt bureaucrats appointed by both state and central government. Jobs are created when small firms start to grow big and recruit more people.

As an OECD (Organisation for Economic Co-operation and Development) research paper points out: “SMEs (small- and medium-sized enterprises) account for 60 to 70 per cent of jobs in most OECD countries, with a particularly large share in Italy and Japan, and a relatively smaller share in the United States. Throughout, they also account for a disproportionately large share of new jobs, especially in those countries which have displayed a strong employment record, including the United States and the Netherlands. Some evidence points also to the importance of age, rather than size, in job creation: young firms generate more than their share of employment.”

Hence, jobs are created when small firms grow. And that clearly isn’t happening in India. The labour laws continue to remain as screwed up as ever. And so does the ease of doing business. On that front Shah’s government has barely managed to move.

When it comes to creating jobs, the government can at best act as a facilitator and help the private sector and individuals create jobs. But that facilitation is easier said than done.

Postscript: I recently did a podcast with the writer Amit Varma who is currently the editor of the Pragati magazine, on The Coming Jobs Crisis. Most of what I spoke was based on my new book India’s Big Government-The Intrusive State and How It is Hurting Us. You can listen to the podcast here.

The column originally appeared in Equitymaster on May 29, 2017.

Why Demonetisation Did Not Hurt Modi

narendra_modi

Later this week, the prime minister Narendra Modi will complete three years in office. In the recent past, there have been a spate of articles analysing the performance of the Modi government.

The general conclusion seems to be that the prime minister continues to remain politically popular. The recent wins of the Bhartiya Janata Party in the Uttar Pradesh state assembly elections and the Delhi municipal elections, is evidence of the same.

Over and above this, there has been a lot of analysis around the impact of demonetisation, as more data becomes available. Most data show that the economic impact of demonetisation has been negative. For all the trouble that people were put through, the income tax department hasn’t been able to identify much of black money.

Further, barely any fake currency was identified during the process of demonetisation. Digital transactions peaked in December 2016 and have fallen since then. Hordes of informal businesses were shut down and many people lost their jobs, in the process. And if all this wasn’t enough, on some days ATMs still run out of cash.

Nevertheless, despite all this Modi continues to be a popular prime minister. What is happening here? The negative economic environment created in the aftermath of demonetisation hasn’t impacted the prime minister.

Narendra Modi is what political scientists call a populist leader. What is the definition of a populist leader? Jan-Werner Müller, a professor of politics at Princeton University, defines this in his book What is Populism?

First and foremost “it is a necessary but not sufficient condition to be critical of elites in order to count as a populist”. Over and above this, there are other factors that go into the making of a populist leader like Modi is.

As Müller writes: “Populists claim that they, and they alone, represent people… The claim of exclusive representation is not an empirical one; it is always distinctly moral. When running for office, populists portray their political competitors as part of the immoral, corrupt elite; when ruling, they refuse to recognise any opposition as legitimate. The populist logic also implies that whoever does not support populist parties might not be a proper part of the people—always defined as righteous and morally pure.”

A populist leader also likes cutting out the middleman. This means relying as little as possible on party organisations and the media, which acts as intermediaries between party organisations and the people.

This explains why Modi chose to directly address the nation on Doordarshan while announcing demonetisation on November 8, 2016. He spoke to the nation through the mann ki baat programme on radio on November 27, 2016. He addressed the nation again on December 31, 2016.

The focus of the message delivered was on how black money of the morally corrupt elite was hurting India big time and how important it was to tackle this problem on a war footing on an immediate basis. By doing this a situation of a crisis was created.

As Müller writes: “A “crisis” is not an objective state of affairs but a matter of interpretation. Populist will often eagerly frame a situation as a crisis, calling it an existential threat, because such a crisis then serves to legitimate populist governance. Put differently, a “crisis” can be a performance, and politics can be served as a continuous stage of siege.”

And this direct talking by populists attacking the so called morally corrupt elite goes down well with the true people, something which all the data and the numbers offered against decisions made by them can’t do anything about.

As Müller writes: “Populists ultimately appeal to a certain symbolic rendering of the “true people,” the appeal of that image will not vanish automatically when voters are presented with a some set of correct statistics about a particular policy area”.

And that best explains why demonetisation was a politically popular decision though numbers clearly show that it hurt the Indian economy.

The column originally appeared in the Bangalore Mirror on May 24, 2017

Of “Shaky” Demonetisation Statistics, Arun Jaitley and Black Money

We don’t live in a perfect world. And given this, governments like to showcase the positive impact of the decisions they make, all the time. Sometimes, they get very desperate in the process.

Take the case of the economic impact of demonetisation. Most data now coming out clearly shows that the decision did not have a positive impact on the Indian economy. It might have helped the Bhartiya Janata Party to win the Uttar Pradesh assembly elections, but that doesn’t necessarily make it a right decision on the economic front.

Nevertheless, the Modi government would like us to believe that demonetisation has helped the country on the economic front. Early last week the finance minister Arun Jaitley said that “more than 91 lakh people were added to the tax base due the result of the actions taken by the income tax department.”

It was later clarified that 91 lakh people were added to the tax base in 2016-2017(i.e. between April 1, 2016 and March 31, 2017). As per Jaitley’s statement 91 lakh individuals were added to the tax base post demonetisation, which is incorrect.

Meenakshi Goswami, Income Tax Commissioner and the official spokesperson of the Central Board for Direct Taxes (CBDT), told NDTV later in the week that91 lakh was the total number of new taxpayers enrolled in the financial year 2016-2017.”

Now this makes things interesting. On the face of it, the addition of 91 lakh individuals to the income tax base sounds like a huge number. But when we are talking about any increase or decrease, a number should never be viewed in isolation.

The trouble is that we don’t have long term data on this front because of a change in the definition of “tax base” and “new tax payer added during the year”. The annual report of the ministry of finance for 2015-2016 points out that new taxpayers “added during the year 2014-15 is 76,04,154”. This basically means that 76 lakh new taxpayers were added during 2014-2015. I couldn’t find any data for 2015-2016. Now compare the 91 lakh additions in 2016-2017 to 76 lakh additions in 2014-2015, and suddenly the number doesn’t seem too high, given that no demonetisation was carried out in 2014-2015.

Even if the government doesn’t do anything, taxpayers get added every year, especially when the minimum tax slab continues to remain the same. In 2014-2015, the minimum tax slab was Rs 2,50,000, which is where it continues to be. This basically means that inflation alone would have ensured that more people came into the tax bracket and thus increased the tax base.

Over and above this, as the economy grows and people earn more, more people come into the tax bracket.

Once we take these factors into account, the addition of 91 lakh taxpayers suddenly doesn’t sound much, especially taking into account the disruption that demonetisation caused through the length and the breadth of the country.

Further, Sushil Chandra, chairman of CBDT said that between November 2016 and March 2017, the search actions of the income tax department revealed an undisclosed income of Rs 16,398 crore. On the other hand, the surveys had led to a detection of Rs 6,746 crore during the same period.

Again, if we look at these numbers in isolation, they sound like a lot of money. But that doesn’t turn out to be the case if we look at numbers over a period of time. Take a look at Table 1. It shows the undisclosed income admitted to and detected during the search operations as well as surveys conducted by the income tax department over the last few years.

Table 1: Undisclosed income

Financial Year Number of groups searched Undisclosed income admitted (in Rs Crore) Number of surveys conducted Undisclosed income detected (in Rs Crore) Total undisclosed income (in Rs Crore)
2012-2013 422 10,291.61 4630 19,337.46 29,629.07
2013-2014 569 10,791.63 5327 90,390.71 1,01,182.34
2014-2015 545 10,288.05 5035 12,820.33 23,108.38
2015-16 445 11,066.24 4422 9,654.8 20,721.04
2016-17* 222 6,304.71 977 17,62.51 8,067.22

*Up to September 2016 in case of search numbers and August 2016 in case of survey numbers
Source: Ministry of Finance Annual Reports and the Press Information Bureau
The numbers for 2016-2017 are incomplete. But there is enough detail that lets us analyse the issue. Between April and September 2016, the total undisclosed income (or black money) admitted through search operations of the income tax department stood at Rs 6,304.71 crore. The undisclosed income detected through surveys conducted between April and August 2016 had stood at Rs 1,762.51 crore. If we add these numbers we get Rs 8,067.22 crore.

Between November 2016 and March 2017, the search actions of the income tax department revealed an undisclosed income of Rs 16,398 crore, as pointed out earlier. On the other hand, the surveys had led to a detection of Rs 6,746 crore during the same period. Adding both these numbers we get Rs 23,144 crore. Adding this to the earlier Rs 8,067.22 crore, we get around Rs 31, 211 crore.

This is the total undisclosed income identified by the income tax department during the course of 2016-2017. The number is incomplete because the information for the month of October 2016 is missing in case of search operations and information for the months of September-October 2016 is missing in case of survey operations.

Nonetheless, it is a good ballpark number to work with. Hence, the total amount of undisclosed income or black money identified by the income tax department in 2016-2017 stood at more than Rs 31,211 crore.

Is it such a big deal? Look at Table 1. The total amount in 2012-2013 had stood at Rs 29,629 crore. This amount hasn’t been adjusted for inflation. It is safe to say that in inflation adjusted terms more undisclosed income was identified by the income tax department in 2012-2013 than in 2016-2017. In 2013-2014, the number stood at Rs 1,01,182 crore, which is significantly more than 2016-2017. And it is worth remembering here that these numbers happened without demonetisation. In fact, as the numbers clearly show the efficacy of the income tax department when it comes to identification of black money has come down since 2014-2015.

To conclude, the rosy picture of demonetisation that the government is trying to paint, is really not true. The more data we look at the clearer this becomes.

Postscript: I recently did a podcast with the writer Amit Varma who is currently the editor of the Pragati magazine, on the Right to Education and how it has screwed up our education system. Most of what I spoke was based on my new book India’s Big Government—The Intrusive State and How It is Hurting Us. You can listen to the podcast here.

The column originally appeared in Equitymaster on May 22, 2017.

New IIP Shows Demonetisation Slowed Down Indian Manufacturing Growth Big Time

India_textile_fashion_industry_workers

India has a new Index of Industrial Production (IIP). It is bigger and according to economists who track such things, it is better than the previous one. The IIP basically gives growth estimates of three sectors-manufacturing, mining and electricity. The manufacturing sector forms more than three-fourths of the IIP.

The base year for the new IIP has been changed to 2011-2012 from the earlier 2004-2005. This has been done to capture the changes in the industrial sector that have happened over a period of time and “to also align it with the base year of other macroeconomic indicators like the Gross Domestic Product (GDP), Wholesale Price Index (WPI)”.

Like any other index, the IIP tracks various items that make for the manufacturing, mining and electricity sectors. These items need to be changed or relooked at from time to time in order to ensure that the IIP continues to maintain a representativeness of the manufacturing, mining and electricity sectors in particular and the industry as a whole in general.

The new IIP has a total of 809 items in the manufacturing sector. The earlier one had 620. While, the number of items which constitute the manufacturing part of IIP have gone up, 124 items have been removed as well. These include items like gutka, calculators and colour TV picture tubes. Items like cement clinkers, medical and surgical accessories, refined palm oil etc., have been added. Along similar lines, the electricity sector now includes data from the renewable energy sector as well.

Over and above this, there has been an increase in number of factories in panel for reporting data and closed ones have been removed. All in all, these steps have been taken in order to ensure that the new IIP is a better representation of industry than the old one was.

Given that, items that constitute IIP have change majorly, it is not surprising that the growth figures of IIP have changed as well. Take a look at Figure 1. It plots both the new IIP and the old IIP growth rates over the last half decade, April 2012 onwards.

Figure 1: 

One look at Figure 1 is enough to tell us that the old IIP and new IIP are different beasts altogether, though both are very volatile. Now take at data from March 2013. As per the old IIP series, the growth was at 3.5 per cent. The new IIP series puts the growth at 15.1 per cent. That’s how different the old and the new IIP are.

In fact, as per the new IIP, the industrial growth stood at 3.3 per cent in 2014-2015, the last year of the Congress led UPA government. As per the old IIP the growth had stood at – 0.1 per cent. Hence, we can conclude that the state of the industry in the last year of the Congress government wasn’t as bad as it seemed at that point of time. It’s just that the old IIP may have no longer remained a good representation of the Indian industry.

In fact, the new IIP shows that industrial growth picked up in 2016-2017, the last financial year. The growth stood at 5.1 per cent. As per the old IIP the industrial growth was at 0.6 per cent, during the course of the year. What this also tells us is that the two IIPs are as different as chalk and cheese.

There is an interesting trend that the new IIP catches on to in the manufacturing sector. Manufacturing makes up for 77.6 per cent of the new IIP as against the 75.5 per cent in the old one. Take a look at Table 1.

Table 1: Manufacturing Growth

Period Manufacturing Growth(in %)
Dec 2012 to Mar 2013 9.4
Dec 2013 to Mar 2014 3.7
Dec 2014 to Mar 2015 3.2
Dec 2015 to Mar 2016 4.9
Dec 2016 to Mar 2017 1.6

Source: Centre for Monitoring Indian Economy.

The manufacturing growth between December 2016 and March 2017 stood at 1.6 per cent. This has been the slowest in comparison to the same period in previous years. Why is this the case? The one word answer to this is demonetisation. The Modi government announced demonetisation of Rs 500 and Rs 1,000 notes on November 8, 2016, and sent the economy into a tailspin. The interesting thing is that the average manufacturing growth between April 2016 and October 2016 had stood at 6.9 per cent. This signalled the revival of the manufacturing sector after having grown by around 3 per cent in 2015-2016 and 3.8 per cent in 2013-2014.

Demonetisation managed to scuttle that revival in this growth. Also, it is worth pointing out here that the IIP data is collected from “entities in the organised sector units registered under the Factories Act, 1948”. This means that the unorganised sector is not covered. And as I have often written in the past, the impact of demonetisation on the unorganised sector has been far greater.

Up until now, the government has refused to admit that demonetisation has had a negative impact on the economy (Subscription Required). I guess it’s time it looked at the new IIP numbers to realise the obvious.

(The column was originally published in Equitymaster on May 16, 2017)