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How Demonetisation Destroyed Indian Jobs and 'Possibly' Helped Create Jobs Abroad

Sep 26, 2017

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The ill-effects of demonetisation are still coming to the fore. In this issue of the Diary, I will talk about how demonetisation destroyed Indian jobs and "possibly" helped create jobs abroad.

Before I get into explaining why I am saying what I am saying, a recap of some basic economics is necessary here.

At its most basic level, the gross domestic product(GDP), a measure of the economic size of a country, is expressed as Y = C + I + G + NX, where:

Y = GDP

C = Private Consumption Expenditure

I = Investment

G = Government Expenditure

NX = Exports minus imports

The point to remember here is that imports are a negative entry in the GDP formula. The more a country imports, its GDP falls to that extent. Having said that imports also represent consumer demand at the end of the day, even though that demand does not add to the country's GDP. For example, every time an Indian buys an electronic good manufactured in China, he is adding to the consumer demand but not to the GDP. Of course, he is adding to the Chinese GDP because exports are a positive entry into the GDP formula.

Hence, if we remove the imports of oil, gold and silver, from the total imports number (in dollars), what remains (i.e. non-oil non-gold non-silver imports) is a good indicator of consumer demand.

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Now let's take a look at Figure 1, which basically plots the year on year growth in the monthly non-oil non-gold non-silver imports. Hence, the non-oil non-gold non-silver imports in April 2017 went up by 42.5 per cent in comparison to the imports in April 2016. And that's how it is for all other data points in Figure 1.

Figure 1:

What does Figure 1 tell us? It tells that non-oil non-gold non-silver imports have grown at an extremely fast rate after October 2016. They are growing at rates at which they haven't grown for a couple of years. What is happening here?

As Jahangir Aziz, head of emerging market economic research, told Bloomberg Quint recently: "What we had also feared was the demonetisation would disrupt the supply chains that run through both the formal and the informal economies. And if those supply chains get disrupted, then the revival in demand would not get fulfilled by domestic production."

This basically means that demonetisation destroyed domestic supply chains. Without supply chains products can't move. This has resulted in consumer demand being fulfilled through imports.

This is clearly visible in the huge growth of non-oil non-gold non-silver imports. What this also means is that as demonetisation destroyed supply chains in India, it also led to a huge job destruction. If goods weren't moving, there was no point in producing them either. This meant shutdown of firms and massive job losses.

Further, by importing stuff that we used to produce in India earlier, we have helped the manufacturing business in foreign countries and in the process "possibly" helped create jobs there.

The irony is that one million youth are entering the workforce in India, every month. The economist Kaushik Basu had said in November 2016 that "[The] economics [of demonetisation] is complex & the collateral damage is likely to far outstrip the benefits."The impact of this complex economics is still playing out and along with the botched up implementation of GST, has pulled down non-government GDP growth to around 4.3 per cent.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

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16 Responses to "How Demonetisation Destroyed Indian Jobs and 'Possibly' Helped Create Jobs Abroad"

Pankaj Sharma

Sep 28, 2017

Dear Sir
At the outset I heartily appreciate and thanks for sharing your interesting posts based on deep research and data analysis. Though I read many of your posts but this is the first time I'm writing to you.

In this article you have mentioned 'This basically means that demonetisation destroyed domestic supply chains. Without supply chains products can't move. This has resulted in consumer demand being fulfilled through imports.'

My query related to this is that if supply chain is broken how come the imported products are reaching the customers. I mean demand of imported products is higher because of the higher consumption in India which means customers are getting it through the intact supply chain. Higher demand for imported products indicates that demonetization has adversely affected the manufacturing sector in India which has 'unemployment' as collateral damage.

Well that's my understanding but would request you to clarify on this.

Thanks again for your well researched and interesting reads

Best Regards
Pankaj Sharma

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mukul

Sep 27, 2017

What an idiotic analysis by the `STAR' economist!

Statistics 101 says, correlation does not mean CAUSATION. Here the author picks up one data point (rise in non-oil, non-gold, non-silver imports), takes some quote of one commentator (Jahangir Aziz) and comes to an earth-shattering conclusion that demonetization led to `destruction of domestic supply chains' and manufacturing/jobs moved to foreign countries. No, you don't need any detailed cause-effect analysis or in fact, any kind of analysis at all.

Wow! What intellectual laziness! Pick a data point and immediately jump to a pre-decided conclusion! Wonderful!

Like (3)

Ambrish Nigam

Sep 27, 2017

8090507334
Is Indian Economy & Its' fundamental more strong between 2014 & 2018?
The Real GDP No. (GDP-Inflations), Performance Analysis between 2000-2018?
No. of Jobs Created 2000-2018?
New Capital Creation 2000-2018?
No. of Bogus Currency Notes in Economy (I happen to get the information that on an average 2 notes per day were received by a medium size bank, happen to be bogus notes. How come during demonetisation the figures are none.

Last but not the least, a quick analysis reveals that during 2004-2009, a certain class of citizen were benefited by the growth in economy. they were

1. Land Buyers
2. Property Buyers(Not Home buyers). This class was playing on arbitrage with cash money in circulation
3. Cash investments in Gold
4. Stock Market

This class has been brutalised in last 3 years, more so post November 2016. The land price have fallen by 5%-40%. Most Developers facing the challenges in Loan Repayments, still they are reluctant, in lowering the price assuming, in case, they get a reversed Govt. in 2019, they will recover their notional damanges.

There has been a systematic campaign, in this regards.
My wife has been very sincere in bookkeeping our expenses, And there have been a moderate growth in earnings so the level of Expenses are not been affected, as part of household Consumption Basket. I have analysed evaluating my consumption basket, our total consumption has come down by over 7% (Real terms & Not annualised) post GST, It has declined by almost 3% post 2014 & from inflated expenses growth @ modestly 9% between 2004-2012.

These are some of the common analytical results of Demonetisation & NDA Govt's performance.

However if one look around, We see Big Luxury Showrooms, with a negligible foot counts, which used to have thin affluent crowd prior to demonetisation.

Some hard facts, If a person earns a thousand rupees or a million rupees, He / She values it. If someone earn by fooling others (be it corruption, black money, immoral trade practice, he lavishly expense out.)

This is purely reflected in the life style of some of the very rich Indians.

About FUEL - the owners of BMW, owner of Every New APPLE I-PHONE SERIES CRY&CRIB ABOUT FUEL PRICE.

But Lot of unorganised content comes to a conclusion that.

a. Demonetisation was Good
b. Will give rewarding results in 3-5 Years durations
c. Rome was not built in a day
d. Economy is poised to take a flip and if circumstances permitted, by 2021, we will see a GDP Growth of 12%+

Ambrish Nigam
+918826114305


Like (2)

KAUSHAL KUNWAR

Sep 26, 2017

What exactly is this non-oil non-gold non-silver imports component which have grown at an extremely fast rate after October 2016? The source of this data is a private organization? Are u sure about authenticity? Narrowing down to exact sectors where in import spurt has taken place would further provide reasons for such phenomenon. concrete supply chain disruption in specific sectors and regions based on authentic data should be established. Till then such tall claims are mere speculations.

You write a lot about one million youth entering the workforce in India, every month. Have you ever wondered why? Complete failure of our population control policies. First and foremost need of India is to have compulsory one child policy and Punitive measures for violators. For any govt creating such huge employment is mirage in face of such automation era. At least 30 Years down the line future generations wont suffer the same problem.

Before doing any miracle on any front, any govt in India must comply with the above required Population control legislation. This one act alone would propel India on all accounts i.e. Environment, Infrastructure (more would not be needed becoz of less population), Income inequality, Inflation control, Less speculation in asset classes i.e Reality, Less Public spending, Less air & water pollution etc. Existing Health care & education infrastructure would be sufficient to cater to lower Population.

Problem with India right now is all state's and central govt & even private businesses are busy expanding or augmenting the Infrastructure i.e. Roads, cities, Railways,Health, Education,Airports, Telecoms, Ports, Power Plants & distribution networks etc because of the ever increasing Population. Whatever Flyovers or highways we built to decongestant soon becomes congested. Whole mad race of Pig like population growth rate is creating huge pressure on environment and wildlife. Everybody is busy increasing the capacity i.e. Mines, Minerals, Textile, Auto, Banks, Oil n gas, Power to cater to ever increasing population.

The NET result is scary. We are draining mother nature of all resources,harming other species and making it a filth to live in. GDP may be growing but Gross Happiness Index is surely coming down.

There should be some estimate on the design capacity of net population that Indian geography can support? I believe never before in history we had such population pressure on our land. Its time to take the corrective action rather than waiting for the same to happen by 2040 or 2050. When complying to Paris agreement by 2030 is so important than why not compulsory population control? We don't need to stabilize India's population at 150 or 180 crores. We need to reverse the growth and bring it back to sustainable level of 25 to 30 crores. By now everybody knows quality matters and not quantity. US for an example having 3 times area and one fourth population beats us in almost all socio-economic indicators. We will contribute to world far more by this one legislation than by any other compliance of blah blah accord. We will become shining example to our other estranged brothers namely Pakistan and Bangladesh to follow the same.

Like (2)

R N Gokhale

Sep 26, 2017

Dear Sir,
1. I read your all articles with great interest and passion.They are comprehensive, interesting supported by statistics.I have treasured many. having said that It is also to put on record that this is the first time that some government had the guts and gumption to take a stand. The policies will show effect after a two years.
(a) How many shell companies were operational before and after.No media had the guts to expose them.
(b) How many builders and property developers had a dream run at the cost of citizens and nation.
(c) How the so called NGOs siphoned crores, no records of transactions, anti national activities.
(d) For the first time all transactions are getting on record and that is what is hurting the media,businesses, jewelers.
(e) How the jewelers plundered and cheated citizens.
2. I fail to understand one thing if earlier payments were made in cash why cant it be paid in cheques or direct transfers. Why cant acct be opened for every laborer, banks are not there but post offices were. Coop banks are there.
3. Everything will fall in place and things will show up in year or two years time frame. Our biggest enemy is our opposition in parliament and not outside. The day this equation will change everything will change.
Collectively we the citizens are convinced and ready to bear the pain.It is reflective in the election results.
4. We advise you to show a way forward.

Like (1)

Vikram Bhatt

Sep 26, 2017

If internal supply chain in India broke down, should movement of imported goods also not have got affected?
May be exact data on what was being imported during the period under consideration could clarify whether it was indeed replacement of local produce or something else.
Regards
Vikram Bhatt

Like (1)

N K SHARMA

Sep 26, 2017

Do we have a breakup of specific product categories where imports went up significantly or it increased across the board.

Like (1)

ramesh

Sep 26, 2017

It is very clear that growth will be impacted with big change in policies. These policies will give better results in long term, infact these are aimed for the same. Do not scare the people with these articles.

Like (1)

Sreekanth.S

Sep 26, 2017

First of all, I am a individual without allegiance to ANY Political Party or group. I am neither left or right oriented but Centre path. I have been observing that your column is biased and against the present central Government. I never say that what all they are doing is correct & Right. But some at least there are certain decisions and actions are correct and Right !! But you don't ever be honest enough to acknowledge them..
I read your column regularly and also of others but never seen a single article acknowledging the decision of the present Government.
Please watch the Video recording of the speech of Mr Gurumurthy. I am sure you know him.

Like (1)

Rajiv Gupta

Sep 26, 2017

We have always played spoilsport for ourselves whenever the going is good. Therefore, we are ourselves responsible for the mess. We used to speak about demographic dividend therefore we were fully aware of the need for jobs but then too we could not really do anything about it. This is simply despicable because even God does not help those who do not help themselves. Therefore, we have frittered away a very real opportunity. Up till now the cyber coolies were recruited by the software industry & a sizeable number of jobs were created but even that tap has dried up. As a matter of fact, automation is the need of the hour because it is highly impossible to compete against robots & jobs will be lost & not added at a very fast rate in any case. It would be better if we acknowledge the reality & do course correction. The demonetization was a very serious error with huge detrimental implications. The GST has compounded the problems further because GST is disruptive & outrightly detrimental to exports. Private investment is not picking up. Savings are reducing because of lower interest rates & share market is completely out of sync with reality & bubble territory because there are not many alternatives for getting a good return therefore people are flocking to SIP & this does not augur well because the fall will be harder to bear when the tide turns. All said, we are in for a very bitter surprise if we don't take appropriate action immediately.

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