Carpet Bombing vs Surgical Strikes

Some have called it a surgical strike on black money while the Supreme Court labelled it ´carpet bombing´. Yes, we are talking demonetisation, the topic of the day, and the target of this attack are black and counterfeit money. The difference between the two modes of attack is basically in the extent of collateral damage, and judging by this criterion alone, the Supreme Court´s description seems to be more apt.

Let us look at some relevant numbers. A paltry 6 to 8 per cent of the black wealth is held as cash, the rest being held in the form of gold, forex, property and other offshore assets, according to statistics released from Income-Tax Dept´s data. How much of this 6 per cent of black economy can we trap through this demonetisation? I suspect a very insignificant fraction. Even if, optimistically speaking, we can isolate 20 per cent of this black cash, (which seems more and more unlikely) it will mean a negligible 1.2 per cent of our nation´s black wealth! According to social media, there are at least 14 different well-publicised methods of converting black money into white and depositing the same into bona fide bank accounts through loopholes left wide open by the government. Out of the Rs 14 lakh crore of demonetised currency, Rs 11 lakh crore would be in circulation, the rest being in the banking system at any given point of time. Of this, as we go to press, upwards of Rs 11.5 lakh crore have been already safely deposited into banks, and it is likely that bulk of the remaining notes will also come into the banks, all as white money, by the 30th December deadline. If that were to happen, one can well judge the efficacy of this drive, at least on the count of removing black money, which happens to be the raison d´Otre of this exercise. This will also mean that not much of RBI´s existing liabilities can be extinguished and given over to the government as special dividend. Coming to the second target of counterfeit currency, an even paltrier 0.023 per cent of cash in circulation is suspected to be forged, according to government- commissioned studies carried out by the Indian Statistical Institute. Going after Rs 14 lakh crore to kill 400 crore, seems to be the classical copybook example of carpet bombing.

What is done, cannot be undone. This has to be endured. The infrastructure sector also, like most other sectors, cannot avoid the effects of this huge intervention of demonetisation. Let´s not get bogged down in very transient and immediate issues like temporary stoppage of toll collections on roadways and parking fees in airports, and look at major implications. Overall, the GDP growth in the last two quarters of the current fiscal is surely going to be adversely impacted – some say that the GDP of the year will be depressed by 1 to 2 per cent, some go as far as to say that GDP numbers for FY 17 will fall to as low as 3.5 per cent. So, what is in store for the infra sector ?

Traditionally, the construction industry transacts a lot in cash for payments of building materials, labour wages, service fees, etc. And since construction industry helps create most of our infra assets, speed of construction could slow down and this could be a dampener. On the other hand, the government may inject a lot of money from the expected ´extinguished liability´ of the RBI into infrastructure projects, which could turn out to be a great stimulus, not only for this sector, but for the whole economy. There is one more interesting aspect that bears consideration.

Infrastructure assets are capex-heavy, and infra companies are therefore overly sensitive to fluctuations in interest rates. Experts are of the opinion that with all this liquidity in banks, the interest rates could go down, although some others hold diametrically opposing viewpoints. If interest rates are in fact, reduced, it is a big, big good news for infrastructure entities. We´ll have to wait and watch out for this one.

Of course, in the very long term we are told to expect eradication of corruption and subjugation of black economy, as towering benefits of this currency switch. However, in the long run, we are all dead, aren´t we?