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The UPA’s real growth story

That black money induced rising asset prices leading to jobless GDP growth is a phantom argument.

December 19, 2016 12:15 am | Updated December 04, 2021 10:50 pm IST

Former Prime Minister Manmohan Singh penned a poignant article (“Making of a mammoth tragedy”, The Hindu , December 9) warning us of the impending pitfalls of the demonetisation exercise. In a response, Rashtriya Swayamsevak Sangh (RSS) ideologue S. Gurumurthy wrote about the economic performance of the National Democratic Alliance government (1999-2004) and the United Progressive Alliance-1 government (2004 to 2009), sidestepping the entire issue of economic and social costs of demonetisation or its benefits, if any (“Not a tragedy but the remedy”, December 13).

All about a decade

Mr. Gurumurthy’s argument goes like this: GDP grew rapidly from 2004 to 2009. Asset prices (stock markets, gold, real estate) also grew rapidly during this period as did the share of high denomination currency notes in circulation. He then uses a misleading number for jobs generated in this period to make the point that GDP growth in this period was “fake” growth. He then argues that huge amounts of ‘black cash’ led to asset price inflation which led to high GDP growth. This bizarre argument then goes on to justify how invalidating high denomination currency notes overnight was the remedy for this surfeit of “black cash”. Mr. Gurumurthy misdiagnoses a non-existent problem for which apparently the demonetisation initiative is a remedy.

India’s GDP growth was indeed 50 per cent higher in 2004 to 2009 (UPA-1) vis-à-vis 1999 to 2004 (NDA-1). Asset prices also rose sharply between 2004 and 2009. These are valid, independent observations in themselves and are natural correlates in most economies. This does not imply that rising asset prices were the reason for high GDP growth — correlation is not causation. Further, hard data refute the allegation that it was merely wealth effects of asset price inflation that drove GDP growth during UPA-1. India manufactured 5.5 crore new automobiles in this period compared to 2.8 crore in 1999-2004. India produced 257 million tonnes of steel versus 159 million tonnes during the tenure of NDA-1; 260 million sq. m of textile were manufactured during UPA-1 versus just 204 million sq. m during NDA-1. All these are real economic outputs that add up to GDP growth. Almost every output indicator — foodgrains, fertiliser, electricity, cement, crude oil — grew 1.5-2 times during UPA-1. All this output did not come out of thin air but out of real economic activity.

Stock prices rose sharply in this period. But that was because revenues and earnings of companies also grew significantly. Turnover of the BSE 500 companies grew 15 per cent annually during NDA-1. It grew 22 per cent during UPA-1. Profits of these companies grew 24 per cent during NDA-1 while they grew 28 per cent during UPA-1 despite the global economic crisis of 2008. Stock markets will naturally rise to reflect these increased earnings. Propelled by strong GDP growth, households became richer and bought twice as much gold during UPA-1 as during NDA-1. It is thus not a surprise that gold prices also rose rapidly. These data amply prove that the assertion that GDP growth during UPA-1 was driven only by asset price inflation is wild and baseless.

Contrary to Mr. Gurumurthy’s claims, robust economic activity during 2004-2009 also resulted in significant job creation in the organised sector. His claim that 60 million jobs were generated during NDA-1 but only 2.7 million during UPA-1 is misleading. The 60 million figure is based on the National Sample Survey Organisation (NSSO) data where some sample households are asked if they are employed or not. Notice there is a subtle but important difference in terminology used by the NSSO surveys and Mr. Gurumurthy’s position — employment versus jobs. According to the NSSO survey, there was an increase in employment of 60 million people during NDA-1. It turns out that a significant part of this increase was actually people claiming to be employed in agriculture. Now, that is not the same as “generating new jobs”, is it?

When we say jobs, we usually mean a salary-paying formal or informal sector job, not self-employment in agriculture. The same NSSO survey report also shows a decline (yes, not increase) of 1.7 million people in organised public and private sectors during NDA-1. In other words, there were net reductions in organised sector employment, that is, jobs. This inconvenient statistic does not find a mention in Mr. Gurumurthy’s article. The NSSO survey data also show how during 2004-10, there was a net increase of 2.3 million people in organised sector jobs, implying UPA-1 created more “jobs” than NDA-1. If one needs to look at empirical data for jobs numbers, one indicator is provident fund (PF) registrations. Most permanent salary-paying jobs in the formal sector entail PF payments to employees. The UPA-1 period had an increase of nearly 2 million PF registrations compared to less than a million during the NDA-1 period. Whichever way one looks at the data, the claim that there were 30 times more “jobs” created by NDA-1 than UPA-1 is specious.

Let’s come to the next claim that high denomination notes rose to unusually high levels during UPA-1. India is a cash-dominated economy where more than 90 per cent of all consumer transactions happen in cash. So, it is natural that as economic activity increases and GDP grows robustly, demand for cash will grow commensurately as will the share of high denomination currency, unless there has been a structural change in India’s cash addiction. So, the right question to ask is: did high denomination currency grow disproportionately vis-à-vis GDP growth? The answer is no.

GDP growth and notes in circulation

The share of Rs.500 notes in circulation went from nearly 20 per cent in 1999 to 40 per cent in 2004, as GDP grew 1.4 times in this period. Similarly, the share of Rs.1,000 notes went from less than 1 per cent to nearly 10 per cent in this period. When GDP grew much more rapidly at 1.8 times between 2004 and 2009, the share of Rs.500 notes went from 40 per cent to only 45 per cent, but Rs.1,000 notes went from 10 per cent to 30 per cent. This is entirely in line with GDP growth, as a simple logarithmic growth analysis shows. High denomination notes account for about 85 per cent of all currency in circulation in India. In China, they account for 87 per cent, and even in a far more cashless society such as the U.S., the share is 80 per cent. So the claim that India’s high denomination notes is disproportionately large is baseless. Mr. Gurumurthy does not find any problems in a 10-fold increase in the share of Rs.1,000 notes and a doubling in share of Rs.500 notes during NDA-1. But he thinks a similar increase for a much higher GDP growth during UPA-1 is a sign of ‘black money roaming around fuelling fake growth’.

In essence, the story that black money induced rising asset prices which led to high GDP growth with no jobs is a phantom one, devoid of any basis. This phantom story is then used to justify an unprecedented, ill-conceived, overnight invalidation of nearly 90 per cent of a country’s currency. Dr. Singh expressed genuine concern over the demonetisation policy, its objectives, implementation and potential costs. Is there anyone in the RSS or government who can clearly articulate the intended objectives, economic impact and measurable outcomes of this demonetisation exercise?

Rajeev Gowda is a Congress member of the Rajya Sabha. He has previously been a Director on the Central Board of the Reserve Bank of India and Professor at the Indian Institute of Management, Bangalore.

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