What’s happened to the Indian economy? From an aspiring 10% growth, we are struggling to do half of that. The mood is down. Consumers are not buying. Household savings are at a low. Corporates are not investing. Gold prices have fallen. Real estate is still comatose. Just the stock market has the steam to keep rising higher. Clearly, there is something deeper to this story—what’s going on with the Indian consumers, savers, investors and entrepreneurs? And why is the market up, when data on consumption, spending, confidence, jobs and growth shows only gloom. On one side, the reasons for this skid off the growth path are said to do with demonetization, a botched GST, the persistent bank NPA problems, the shadow banking mess and hardening of rules. The other argument looks at this being a result of an attempt to switch the Indian business model towards formalization. Whatever may be the reason for the skid, the result right now is a slump in the mood of the economic participants.

One way to think about this is to look at the problem from 30,000 feet and connect the macro dots, and the other is to try and stitch together a narrative based on conversations, interactions and stories gathered over a few months. One such story that has begun to emerge out of such conversations across a wide spectrum of stakeholders is this: a part of the discretionary spend in India has been linked to non-tax-paid money since most Indians do not see the sense of paying the government a share of their incomes (the number of individual taxpayers remains at a tiny 8 crore out of a population of 137 crore) and have found plenty of ways to stay out of the tax net, including multiple PANs, benami properties, cash payments for high-value goods like cars and so on. A large part of the circle of cash has been anchored in real estate—that was both the sump as well as the generator of more non-tax-paid cash and would lead to more discretionary spend in cash. The crackdown on corruption by the Narendra Modi government has created a strange situation where there is a circling of the cash economy using a multi-pronged approach so that cash and its use will come into visibility, but the root cause of cash—corruption—is not yet in check. The rates for violating a rule have actually gone up rather than down, rent seeking rates are up, the cash component in property deals is up rather than down (but it must be said that the availability of all white deals has improved) and the municipal, police and government corruption has not abated. So cash is still getting generated, but its use is now in question.

People with cash need to either spend or invest. But spends over a certain amount now need an identifier—PAN or Aadhaar—and while multiple PANs are still there, the tax-PAN-Aadhaar link makes it more difficult to use them. Benami large-ticket purchases in cash have not disappeared but are getting more difficult. People with cash seem to be responding with either reducing the value of their purchases or simply delaying it. If you can’t spend, then you need to invest it. Cash can go into gold or real estate, but even gold purchases over ₹2 lakh need a PAN number. Real estate is the last surviving sump of cash—this is one asset whose ownership is not linked to Aadhaar all over the country—but there has been an increase in the scrutiny in this space as well, especially with the Benami Transactions Act getting teeth. But the slump in the sector makes real estate a poor investment for those wanting to rotate their money. Also deals over ₹10 lakh need a PAN card. Again, the PAN, tax, Aadhaar link makes using multiple PANs difficult, though not impossible yet. So, is the money going to the stock market? Markets rise when investors put more money into it than take it out. The high valuations point to a thick pipeline of institutional and retail money through SIPs and a part of the real estate money that got tired and has begun to shift to the market. This money is now a part of the formal economy. And this money is hungry for an investment opportunity—look at the oversubscription of the IRCTC issue, in particular, and most other IPOs getting the money they need off the market.

But there is still plenty of money waiting on the side. What happens to the cash money? Will it come into the system or keep waiting? At the moment, it does look as if people are waiting. Waiting to see the old way come back where the circle of cash can resume and in the meantime they are just sitting on cash. While holding cash, they worry about the ₹2,000 note that could get replaced by the ₹1,000 one anytime. That they will find a way to convert that useless into a useful note one more time is sure, but the effort and cost is getting tiring. If the old way does not return, then this cash will have no option but to come back into the system through consumption and investments. Which will happen first is possibly the question on which India’s future as an economic power depends. Will this government be able to kick-start consumption to tide over the current slump and rekindle the economy, hold on to power for the cash economy to give up or will the push back against formalization find a political voice. I had thought that the 2019 election was that moment where the politics was going to define the economics, but it seems the wait is still on for the cash-wallahs on a political change that will bring back the cash way.

Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation

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