India: One year after demonetisation, economy in shambles as trust in govt undermined

  • While the immediate impact of demonetisation was seen in the long queues outside ATMs and felt through acute cash shortage, its 1-year anniversary is an appropriate vantage point to assess the less visible and generalised effect on the economy of what was easily the most disruptive measure post-Independence.
  • The difficulty in making a cost-benefit analysis is that the move was not purely economic, given the fact that the Reserve Bank of India had no role in the decision, as testified by former Governor Raghuram Rajan.
  • Demonetisation comes across more as a measure of political economy with the declared objective of curbing black money and countering counterfeiting and terror finance, and which appeared to have paid political dividend to Prime Minister Narendra Modi in the Uttar Pradesh elections earlier in 2017.
  • The informal sector transacts entirely in cash and was the hardest hit by demonetisation, which withdrew 86% of currency from circulation. Former Chief Statistician Pronab Sen had said in Mar 17 that once the informal sector numbers came in, the growth rate could go below 6.5%, which turned out to be close to the actual figure.
  • This was not too far from former Prime Minister Manmohan Singh’s prediction that the economy would be hit by around 2% because of the note ban. Rating agency ICRA said in a note earlier in 2017 that “since the early estimates of quarterly GVA rely heavily on available data from the formal sector, which is expected to have weathered the note ban better than the informal sector, the 4Q17 projected GVA growth of 6.6% may not fully capture the impact of the note ban”.
  • Former RBI Governor Raghuram Rajan, who, on being asked by Modi for his informal opinion, had said the costs of such a measure would outweigh any long-term benefits, while there were less costly alternatives to achieve the stated goals of demonetisation.
  • Citing the cost analysis by metrics of demonetisation done by JP Morgan, Rajan said the GDP took a hit of around 1.5%, which translates to a sum of IR2tr.

External Link : http://www.financialexpress.com/economy/one-year-of-demonetisation-economy-shaken-gdp-hurt-trust-in-government-undermined/902782/

23-Oct-2017


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