Former Chief Economic Advisor Arvind Subramanian has said that demonetisation was a “massive, draconian, monetary shock” that accelerated the decline in economic growth to 6.8%.
In his upcoming book, Of Counsel: The Challenges of the Modi-Jaitley Economy, Subramanian has said that the informal sector had to bear substantial costs due to the ban on high-value currency, IANS reported. The book will be released on December 5.
However, the former chief economic advisor, who quit his post in June, has not indicated whether he was consulted before the decision to ban notes worth Rs 500 and Rs 1,000 was taken. Prime Minister Narendra Modi announced the decision on November 8, 2016, and said it was intended to reduce corruption in the system.
“Demonetisation was a massive, draconian, monetary shock: In one fell swoop, 86% of the currency in circulation was withdrawn,” Subramanian wrote in the chapter The Two Puzzles of Demonetisation – Political and Economic. “The real Gross Domestic Product growth was affected by the demonetisation. Growth had been slowing even before, but after demonetisation, the slide accelerated. In the six quarters before demonetisation, growth averaged 8%, and in the seven quarters after, it averaged about 6.8%.”
Subramanian added that while there is no dispute over the fact that demonetisation slowed growth, the size of the reduction is up for debate. “After all, many other factors affected growth in this period, especially higher real interest rates, Goods and Services Tax implementation and oil prices,” the former chief economic advisor wrote, according to IANS.
A move like demonetisation would affect the informal sector the most, he has written. “…any squeeze in informal sector incomes would depress demand in the formal sector, and this effect [on GDP] should have been sizeable,” he wrote. However, he added that demonetisation may have enabled more people to shift from cash transactions to payments through electronic means.
He called demonetisation an “unprecedented move” which no country had carried out in “normal times”. The former chief economic advisor said other countries have either done it gradually or only during currency crisis, war or hyperinflation.
Subramanian said the adverse effects of demonetisation on the poor could have been seen as “unavoidable collateral damage” and added that the poor were probably willing to overlook their hardships, believing that the rich had lost more than them. However, Subramanian contended, “collateral damage” was avoidable.
“Understanding the political economy of demonetisation may require us, therefore, to confront one overlooked possibility – that adversely impacting the many, far from being a bug, could perhaps have been a feature of the policy action,” Subramanian wrote. He added that adversely impacting many people could have been “intrinsic” to the success of the policy.
Source – Scroll