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Demonetization impact may take a few months to assess: CEA

April 19
11:29 2017

WASHINGTON: India’s high economic growth rate last fiscal may not reflect the actual impact of demonetization particularly on the informal sector, and it may take a few months to assess its real fallout, Chief Economic Adviser Arvind Subramanian has said.

He, however, said the impact of the sudden withdrawal of 86 per cent of currency is “pretty much over” as the newly-printed 500 and 2,000 rupee notes hit the banking system, replacing the old 500 and 1,000 rupee notes that were voided overnight on November 8, last year.

India is estimated to have clocked a surprising 7.1 per cent GDP growth in 2016-17 fiscal with a 7 per cent growth rate in the October-December quarter, notwithstanding demonetization.

“There (has) been an impact of it (demonetization) on the informal sector which would be difficult to assess. But, I think it is pretty much over. It was related to cash in the economy. The cash is back, so hopefully those short-term costs are pretty much behind us,” Subramanian said at the Centre for Global Development, a top American think tank.

Subramanian, who is here to attend the annual Spring Meetings of the International Monetary Fund and the World Bank, said the actual impact of demonetization is not reflected in the GDP numbers.

“That being said, I do think that the headline number might not give the actual impact of demonetization. I think we will get to know over the course of the next few months what the actual impact is going to be,” he said.

The informal sector, which does the bulk of its transactions in cash, had borne the biggest brunt of demonetization.

“A lot of impact of demonetization is really a case of too early to tell and (we) will find out over the course of (the) next few months, except for the impact on the informal sector, which I do not think we are really going to get a handle on at all,” he said.

Subramanian said that the popular response to this policy of Prime Minister Narendra Modi has “humbled him” in his understanding of Indian politics and to some extent economics as well.

“…What you have seen on demonetization in terms of the popular response…it certainly humbled me in my understanding of Indian politics and to some extent Indian economics,” he said.

Responding to a series of questions on demonetization, the chief economic adviser said that it was over and it signaled a regime change.

Demonetization on the part of the government does signal a “regime shift” which says “if you are not going to be compliant on your tax payments, the government is going to make extra efforts to do so”, he said.

So, it is kind of signaling a regime change, he added.

Acknowledging that a lot of demonetization was part economics, part politics, Subramanian said it does raise some really interesting questions about the popular response to demonetization.

He conceded that this was a step towards digitization and broadening of the tax base.

“It is really about creating an infrastructure, using technology to better deliver government services in the long run,” he said.–PTI

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