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While the immediate impact of demonetisation was seen in the long queues outside ATMs and felt through acute cash shortage, its 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.
So 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 in 2017.
India's GDP during the past fiscal grew at 7.1 percent, at a rate lower than the eight percent achieved in 2015-16. In terms of gross value added (GVA), which excludes taxes but includes subsidies, the growth came in even lower at 5.6 percent over the GVA for 2015-16.
Chief Statistician TCA Anant sought to downplay the impact of the note ban, saying he "would caution against reading a single number that comes out after an event as being reflective of consequences of the event".
At the time of releasing the previous quarter's GDP, he had said that this was based on figures on industrial production and only on the advance filings of corporates.
The numbers, therefore, had not factored in the informal economy, which accounts for an estimated 45-50 percent of output in the Indian economy, and employs around 85 percent of the country's workforce. More importantly, this sector transacts entirely in cash and was the hardest hit by demonetisation, which withdrew 86 percent of currency from circulation.
At the same time, both the RBI and the International Monetary Fund (IMF) lowered India's growth estimates for 2016-17 by up to 1 percent, citing the impact of demonetisation.
This was not too far from former Prime Minister Manmohan Singh's prediction that the economy would be hit by around two percent because of the note ban.
Rating agency ICRA said in a note earlier this year 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 third quarter (October-December) projected GVA growth of 6.6 percent may not fully capture the impact of the note ban".
The IMF projected India to grow at 6.7 percent in 2017 and 7.4 percent in 2018, which are 0.5 and 0.3 percentage points less than the projections earlier this year, respectively.
The World Bank too, forecast that India's GDP may slow from 8.6 percent in 2015 to 7.0 percent in 2017 because of disruptions by demonetisation and the GST.
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.
Rajan at the launch of his book I Do What I Do said:
Citing the cost analysis by metrics of demonetisation done by JP Morgan, Rajan said the GDP took a hit of around 1.5 percent, which translates to a sum of Rs 200,000 crore.
"On the benefit side you have Rs 10,000 crore coming in, but you need a lot more taxes than that to really benefit," he said.
With demonetisation also designed to enlarge the tax base, an ex-IRS official's perspective on Modi's likely motive is provided by former Director of Revenue Intelligence BV Kumar, who writes in his book, "Underground Economy":
Demonetisation, after one year, does not look as rosy as it was painted out to be by the image spinners in the government.
(This article has been published in arrangement with IANS. The author Biswajit Choudhury can be reached at biswajit.c@ians.in. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.))
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