Indian Economy Paying Hefty Price for Demonetisation: Kaushik Basu

Growth in gross valued added terms grew at 5.6% in the first quarter of the current fiscal, the lowest in 3 years.

The slowdown in India’s economy in the first quarter is largely due to the impact of demonetisation extending into the new fiscal, World Bank's former chief economist Kaushik Basu told Bloomberg in an interview.

The country’s gross domestic product grew 5.7 percent while the growth in gross valued added terms grew at 5.6 percent in the first quarter of the current fiscal, the lowest in three-years. Basu believes that downturn is more than what was anticipated.

Responding to a question on the government's miscalculation of the amount of black money in the system, the former chief economic adviser of India said, “What is particularly shocking is 99 percent of the junked Rs 500 and 1,000 notes have returned to the banking system.”

On the whole, Basu said, the government’s decision to demonetise old Rs 500 and Rs 1,000 currency notes in November last year was misplanned and in poor judgement, and the country is paying a hefty price in terms of its economic growth.

However, he believes that the shock will wear off after two quarters unless the government makes a “mistake” like demonetisation again. He expects the economy to recover by 2018.

Basu’s Big Picture On India

1. The bigger worry for India is export promotions. Basu says the government needs to focus more on policy initiatives focussed on fiscal and monetary interventions to boost exports.
2. The Indian rupee seems to be artificially appreciating which is hurting the country’s export capacity; the currency, therefore, needs to correct.
3. India needs to move to lower interest interest rates in line with other global peers in order to give a boost to many sectors.