RBI has moved to silence the critics of demonetisation – once and for all! In its latest report, titled “Macroeconomic Impact of Demonetisation- A Preliminary Assessment”, the central bank has said that the negative impact of demonetisation has been transient. “Demonetisation impacted various sectors of the economy; however, the adverse impact, in general, was short-lived as it was felt mainly in November and December 2016. The impact moderated significantly in January and dissipated by and large by mid-February 2017, reflecting an accelerated pace of remonetisation,” says RBI in the report.
According to RBI, GDP growth is expected to “recover significantly” in 2017-2018 and demonetisation is expected to have a positive impact over the medium to long-term. “Overall, demonetisation has had some negative macroeconomic impact, which, however, has been transient as remonetisation has moved at an accelerated pace in last twelve weeks. More importantly, demonetisation is expected to have a positive impact over the medium to long-term. In particular, there is expected to be greater formalisation of the economy with increased use of digital payments,” notes the central bank. “The reduced use of cash will also lead to greater intermediation by the formal financial sector of the economy, which should, inter alia, help improve monetary transmission,” it adds.
“The impact (of demonetisation) on GVA growth, albeit modest, was felt in Q3 of 2016-17. The organised sector remained largely resilient. The latest CSO estimates suggest that the impact of demonetisation on GVA growth in Q3 of 2016-17 was felt mostly in real estate and construction, but because of stronger growth in agriculture, manufacturing, electricity, and mining, the overall impact on GVA growth was modest. With remonetisation progressing at a fast pace, the adverse impact is expected to have reversed from the latter part of Q4 of 2016-17. GVA growth is estimated to recover significantly in 2017-18,” believes RBI.
Talking about the impact of demonetisation on various sectors and segments, RBI says, “Reflecting the expected slowdown in sales and earnings, share prices of cash intensive sectors such as automobiles, FMCG, consumer durables and real estate declined sharply in November-December 2016. Most of these sectors have more than recovered the lost ground subsequently. In fact, the consumer durable sector outperformed the overall increase in the stock market post-demonetisation. The impact on the forex market was transitory.” “There has been a significant improvement in the use of digital modes of payments post demonetisation, although their base is still small,” it says.
RBI’s latest report comes on a day when the BJP has swept the Uttar Pradesh and Uttarakhan polls. A victory in UP and Uttarakhand means that the BJP would in the coming months have more seats in the Rajya Sabha – a fact that would greatly aid in the passage of crucial reform bills. With RBI terming the negative impact of demonetisation transient and the Narendra Modi government set to have more room to introduce radical reforms, Indian economy is likely to see better days ahead.