Economic Survey 2016-17: Demonetisation’s top 5 short term and long term effects

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Updated: Jan 31, 2017 2:32 PM

The Economic Survey 2016-17 forecast a temporary dip in real GDP growth at 0.25-0.5 percentage points relative to the baseline on the back of short term pain inflicted by demonetisation.

Demonetisation, budget 2017, Arvind Subramanian, Narendra Modi, income tax, The Economic Survey 2016-17, GDP, GST (Goods and Services Tax), Prime MinisterThe growth would come back towards its trend in the next financial year 2017-18, the survey added.(Reuters)

The Economic Survey 2016-17 forecast a temporary dip in real GDP growth at 0.25-0.5 percentage points relative to the baseline on the back of short term pain inflicted by demonetisation. The growth would come back towards its trend in the next financial year 2017-18, the survey added.

“Demonetisation has had short-term costs but holds the potential for long-term benefits,” Chief Economic Adviser Arvind Subramanian said on Tuesday after the Economic Survey was tabled in the Parliament.
India’s GDP growth is understood to have slowed through December, as demonetisation reduced demand, supply, liquidity and working capital, and increased uncertainty, among the short-term effects of the note-ban exercise. However, it “could be beneficial in the long run if fomalisation increases and corruption falls”, the survey document said.

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Prime Minister Narendra Modi in a surprise move on November 8 demonetised Rs-1,000 and Rs-500 currency notes, wiping off 86% of all currency in circulation in the country. A slew of growth forecast cuts followed, all projecting a major blow to the economy in the wake of unavailability of cash to carry out any economic activity.
Check out what else the survey says:

The survey has pointed to demonetisation as one of the three major risks to its FY18 GDP growth forecast of 6.75%-7.5%. The other two risks are rising crude oil prices and rise in global trade tensions. The GDP growth rate at constant market prices for the current financial year 2016-17 has been placed at 7.1%.

As for the government revenue, income tax collections rose because of increased disclosures in December. In the long term, however, corporate taxes may fall to the extent the country’s growth slows, the survey said. Further, the taxes collection may rise again with the improving compliance and increasing formalisation, it added.

The survey also expects the job losses, decline in farm incomes, social disruption in cash intensive sectors to stabilise as the economy is remonetised.

Demonetisation also impacted interest rates, with those on deposits, loans and government securities declining in December. The survey expects loan rates to fall further in the long term, if much of the deposit increases prove to be durable.

Subramanian said that to maximise the benefits of demonetisation with minimum costs, faster remonetisation is required. He also suggests bringing real estate under the fold of the upcoming GST (Goods and Services Tax).

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