Demonetisation was draconian; Arvind Subramanian’s startling claim 5 months after leaving FinMin

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Updated: November 29, 2018 3:20:16 PM

Arvind Subramanian, however, also cited other factors that played a key role in slowing down the GDP growth such as oil prices, GST implementation and higher interest rates.

No 28% GST in next 1 year? Outgoing CEA Arvind Subramanian says it may become virtual "hollow shell"Chief Economic Adviser Arvind Subramanian succeeded former RBI Governor Raghuram Rajan as CEA and quit the office earlier this year after a four-year tenure. (Image: PTI)

Former chief economic advisor Arvind Subramanian has called the demonetisation a “massive draconian, monetary shock”, which led to the economic growth of the country sliding to 6.8% in the last seven quarters as against the 8% prior to the notes ban, IANS reported. In his upcoming book titled ‘Of Counsel: The Challenges of the Modi-Jaitley Economy’, Subramanian broke his silence on the November 2016 decision by Narendra Modi-led government and said that in withdrawing 86% of the currency in circulation in one go, the real GDP growth was affected.

In the chapter called “The Two Puzzles of Demonetisation — Political and Economic”, Subramanian stated that the economic growth was slowing even before November 2016, but the demonetisation hastened the slide. Subramanian succeeded former RBI Governor Raghuram Rajan as CEA and quit the office in June this year after a four-year tenure.

“Demonetisation was a massive, draconian, monetary shock: In one fell swoop, 86% of the currency in circulation was withdrawn. The real GDP growth was affected by the demonetisation. Growth had been slowing even before, but after demonetisation, the slide accelerated…In the six quarters before demonetisation, growth averaged 8% and in the seven quarters after, it averaged about 6.8% (with a four-quarter window, the relevant numbers are 8.1 per cent before and 6.2 per cent after),” Arvind Subramanian said.

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Subramanian, however, has not commented whether Prime Minister Modi had not consulted with him in the decision-making process of the crucial decision like demonetisation.

Calling the demonetisation an “unprecedented move”, Subramanian said that no country had taken such a step in “normal times”, adding that other nations would have either done it gradually or only during a currency crisis, war or hyperinflation.

On November 8, 2016, the Prime Minister Narendra Modi announced the demonetisation of Rs500 and Rs1,000 notes, in a major assault on black money and corruption. The massive cash crunch after the government’s move adversely impacted the economy. Montek Singh Ahluwalia had also taken part in the same panel discussion and said that India cannot achieve high growth without structural changes.

Further, Subramanian noted that everyone goes on to debate about the size of the effect – whether it’s 2% or more, instead of doubting that demonetisation slowed the economy down. Subramanian, however, also cited other factors that played a key role in slowing down the GDP growth such as oil prices, GST implementation and higher interest rates.

“…But when a shock like demonetisation occurs, that primarily affects the informal sector, relying on formal indicators to measure overall activity will overstate GDP. This hypothesis goes only a small way towards explaining the puzzle since any squeeze in informal sector incomes would depress demand in the formal sector, and this effect should have been sizable,” he said.

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