Demonetization was draconian, massive shock for Indian economy: Arvind Subramanian
In his book the former economic advisor hinted that he was not consulted before announcing demonetization.
Criticizing Prime Minister's Narendra Modi's demonetization decision, former chief economic advisor Arvind Subramanian had said that note-ban was a massive, draconian, monetary shock that accelerated economic slide to 6.8 per cent in the seven quarters.
Signalling that he was sceptical of the decision, he added that he did not have a strongly-backed empirical view apart from the fact that the welfare costs, especially on the informal sector, were substantial.
Subramanian said, "Demonetization was a massive, draconian, monetary shock: In one fell swoop, 86 per cent of the currency in circulation was withdrawn.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 one of the chapters from his book, "Of Counsel: The Challenges of the Modi-Jaitley Economy", Subramanian said, "In the six quarters before demonetization, growth averaged 8 per cent and in the seven quarters after, it averaged about 6.8 per cent (with a four quarter window, the relevant numbers are 8.1 per cent before and 6.2 per cent after)."
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In his book the former economic advisor hinted that he was not consulted before announcing demonetization.
The former CEA sais he does not think anyone disputes that demonetization slowed growth. Rather, the debate has been about the size of the effect -- whether it was 2 per cent points, or much less. "After all, many other factors affected growth in this period, especially higher real interest rates, GST implementation and oil prices."
"...But when a shock like demonetization 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.