Six months of demonetisation: Economy hurt, bruised but is the pain over?

business

Updated: Jul 19, 2017 15:42 IST

As the Indian government scrapped 86.9% of the currency in circulation in one go in November last year, critics shouted that it will put a spoke on the India growth cycle, sending shock waves through an economy largely dependent on cash.

But government data showed that despite some economic pain last year, it is now well-poised to rebound during 2017-18.

Many of the cash-dependent small businesses had to shut down and thousands lost their job as the government tightened the noose around cash hoarders.

While economists and experts sparred over the extent of the damage to Asia’s third largest and world’s fastest growing emerging nation, many believe the decision to scrap old Rs 500/1,000 notes crimped economic activity in some sectors.

“Anecdotal evidence shows that the formal sector was hurt to some extent. But it is the informal sector that has been impacted the most. We still don’t know the extent of impact,” said Pronab Sen, former chief statistician of India.

Sen, who is also a former chairman of National Statistical Commission, pointed out that activity in the construction sector, which is the second highest employers after agriculture, was halted after the demonetisation drive. Trade and hotels were also hurt.

The CSO has estimated the growth will slow to 7.1% during 2016-17 from 7.9% in the previous year.

Sen contested the estimates saying growth could have slowed to 6.5% if not more, when the informal sector data trickles in.

IMF in its first assessment lowered India’s growth forecast to 6.6% for 2016-17, citing the impact of note ban.

As warned by several economists, India’s industrial growth also faltered. Output fell in two out of the four months between November and February.

As economic activity slowed, demand contracted and lowered inflation to an average 3.5% between November and March 2017, as farmers sold their winter crop at throw away prices to run their household.

However, prices have started rising as Indians got back new cash and started spending on consumer goods.

“Bypassing the risk of slowdown post-demonetisation, the Indian economy is estimated to grow at 7.1% in FY17, according to the CSO. This number would be met…as Q4 growth would be in the same range,” said Madan Sabnavis, chief economist of Care Ratings, a unit of Fitch.

The Reserve Bank of India has reiterated that the impact of demonetisation was “transitory” in a report in March.

While the finance ministry hopes the growth rate to rebound to 7.5% in 2017-18 and further to 8% in 2018-19, international agencies such as World Bank and Asian Development Bank have forecast India to expand 7.4% in 2017-18.