IMF sees salutary benefits from demonetisation that took place a year ago. (Image: Reuters)

Demonetisation may have caused disruption in economic activity due to cash stoppages, the International Monetary Fund (IMF) sees benefits in the medium-term from the note ban exercise which India carried out about a year ago. “We see salutary benefits from the demonetisation that took place a year ago. And there are potential benefits going forward,” William Murray of the IMF told reporters at the fortnightly IMF news conference on Thursday. Murray said demonetisation did cause some temporary disruptions in economic activity, primarily, private consumption and small businesses due to cash shortages (But) the effects are dissipating. The IMF is slated to come out with an update of its projections of India’s growth rate along with the rest of the world in January.

Three salutary benefits from demonetisation to India

1)Greater formalisation of economic activities

2)Broader information on economic activities

3)More efficient payment system with a greater use of the banking system and digital payments

Earlier in November this year global credit rating agency Moody’s Investors Service had recognised the impact of demonetisation saying that such reforms will continue to strengthen India’s institutional reform. “Government efforts to reduce corruption, formalize economic activity and improve tax collection and administration, including through demonetization and GST, both illustrate and should contribute to the further strengthening of India’s institutions,” said Moody’s in its report. The firm noted, “Most of these measures will take time for their impact to be seen, and some, such as the GST and demonetisation, have undermined growth over the near term.” Decoding the costs and benefits associated with the reform, Sajjid Z Chinoy, Chief India Economist at JP Morgan Chase had told Indian Express yesterday that note-ban had a short-term cost but there will be medium-term benefits.

On 8 November 2016, the Government of India announced the demonetisation of all Rs 500 and Rs 1,000 banknotes of the Mahatma Gandhi Series. The government claimed that the action would curtail the shadow economy and crack down on the use of illicit and counterfeit cash to fund illegal activity and terrorism. The sudden nature of the announcement and the prolonged cash shortages in the weeks that followed created significant disruption throughout the economy, threatening economic output.

With PTI inputs