Demonetisation a Massive, Draconian, Monetary Shock: Ex-chief Economic Advisor Arvind Subramanian
New Delhi, Nov 29: Demonetisation was a massive, draconian, monetary shock that accelerated economic slide to 6.8 per cent in the seven quarters after it against the 8 per cent recorded prior to the note ban, says former Chief Economic Advisor Arvind Subramanian.
Breaking his silence on the November 8, 2016 decision of Prime Minister Narendra Modi, he says that he does not have a strongly-backed empirical view apart from the fact that the welfare costs, especially on the informal sector, were substantial.
Though Subramanian, who quit the post earlier this year after a four-year tenure, has devoted a chapter in the upcoming book "Of Counsel: The Challenges of the Modi-Jaitley Economy", published by Penguin, has continued to keep a studied silence on whether he was consulted in the decision-making process of demonetisation. The detractors of the government had said that the Prime Minister had not consulted the CEA on the crucial decision.
"Demonetisation was a massive, draconian, monetary shock: In one fell swoop, 86 per cent of the currency in circulation was withdrawn.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 the six quarters before demonetisation, 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)," Subramanian says in the chapter "The Two Puzzles of Demonetisation - Political and Economic".
The former CEA says he does not think anyone disputes that demonetisation 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 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.
Searching for other explanations, Subramanian says one possibility was that people found ways around the note ban with the possibility that the production was sustained by extending informal credit.
Finally, to a certain extent, people may have shifted from using cash to paying by electronic means such as debit cards and electronic wallets.
"Or, there may be other, completely different explanations that have eluded my understanding of demonetisation, one of the unlikeliest economic experiments in modern Indian history," he says.
From the political aspect, the former CEA says that demonetisation was an unprecedented move that no country in recent history had made in normal times. The typical pattern had been either gradual demonetisation in normal times or sudden demonetisation in extreme circumstances of war, hyperinflation, currency crises or political turmoil (Venezuela in 2016).
According to him, the Indian initiative was, to put it mildly, unique. Referring to the BJP's victory in Uttar Pradesh assembly elections, shortly after demonetisation, he says it was widely seen as a verdict on the note ban.
One answer to the demonetisation puzzle has been that the poor were willing to overlook their own hardships, knowing that the rich and their ill-begotten wealth were experiencing even greater hardship: 'I lost a goat, but they lost their cows', he says. In this view, the costs to the poor were unavoidable collateral damage that had to be incurred for attaining a larger goal.
Subramanian says this is not entirely convincing. After all, the collateral damage was, in fact, avoidable.
"Understanding the political economy of demonetisation may require us, therefore, to confront one overlooked possibility - that adversely impacting the many, far from being a bug, could perhaps have been a feature of the policy action.
"Not necessarily by design or in real time, but in retrospect, it appears that impacting the many adversely may have been intrinsic to the success of the policy," he says.
Courtesy: www.news18.com
Let the Truth be known. If you read VB and like VB, please be a VB Supporter and Help us deliver the Truth to one and all.
No more street vending on B’luru’s main roads, as govt plans to bring new policy for street hawkers
Bengaluru: Deputy Chief Minister D.K. Shivakumar on Friday said that the state government has decided to formulate a new policy for footpaths in Bengaluru, under which street vending will not be allowed on main roads and sub-main roads.
Addressing the media after a budget preparation meeting and executive meeting of GBA corporations at Vidhana Soudha, Shivakumar said discussions were held with MLAs from the GBA region regarding the corporations’ budgets and key civic issues.
Leader of Opposition R. Ashok also participated in the meeting and shared his views. Officials from multiple departments, including police, BESCOM, BMRCL, BWSSB and BDA, along with ministers and legislators, were present.
He stated that all five municipalities have prepared their individual budgets, while MLAs have submitted their demands, including calls for ward-wise grants.
“We have decided to bring a new policy for footpaths. Citizens are struggling to walk as footpaths are encroached upon by street vendors,” Shivakumar said.
Highlighting the need to balance livelihoods and public convenience, he added that “a separate space will be provided for street vendors, and specific roads will be designated for their business,” ensuring that pedestrians can use footpaths without obstruction. He noted that there was unanimous agreement among MLAs on this approach.
Issuing a warning to vendors, Shivakumar said that authorities will act against those violating the rules. “If vendors operate during the day and leave their carts on the roadside at night, authorities will clear them. People should be aware of this,” he said.
Providing data on street vendors, he said that around 60,000 vendors have registered so far, of which 30,000 have applied for vehicles, and a tender has already been floated.
“Only those with street vendor identity cards will be allowed to do business. Those without ID cards will not be permitted to operate on the streets,” he added.
