Demonetisation's impact on GDP growth won't be very significant in FY17: Bibek Debroy

Interview with the NITI Aayog member

There are various estimates on the impact of the central government’s demonetisation move on the country’s economic growth. Economist and a NITI Aayog member Bibek Debroy tells Indivjal Dhasmana the impact would be felt in the third quarter of the current financial year and up to the middle of January in the fourth quarter to be replaced by benefits in the medium term. Edited excerpts: 

There are fears that the portion of cash will shrink in the system due to demonetisation that will affect the economic growth at least in the third and fourth quarters. Do you think these fears have any ground?
 

When it comes to cash, we must distinguish between something that is a period of transition and, therefore, is a one-shot kind of change and something that happens afterwards. Roughly, let us say high-value notes of Rs 500 and Rs 1,000 are to the tune of roughly Rs 14 lakh crore –I’m not counting counterfeit notes. Let’s break it up.

While Rs 14 lakh crore is a RBI (Reserve Bank of India) figure, the break-up is my guesstimates and my guesstimates could be different from yours. Out of Rs 14 lakh crore, probably something like Rs 4 lakh crore may be black money. There are two kinds of black money. I will call one kind of black as ‘double black’ where the activity that led to generation of that income is illegal – crimes, trafficking etc.

‘Single black’ is when the activity is not illegal but you have not paid taxes. Let’s assume that out of Rs 4 lakh crore, Rs 2.5 lakh crore is single black and Rs 1.5 lakh crore is double black. So, Rs 1.5 lakh crore is roughly 10 per cent of Rs 14 lakh crore. This is completely destroyed. On Single black – Rs 2.5 lakh crore – I think a large part of it will come back into the system. Of the remaining Rs 10 lakh crore, Rs 8 lakh crore is just probably transaction-related. This cash temporarily goes out of the system, but it eventually comes back into the system.

The remaining Rs 2 lakh crore is what the people were sitting on. This is not illegal. This Rs 2 lakh crore is unproductive for the people holding on to it and for the system. This comes into the system. In the short-term of course there is impact — macro and sectoral impact. But, in the slightly medium-term, several things happen through RBI and outside RBI. And, the government and the banking system have more resources. The government can spend this extra money on various public goods and services including infrastructure, and the lenders can lend more. So, wealth is transferred from relatively rich to relatively poor in the process. 

How long will short-term impacts last – the third quarter of the current financial year or will it spill over into the fourth quarter?
 

Because of secrecy, there are some things that you could not really do. One step is printing the notes, the second step is getting the notes to banks, branches etc. There is a separate step of getting them into the ATMs. Remember, banks have largely outsourced replenishment of ATMs. So, this is outside the control of banks. Yes, Q3 (third quarter) will be affected, but, not all of Q4. I would say by mid-January, problems relating to transactions would be over. I suspect the effect on Q4 will be more concentrated on the month of January. I don't think it will affect Q4 as much as it will affect Q3.

How much will the GDP growth in Q3 and Q4 be? It was a five-quarter low of 7.1 per cent in Q1 and Q2 GDP numbers are yet to come out.

There are two GDP series – old and new. And, there are two main differences between the two. Old series was on production; the new series is on consumption. I can give you a counter argument to say that because of the government’s step, the people are now going to splurge on consumption. I don’t know how important it is quantitatively.

Secondly, there is no great controversy about nominal GDP numbers. So, those who criticise the new GDP series don’t do so on nominal GDP, but on deflators. And, deflators have still not been satisfactorily resolved.

One can reasonably predict nominal growth in reasonable terms, but not real GDP growth. Independent of all this, if you would have asked me would growth be eight per cent in real terms for the entire 2017-18, I would say I’m somewhat sceptical because when the economy begins to improve, deflators also go up. I would say 7.5 per cent, not eight per cent, because of the demonetisation move would not be very significant. If you expect me to say if instead of 7.5 per cent, it will be 7.4 per cent, I would say it is complete conjecture. 

You said nominal GDP growth could be reasonably predicted. So, what will it be in the current financial year?
 

I’m hazarding a guess. The right people to ask this question are people like the chief economic adviser because they really track indirect tax revenue, which is a good indicator of nominal GDP growth. Having said all that as a qualification, I would say 12.5 per cent, if I am optimistic. If I am pessimistic, I would say 12 per cent. 

So, will the gains which were to accrue because of the normal monsoon after two consecutive years of drought be nullified, at least in Q3?
 

It is impossible to quantitatively answer that. We tend to exaggerate quantitative importance of several things. People talk of lack of financial inclusion, but all said and done, 600 million people in India have debit cards. Of this, 225 million cards are Jan Dhan kind of debit cards. So, a lot of people, including the poor ones, have debit cards but they don’t use these cards for transactions. They use the debit cards for withdrawals from ATM, nothing more. I will be extremely foolhardy to hazard a guess on your question. 

READ OUR FULL COVERAGE ON THE MODI GOVT'S DEMONETISATION MOVE