One year of demonetisation: Changing goal posts and limited impact

The government’s move to demonetise high-value currency, announced on November 8, 2016, was meant to root out unaccounted wealth, stem terror financing and curb counterfeiting. It has been argued that the move did more harm to the economy than good. A year after Modi's announcement, Madan Sabnavis decodes the economic impact of  demonetisation in this piece for Business Standard.

Demonetisation was an attempt to address issues like black money, terror funding and counterfeit currency. Somewhere along the way, the goal post changed to digitising the economy to leave a better audit trail. Even as it caused a lot of physical inconvenience to the public, which can be the cost of such a bold programme, the economic impact is still uncertain.

 The RBI has revealed that almost all the money that was withdrawn has come back into the system, which means that households still prefer to hold cash. The government has revealed that the number of taxpayers has increased, though the extra income that could be earned through taxation is still a matter of conjecture. As the amount collected through the declaration schemes has not yet been disclosed, the gains from the macro perspective would be futuristic and not significant in the short run. However, this precise impact might still be hard to separate, given the turbulence also being caused by the Goods & Services Tax (GST).

 It is also debatable as to what could be the impact on GDP growth as data are unavailable and subject to substantial revisions by the CSO. But going by the logic that growth in the not-so-good year 2015-16 was 8 per cent, and that in 2016-17 was 7.1% despite all economic conditions being very good — from rains to demand — a thumb rule could be that at least 1 per cent decline in GDP could be attributed to demonetisation as the period involved five months.

 Non-availability of cash did affect the SME segment in particular as transactions here are cash-based on both ends which restricted activity. While agri markets too were affected, normalcy was restored in due course of time. However, for SMEs, given the severity of the problem and the resultant unemployment, the impact was more serious. To top it all, GST later put further pressure on their operations, and while the government has been trying to address these issues, it could take another three-four quarters before normalcy is reached.

 The important question is whether or not we have gone past the worst of the demonetisation impact. Based on the presentations made by several companies dealing with consumer-related products — consumer goods, automobile, real estate — the shadow of disappearing currency had left its imprint till June 2017.  

The macro numbers that are available for different sectors, such as industrial growth, including core sector and critical sectors, do indicate that the worst is over from the point of view of demonetisation and the problems now are more on account of adjusting to the GST regime. This can also be attributed to the remarkable manner in which the RBI has brought back the currency required within a span of six months or so to eschew any new challenges on the availability of currency. 

The significant increase in digital payments can be a plus point scored by demonetisation, though at some point of time there would be a need for a reconciliation of the cost involved in such a system — at the end of the day someone has to bear it. But it would still be premature to conclude that digital payments have substituted the use of cash. It is more likely that the two are complementary.

The author is chief economist, CARE Ratings. Views expressed are personal