‘Note ban can slow growth by 0.5 percentage point’

The RBI had trimmed its projection for Gross Value Added growth for the current financial year to 7.1% from 7.6% after considering the short-term disruptions caused by demonetisation

A woman gets indelible ink marked on her index finger after exchanging old currency notes in a bank in Chennai. PHOTO: AFP

The Economic Survey acknowledged the adverse impact of demonetisation in the short term as it projected that GDP growth this year would be slowed by 0.25-0.5 percentage point as a result of the withdrawal of high-value currency notes.

“It would be reasonable to conclude that real GDP and economic activity has been affected adversely, but temporarily, by demonetisation,” the survey said.

“The question is: how much? The short answer is between one-quarter and half-a-percentage point relative to the baseline of about 7%,” it said.

The Reserve Bank of India had in December trimmed its projection for Gross Value Added growth for the current financial year to 7.1% from 7.6% after considering the short-term disruptions caused by demonetisation.

The Centre had in November decided to withdraw high value banknotes in a move to curb black money. As a result about 86% of the currency in circulation ceased to be legal tender.

“India’s demonetisation is unprecedented in international economic history, in that it combined secrecy and suddenness amidst normal economic and political conditions,” the survey said.

The survey acknowledged that GDP growth in the second half of the current fiscal would understate the overall impact because the most affected parts of the economy, informal and cash based,were either not captured in national income accounts or measured based on formal sector indicators.

“The impact on the informal sector will, however, be captured in sofar as lower incomes affect demand for formal sector output, for example, two wheelers,” it said.

However, the survey sounded optimistic in the medium term as it expects growth to retun,

The survey expects once the cash supply is replenished, which it expects ‘largely be achieved’ by end-March 2017, the economy should revert to normal, ‘perhaps even with a bounce reflecting reversion to the mean.’

“Therefore real GDP growth in 2017- 18 is projected to be in the 6¾-7½%

range,” it said.

It said over the medium run, the implementation of GST, follow-up to demonetization and other structural reform measures could take the trend rate of growth of the economy to the 8-10% percent range that India needs.