The Indian economy will recover in 2017-18 after the cash supply is replenished post demonetisation of Rs. 1,000 and old Rs. 500 notes and the country’s gross domestic product (GDP) is expected to grow in the range of 6.75-7.5 per cent, the Economic Survey 2016-17 tabled in Parliament on Tuesday said.
“Once the cash supply is replenished, which is likely to be achieved by end March 2017, the economy would revert to the normal,” the Survey said. Demonetisation will lead to a temporary slowdown in the GDP growth but will reap benefits in terms of increased digitalisation, greater tax compliance and a reduction in real estate prices, which could increase long-run tax revenue collections and GDP growth, it noted
The Survey, however, said the cash squeeze will “have significant implications for the GDP, reducing 2016-17 growth by ¼ to ½ percentage points compared to the baseline of 7 per cent.” The GDP may not be able to gauge the impact of demonetisation on the informal sector “because informal manufacturing is estimated using formal sector indicators (Index of Industrial Production).
The Survey illustrated a sector-wise impact of demonetisation. It stated demonetisation led to “job losses, decline in farm incomes and social disruption, especially in cash intensive sectors.”
It said that cash intensive sectors such as agriculture, real estate and jewellery were affected more. “Uncertainty increased, as firms and households were unsure of the economic impact and implications for future policy.” Investment decisions and durable goods purchases were postponed. The credibility would be strengthened only if demonetisation was accompanied by early and full remonetisation, it said and warned that “tax arbitrariness and harassment could attenuate credibility.”
Although the private sector wealth declined, since some high denomination notes were not returned and real estate prices fell, demonetisation had no impact on the public sector wealth that may rise when unreturned cash is extinguished, reducing liabilities, the Survey said.
According to the Survey, the weighted average price of real estate in eight major cities, which was already on a declining trend, fell further after demonetisation was announced on November 8. “An equilibrium reduction in real estate prices is desirable as it will lead to affordable housing for the middle class and facilitate labour mobility across India currently impeded by high and unaffordable rents,” it said.
The Survey suggested a few measures to maximise long term benefits and minimizs short-term costs due to demonetisation. “One, fast remonetisation and especially, free convertibility of cash to deposits including through early elimination of withdrawal limits. This would reduce the GDP growth deceleration and cash hoarding,” it said. It further suggested that land and real estate should be brought under the Goods and Services Tax following demonetisation.
