The government’s Chief Economic Adviser Arvind Subramanian on Tuesday said there was a sense of anxiety about the economy’s prospects following demonetisation and stressed the need to allay the fears of an overzealous tax regime in its aftermath, even as he proposed the headline “the Chief Economic Advisor finally speaks on demonetisation” for breaking his silence on the issue after 85 days.
Speaking soon after Union Finance Minister Arun Jaitley tabled the Economic Survey for 2016-17 in Parliament, Mr. Subramanian termed the move to cancel the legal tender nature of high-value currency notes a “radical currency-cum-governance-cum-social engineering measure to permanently and punitively raise the cost of illicit and unaccounted transactions or kala dhan (black money).”
“Bank credit growth has come down, two-wheeler sales have come down. There will be an impact on GDP. But the question is how much,” he said.
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Decline in growth
Mr. Subramanian also stressed that it wouldn’t be appropriate to compare the Survey’s forecast of “a quarter to half percentage point decline in growth” to projections made by other agencies, including the International Monetary Fund, which has scaled down its India growth estimate to 6.6%.
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The Survey pegs economic growth in 2016-17 at 7.1%, but this is based mainly on information for months before the November 8 demonetisation of Rs. 500 and Rs. 1,000 notes. This is half a percentage point lower than the 7.6% growth last year, but the CEA warned that comparisons attributing the difference in growth numbers to demonetisation alone would be foolhardy.
Mr. Subramanian declined comment on the design and implementation of demonetisation, but did speak on the costs, and long term benefits of what was “an unusual and unique monetary experiment” aimed at a structural break. “It would be fair to say that short term costs include the hardships and inconvenience faced, particularly by those in the informal sector.”
After a temporary slowdown in GDP growth, the Survey expects the economy to return to normal, once the scrapped currency is replaced by March. In the long run, tax revenues and GDP growth would be bolstered on account of greater tax compliance and a reduction in real estate prices.
Terming job creation as India’s central challenge, the CEA expects growth in the range of 6.75% to 7.5% in 2017-18 — an outlook that hinges on howdemonetisation and its lingering effects play out domestically.
Questions IMF forecast
“Bank credit growth has come down, two-wheeler sales have come down. There will be an impact on GDP. But the question is how much,” Mr. Subramanian said, who also stressed that it wouldn’t be appropriate to compare the Survey’s forecast of ‘a quarter to half percentage point decline in growth’ to projections made by other agencies, including the IMF, which has scaled down its India growth estimate to 6.6%.
The Survey pegs economic growth in 2016-17 at 7.1%, but this is based mainly on information for months before the November 8 demonetisation of ,500 and ,1,000 notes. This is half a percentage point lower than the 7.6% growth last year, but the CEA warned that comparisons attributing the difference in growth numbers to demonetisation alone would be foolhardy.