Demonetisation’s long shadow
The Economic Survey presented on the eve of the Union Budget has been dominated by a singular action of the government. As Chief Economic Adviser Arvind Subramanian stated, “To deify or demonise demonetisation that is the difficult question the world is asking, to which the survey tries to respond.” Describing the November 8 decision to withdraw high-value currency notes as a “radical governance-cum-social engineering measure” aimed at punitively raising the cost of illicit activities, Mr. Subramanian and his team acknowledge the complexities in assessing its potential impact as well as the lack of historical precedent to make reliable predictions. The Survey, however, emphatically asserts that while there have been short-term costs to the economy, which would need to be expeditiously addressed, there will be long-term benefits. Real GDP growth in the current fiscal, the Survey projects, will see a likely reduction by one quarter to half a percentage point relative to the baseline of about 7% as a result of the demand shock triggered by demonetisation. The Survey argues that any comparison with last fiscal’s 7.6% pace would be “inappropriate” as among the other factors that influenced growth this year was that global oil prices stopped declining, lessening the updraught that soft energy prices lend to the economy. It contends that the latest growth estimates of the World Bank and the International Monetary Fund — the bank trimmed its forecast to 7% from 7.6% and the IMF by 1 percentage point to 6.6%, both citing demonetisation as reason — reflect a higher baseline assumption and ought to be compared only on the extent of change in estimate. Devoting a whole chapter to demonetisation, the Survey recommends fast, demand-driven remonetisation, further tax reforms, including bringing land and real estate under the ambit of the Goods and Services Tax, and reducing tax rates and stamp duties. It cautions against tax authorities turning overzealous. It flags the risks that Brexit and the U.S. election result pose to the world economic order, and to India’s economy. The prospect of “shifts in the direction of isolationism and nativism” could threaten the global market for goods, services and labour. The Survey conservatively projects growth for the coming fiscal at 6.75%-7.5%, with a caveat that lingering effects from demonetisation, oil prices and the possible rise of trade protectionism could jeopardise the forecast.
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