Debate over the economic impact of note ban continues

Krishnanand Tripathi
FILE: Mumbai: People stand in long queues outside a bank to exchange their old Rs 500 and 1000 notes in Bhiwandi, Mumbai in Wednesday, Nov 16, 2016. Photo - PTI

FILE: Mumbai: People stand in long queues outside a bank to exchange their old Rs 500 and 1000 notes in Bhiwandi, Mumbai in Wednesday, Nov 16, 2016.
Photo – PTI

One year after the demonetisation, the issue of its impact on the economy is one among the most contentious ones in the country. The slowdown in the GDP growth in April-June quarter this fiscal to 5.7%, which was on the back of another weak growth of 6.1% witnessed during January to March quarter of the last fiscal provided a potent ammunition to the critics of demonetisation.

The attack from the party colleague and former finance minister Yashwant Sinha prompted the Prime Minister to lead from the front to defend the note ban decision. Citing the official data, Prime Minister had said that the recent slowdown was not unusual as India’s economic growth had dipped to this level 8 times during the past 6 years of previous government.

Addressing a gathering of company secretaries and other economic pundits in New Delhi on the fourth of October this year Prime Minister Modi admitted the slowdown witnessed in the economy in the last two quarters and vowed to take the corrective measures.

Prime Minister said : ‘It is correct that despite attaining average growth rate of 7.5% over the past three years, GDP growth rate in April-June period this year saw a decline. We don’t deny it.  However, let me tell you that the government is fully committed to reverse this trend, it has the capability and we are ready to take decisions.’

Addressing an event on the occasion of golden jubilee celebrations of Institute of Company Secretaries in the national capital PM had said that the sale of passengers cars grew by over 12%, sale of commercial vehicle by 23% and sale of two wheelers grew by 14% after the June in this year. Talking about rural demand, PM said the sale of tractors grew by 23% in recent months. He said number of the number of air travelers, demand for FMCG products and other indicators like Purchasing Manger’s Index have either shown growth or expansion mode.

Talking about the increased inflow of foreign direct investment (FDI) and increased mobilisation of funds by companies from capital markets, Prime Minister said that companies have mobilised Rs. 25,000 crore through the IPOs in the first six months this year whereas the figure for the last year was just 29,000 crore rupees. He said it reflected the growing investor confidence in the economy after the demonetization.

Citing other important indicators like revenue buoyancy and increased FDI inflow, Finance Minister Arun Jaitley also defended the decision. In an official release issued on the 31st August this year, the government said that after the demonetisation the E-filing of income tax returns increased by 25.3%, from 2.22 crore in FY 15-16 to 2.79 crore in FY 16-17.  The number of total income tax returns filed through both electronic and physical modes increased by 17.3% to 5.43 crores.

Another noticeable impact was on the collection of personal income tax as it went up by nearly 42% in the first four months of this fiscal in comparison with the collections during the same period last year.

As per reports, following the demonetisation the transactions in nearly 18 lakh accounts were under scrutiny and deposit of Rs. 3.69 lakh crore in 23.22 lakh bank accounts was considered suspicious.

One of the most visible improvement was the reduction in the circulation of currency from 17.77 lakh crore before the note ban to 14.75 lakh crore after full remonetisation in August this year. It’s a reduction of nearly 17%.

The government also cracked down on the shell companies on the basis of the information received due to note ban. It closed down 2.24 lakh inactive companies and disqualified 3.09 lakh directors.

The government said that 35,000 companies were involved in deposit and withdrawal of 17,000 crore rupees post note ban.

File Photo of Prime Minister Narendra Modi.

File Photo of Prime Minister Narendra Modi.

Following the criticsm by the party colleague Yashwant Sinha, Prime Minister cited the data on increase in the formal employment during his government’s tenure. On the 4th of October, he had said that the number of people contributing to provident fund had gone up during the three years of his government as it went up from 3.26 crore at the end of March 2014 to 4.8 crore in the recent times.

Targeting the pessimists, Prime Minister said that these people forgot that this number could not have gone up without the increase in the employment.

Despite these positive numbers, as per a survey done by the CMIE, the Centre for Monitoring Indian Economy, 1.5 million (15 lakh) jobs were lost during January-April period this year after the demonetization.

In its report, CMIE said: ‘Capture of the employment / unemployment status of adults began with the Wave of January-April 2016. We estimated the employed force at 401 million then. This grew to 403 million during May-August 2016 and then to 406.5 million in September-December 2016. Then, it fell to 405 million.’

It said: ‘This is the total employment in the country – including organised and unorganised sectors, and agricultural and non-agricultural sectors.’

But this data, that is based on the household survey of little over 1.61 lakh households (519,285 adults) has some unexplained phenomenon as the same survey reports that the number of people who declared themselves unemployed during the same period fell much more as this number registered a decline of 9.6 million.

Economists blame multiple factors for decline in the economy in recent times. Arvind Virmani, who was the chief economic advisor in the ministry of finance during the previous UPA government, told the Rajya Sabha TV that the decline in GDP growth rate was due to multiple factors including weak credit growth and low private investment. He said that the contribution of note ban in the slow down would be one third of the total factors that contributed to the slow down between April June period this fiscal.

Talking about the impact of demonetisation on GDP growth, Arvind Virmani told Rajya Sabha TV: ‘On purely economic basis, right now the net is negative. But the government’s argument is that, if you believe that ethical argument, what some people call ‘the crusade against the black money’ and if you believe that this is fundamental to reforming the whole system of governance then obviously that is a long term objective.’

Despite the shrill debate over the economic impact of demonetization, it’s difficult to precisely quantify it’s impact on the employment and economy. As per the economists, even after a year it’s difficult to say that the slow down witnessed during the six months (January to June 2017) has already bottomed out or it will persist little longer.

The economic picture will become clearer when the central statistical office (CSO) will release its GDP growth estimate for the second quarter (July-September 2017-18) of this fiscal in the end of this month.