Demonetisation was a ‘massive, draconian, monetary shock’, says former chief economic advisor

Former Chief Economic Advisor Arvind Subramanian has said that demonetization was a “massive, draconian, monetary shock” that accelerated the decline in economic growth to 6.8%.
In his upcoming book, Of Counsel: The Challenges of the Modi-Jaitley Economy, Subramanian has said that the informal sector had to bear substantial costs due to the ban on high-value currency, IANS reported. The book will be released on December 5.

However, the former chief economic advisor, who quit his post in June, has not indicated whether he was consulted before the decision to ban notes worth Rs 500 and Rs 1,000 was taken. Prime Minister Narendra Modi announced the decision on November 8, 2016, and said it was intended to reduce corruption in the system.

A move like demonetization would affect the informal sector the most, he argues in his book. “…any squeeze in informal sector incomes would depress demand in the formal sector, and this effect [on GDP] should have been sizeable,” he writes. However, he adds that demonetization may have enabled more people to shift from cash transactions to payments through electronic means.
“Demonetisation was a massive, draconian, monetary shock: In one fell swoop, 86% of the currency in circulation was withdrawn,” Subramanian writes in the chapter The Two Puzzles of Demonetisation – Political and Economic. “The real Gross Domestic Product growth was affected by the demonetization. Growth had been slowing even before, but after demonetization, the slide accelerated. In the six quarters before demonetization, growth averaged 8%, and in the seven quarters after, it averaged about 6.8%.”
Subramanian adds that while there is no dispute about the fact that demonetization slowed growth, the size of the reduction is up for debate. “After all, many other factors affected growth in this period, especially higher real interest rates, Goods and Services Tax implementation and oil prices,” the former chief economic advisor writes, according to IANS.

Subramanian says the adverse effects of demonetization on the poor could have been seen as “unavoidable collateral damage” and that the poor were probably willing to overlook their hardships, believing that the rich had lost more than them. However, Subramanian contends, “collateral damage” was avoidable, reported Scroll in

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