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Breaking his silence on Prime Minister Narendra Modi's decision of November 8, 2016, he says he does not have a solid empirical view, apart from the fact that the costs of social protection, particularly in the informal sector, were substantial.
Although Subramanian, who left his post earlier this year after a four-year term, devoted a chapter in the upcoming book "Of Counsel: The Challenges of the Modi-Jaitley Economy", published by Penguin, continues a studied silence on knowing he's been consulted in the decision-making process of demonetization. Critics of the government said the Prime Minister had not consulted the CEA on this crucial decision.
"Demonetization was a mbadive and draconian monetary shock: 86% of the money in circulation was withdrawn Real GDP growth was affected by demonetization, growth had already slowed down, but after demonetization, slippage accelerates.
"In the six quarters preceding demonetization, average growth was 8% and 7.8% over the next seven quarters (with an interval of four quarters, the relevant figures are 8.1%, respectively). before and 6.2%), "Subramanian says in the chapter" The two enigmas of demonetization – political and economic ".
The former CEA says that he does not think anyone disputes that demonetization has slowed growth. Instead, the debate focused on the magnitude of the effect, 2 percentage points or less. "After all, many other factors have affected growth over this period, including higher real interest rates, the implementation of the GST and oil prices."
"… But when a shock such as demonetization occurs, which mainly affects the informal sector, relying on formal indicators to measure overall activity will overestimate GDP." This hypothesis makes it difficult to explain the sector's incomes would reduce demand in the formal sector and this effect should have been considerable.
In search of other explanations, Subramanian says that one of the possibilities was that people find ways to circumvent the ban on tickets, with the possibility that production would be maintained through of an informal credit.
Finally, to a certain extent, people may have abandoned the use of cash to pay by electronic means such as debit cards and electronic wallets.
"Or, there may be other completely different explanations that have eluded my understanding of demonetization, one of the most unimaginable economic experiences in history." Modern India, "he says.
On the political side, the former AEC said that demonetization was an unprecedented gesture that no country, in its recent history, had taken in normal times. The typical pattern was either gradual demonetisation in normal times, or sudden demonetization in extreme circumstances of war, hyperinflation, currency crises, or political unrest (Venezuela in 2016).
According to him, the Indian initiative was singular to say the least.
Referring to the BJP's victory in the Uttar Pradesh legislative elections shortly after the demonetization, he stated that this had been widely perceived as a verdict on the ban on banknotes.
One of the answers to the enigma of demonetization is that the poor were willing to put aside their own difficulties, knowing that the rich and their unfortunate wealth were experiencing even greater difficulties: "J & rsquo; I lost a goat, but they lost their cows, "he says. From this point of view, the costs to the poor were inevitable collateral damage to achieve a broader goal.
Subramanian says that it is not totally convincing. After all, the collateral damage was in fact preventable.
"To understand the political economy of demonetization, we may have to oppose a neglected possibility: the negative impact on the greater number, far from being a bug, would have may have been a feature of political action.
"Not necessarily on purpose or in real time, but in retrospect, it seems that the negative impact on the many people might have been intrinsic to the success of the policy," he said.
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