Demonetization was a draconian monetary shock: the former CEA Arvind Subramanian

New Delhi: Demonetization is a mbadive and draconian monetary shock that accelerates the economic slide to 6.8% over the next seven quarters, compared to 8% recorded before the ban, said former Chief Economic Advisor Arvind Subramanian.

Breaking his silence on Prime Minister Narendra Modi's decision of November 8, 2016, he says he does not have a very reliable empirical view, apart from the fact that the costs of social protection, especially in the informal sector, were substantial.

Although Subramanian, who left his post earlier this year after a four-year term, devoted a chapter to the upcoming book Of Counsel: The Challenges of the Modi-Jaitley Economy published by Penguin, continued to keep a silence studied on the question of whether he was 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"Demonetization was a mbadive and draconian monetary shock: in one fell swoop, 86% of the currency in circulation was withdrawn. Demonetization has affected real GDP growth. Growth had already slowed down, but after demonetization, the slippage accelerated. "

" In the six quarters preceding demonetization, the average growth was 8% and in the next seven quarters it was about 6.8% (with a four-quarter reduction). the relevant figures are 8.1% before and 6.2% afterwards), "says Subramanian in the chapter" The two enigmas of demonetization – political and economic ".

The former CEA says that he does not think anyone can challenge this demonetization. slowed growth. The debate was more about the size of the effect – whether 2% or much 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."

Arun Jaitley and Narendra Modi. Credit: PTI

"… But when a shock such as demonetization occurs, which primarily affects the informal sector, relying on formal indicators to measure overall activity will overestimate GDP. This badumption explains very little of the headache as any compression of informal sector revenues would reduce demand in the formal sector, and this effect should have been significant.

In search of further explanations, Mr. Subramanian said one possibility was that people would find ways to circumvent the ban on tickets with the possibility that the production was being maintained through the use of the banknote. 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. [19659002] "Or, there may be other completely different explanations that have eluded my understanding of demonetization, one of the most insignificant economic experiences in history." Modern India, "he says.

From the political angle, the former CEA claims this demonetization was an unprecedented move that no country of recent history had taken in normal times . The typical model 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, to put it mildly,

Evoking the victory of the BJP in the legislative elections of Uttar Pradesh, shortly after the demonetization, he declared that & # 39; 39; it had been widely perceived as a verdict on the ban on tickets.

One of the answers to the puzzle of demonetization is that the poor were willing to ignore their own difficulties, knowing that the rich and their unfortunate wealth were experiencing even greater difficulties: "I lost a goat but they lost their cows, "he says. According to this view, the costs to the poor were inevitable collateral damage to achieve a broader goal.

Subramanian believes that this 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 – one that would have a negative impact on the multitude, far from being a bug, could have been [19659002"Notnecessarilybydesignorinrealtimebutinretrospectitseemsthatreachingalargenumberofpeoplemayhavebeenintrinsictothesuccessofthepolicy"hesaid