Chief Economic Advisor Arvind Subramanian on Tuesday called on the government to not treat digitalisation as a panacea or consider all cash bad, while insisting that the short-term impact of the government’s demonetisation move was not as bad as headlines seemed to suggest it was.

The Economic Survey, an annual report on the state of the Indian economy compiled by Subramanian, said there still isn’t enough data to quantify the relative impact of the massive currency exchange move.

The report, in fact, suggests that Gross Domestic Product growth numbers, which are predicted to fall as a result of demonetisation, will actually underestimate the effect of the massive move. Yet the Survey remains optimistic about the long-term effects on the Indian economy.

The Survey devotes an entire chapter to demonetisation, examining some of the assumptions behind the move and also looking at the impact of it on various portions of the economy. Some of these were listed out in a table:

Short-term impact

The Survey acknowledges a major shock to the economy in the short term, increasing uncertainty, slowing growth, reducing demand and supply and causing job losses.

  • It indicates that currency in circulation had fallen to 65% of estimated demand in December 2016, and will not return to 100% until around March 2017.
  • It looks at various indicators, from automobile sales to credit growth, and concludes that demonetisation will lower GDP growth by between 0.25% to 0.50%.
  • India uses formal sector data to make an estimate of what is happening in the informal sector. But demonetisation clearly affects the informal sector much more than the formal, which is why the Survey concludes that GDP numbers will underestimate the impact on the economy for the next few quarters.
  • It suggests income tax revenues could go up, since black money is likely to have been deposited into the system, but adds that this will have to be balanced against the huge costs incurred in carrying out the exercise: Printing new notes, adjusting to the liquidity shock and the effect of lower GDP.

Long-term advantage?

Most of this is inconclusive, with the Survey saying there simply isn’t enough data to understand what is happening in the economy just yet. But it does offer some suggestions on how we can gauge whether the currency exchange move will be successful – one of the long-term questions that have developed as the government continued to shift its goalposts regarding demonetisation.

  1. Digital payment usage should go up massively. Numbers have increased, but the question is whether they will stay high once cash returns to the system.
  2. India’s cash-to-GDP ratio was said to be abnormally high at around 12%-13%. The Survey’s own estimate of black money held in cash was about Rs 3 lakh crore. If all of this is eliminated, the ratio should come down by 2 percentage points to 10%.
  3. The number of new income tax payers as well as the magnitude of reported and taxable income should rise “significantly” over time, the Survey says. “That will be the surest sign of success.”

Here at least the Survey is slightly more specific than the government has been at giving actual targets which we can use to measure whether the massive currency exchange move has been successful. The government for its part has mostly avoided putting out any specific numbers, or revealing what its calculations were.


The Survey’s chapter ends with a few recommendations to the government on how it should proceed with demonetisation to ensure it actually turns into long-term gains, some of which sound like admonishment from the way the move has been implemented.

  • “The most important effort must be to replenish the cash shortage as quickly as possible. The faster remonetisation takes place, the shorter and less severe will be the overall impact of demonetisation,” the Survey says.
  • Importantly, it adds that the authorities should not push to only bring currency levels up to a certain “desired” level – by keeping withdrawal limits, making withdrawals expensive or charging people to use cash.

“The early elimination of withdrawal limits will help build confidence. By the same token, there should be no penalties on cash withdrawals, which would only encourage cash hoarding.”

  • If there is any windfall from unreturned notes, something that remains unclear because there are no official figures yet, the Survey argues that these should be spent on capital expenditure because the revenue will be a one-off.
  • The Survey argues against controls on cash forcing people to use digital payments and instead suggests it should incentivise these better and make sure the transition is inclusive.

“A few principles must guide this effort going forward. Digitalisation is not a panacea, nor is cash all bad. Public policy must balance benefits and costs of both forms of payments. Second, the transition to digitalisation must be gradual; take full account of the digitally deprived; respect rather than dictate choice; and be inclusive rather than controlled.“

  • Finally it adds a few long-term reforms that will cement the achievements of demonetisation: A Goods and Services Tax that includes the source of black money creation, like land; lower income tax rates and a wider tax base; a faster timetable to reduce corporate taxes and improved tax administration, without harassment.