While demonetisation had hurt several sectors of the Indian economy, the impact will only be felt in the short term, according to a paper released by the Reserve Bank of India late on Friday. In the long run, however, demonetisation will be beneficial, the paper claimed.
Titled Macroeconomic Impact of Demonetisation – A Preliminary Assessment, the paperby the RBI’s Monetary Policy Department attempted to assess the impact of the government’s shock decision to demonetise Rs 500 and Rs 1,000 currency notes starting from November 8. The move resulted in 86% of India’s currency by value being declared worthless instantly
Down and up
The paper considered the impact of demonetisation on the first two months after the move was announced. “The analysis in this paper suggests that demonetisation impacted various sectors of the economy,” the paper said. “However, the adverse impact, in general, was short-lived as it was felt mainly in November and December 2016.”
As 2017 started, the paper held that the increased infusion of new bank notes had softened the shock significantly. “The impact moderated significantly in January and dissipated by and large by mid-February 2017, reflecting an accelerated pace of remonetisation,” the paper argued.
The paper quoted Central Statistics Office numbers to back its point up. According to the second advance estimates of the Central Statistics Officereleased on February 28, 2017, economic growth for 2016-’17 is pegged at 6.7%, which is just 0.3% lower than what was estimated on January 6, 2017. Moreover, growth for the third quarter of 2016-17 (October-December) at 6.6% was only marginally lower than the growth for the second quarter (6.7%). The paper therefor concludes that “demonetisation had only a modest impact on growth in Q3 of 2016-17”.
Industry impact
The report said that while the organised sector remained largely unhurt, the impact was felt most in the real estate and construction industries as well as in cash-intensive sectors such as automobiles, fast moving consumer goods and consumer durables. This was, however, balanced out by growth in agriculture, manufacturing, electricity, and mining resulting in the overall impact on economic growth being “modest”.
Even for the sectors affected, the paper said the impact was short term: “Most of these sectors have more than recovered the lost ground subsequently. In fact, the consumer durable sector outperformed the overall increase in the stock market post-demonetisation.”
Positive long-term impact
The paper also held that the impact of demonetisation would be positive in the long run, given the rise of the formal economy and the reduced use of cash.
“Demonetisation is expected to have a positive impact over the medium to long-term. In particular, there is expected to be greater formalisation of the economy with increased use of digital payments. The reduced use of cash will also lead to greater intermediation by the formal financial sector of the economy, which should, inter alia, help improve monetary transmission.”
While the paper was explicit in pointing out that this is not the official line of the Reserve Bank of India, this view, that the impact of demonetisation would be short-term, was also aired by RBI Governor Urjit Patel in December, 2016.