note demonetisation

Three key letters missing in Arun Jaitley’s latest defence of demonetisation: GDP

From expectations of a ‘V-shaped recovery’ the government is now only speaking of a ‘cleaner’ economy.

Finance Minister Arun Jaitley put out a note on Tuesday in defence of demonetisation, ahead of the first anniversary of the decision. In his piece, Jaitley insists that the note ban, which resulted in 86% of currency being withdrawn and replaced with new notes, has been a major success and was “a watershed moment in the history of Indian economy”. But while Jaitley covered a number of topics in connection with the currency withdrawal scheme, he failed to touch one subject that supporters of the decision had been vocal about: India’s Gross Domestic Product .

“In an overall analysis, it would not be wrong to say that country has moved on to a much cleaner, transparent and honest financial system,” Jaitley wrote. “The next generation will view post November, 2016 national economic development with a great sense of pride as it has provided them a fair and honest system to live in.”

His post touches on a number of subjects, insisting that demonetisation was successful at reducing the amount of currency in circulation, that the Income Tax department now has much more data with which to investigate illicit activity and that the note ban led to further financialisation of savings. He even returned to the argument that demonetisation somehow reduced instances of stone-pelting, protests in Jammu & Kashmir and Maoist activities.

Whither GDP?

But Jaitley did not mention the GDP or economic growth. The only reference to growth in the piece, in fact, is to say that life insurance companies are collecting more premiums. This might have something to do with the fact that India’s numbers on that account are not looking particularly positive at the moment.

In the aftermath of Prime Minister Narendra Modi’s announcement of demonetisation it was apparent that the move had caused tremendous economic distress across the country. The effect was particularly acute in rural markets and the informal economy, but since India’s growth metrics cannot directly measure that, it took some time to begin reflecting in official statistics. The government initially refused to acknowledge any sort of distress and later, after admitting that there had been some short-term pain, insisted that it would disappear soon enough.

Jaitley, in a similar Facebook post in January, insisted that, following demonetisation “the size of the banking transactions and consequently the size of the economy is bound to increase. In the medium and long run, the GDP would be bigger and cleaner.”

V-shaped recovery

Others went even further. Reserve Bank of India Governor Urjit Patel, criticised for simply toeing the government’s line on the note ban, said there would be a “sharp V-shaped recovery”. Jaitley said in March that the worst effects of the move had played out with a 7% GDP growth in the quarter from October-December 2016, and that he expected “in the future quarters this figure itself will grow further”.

By August, that tune had changed entirely. Data that month showed that GDP growth had slipped to 5.7% in the April-June 2017 quarter, which also meant India had registered six consecutive quarters of slowing growth. Far from bringing up a “V-shaped recovery”, Jaitley and others were now trying to insist that this had nothing to do with demonetisation or the other badly implemented policy that came after it, the hurried rollout of the Goods and Services Tax.

In October, the Finance Ministry made another admission that it expects GDP growth to continue to fall, accepting the International Monetary Fund’s projection that India will only get back to 8% GDP growth (under the new series) by financial year 2021-’22. All of this might explain why Jaitley’s latest post speaks only of an “honest” and “clean” economy, and not one that can expect tremendous GDP growth anytime soon.

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