Arvind Subramanian breaks his silence on demonetisation through his upcoming book

Mr Arvind Subramanian, former Chief Economic Adviser, on his upcoming book has dedicated a chapter on notes ban or demonetisation in India in the year 2016. Arvind Subramanian is an Indian economist as well as the former Chief Economic Adviser to the Government of India. He took the charge of Chief Economic Adviser position on 16^th October 2014 and served for 4 years and left the post on 20^th June 2018 preceded by Raghuram Rajan.

Demonetisation is massive, draconian, monetary shock: Arvind Subramanian breaks his silence

Arvind Subramanian through his upcoming book ‘Of Counsel’ breaks his silence on demonetisation in India on 8^th November 2016. In one of the chapter of ‘Of Counsel’ named “The Two Puzzles of Demonetisation — Political and Economic”, Mr Subramanian revealed his thoughts on Prime Minister Narendra Modi’s demonetising decision.

Mr Subramanian dedicates that chapter to the demonetisation exercise undertaken by PM Modi, where 86 percent of the currency in circulation was exterminated at just one night with the termination of currency notes in India.

He said, “I do have some new thoughts, or rather hypotheses, on two demonetization puzzles, political and economic.”

Former Chief Economic Adviser, Arvind Subramanian stated in one of his chapter that “Demonetisation was a massive, draconian, monetary shock: In one fell swoop, 86 per cent of the currency in circulation was withdrawn. The real GDP growth was affected by the demonetisation. Growth had been slowing even before, but after demonetisation, the slide accelerated.”

He further stated “In the six quarters before demonetisation, growth averaged 8 per cent and in the seven quarters after, it averaged about 6.8 per cent (with a four quarter window, the relevant numbers are 8.1 per cent before and 6.2 per cent after)”

He also said that he does not think anyone disagreed that notes ban in India slowed the growth. Rather, the argument has been about the size of the consequence or outcome, whether it was 2 per cent or much less points.

He said “After all, many other factors affected growth in this period, especially higher real interest rates, GST implementation and oil prices.”

“…But when a shock like demonetisation occurs, that primarily affects the informal sector, relying on formal indicators to measure overall activity will overstate GDP. This hypothesis goes only a small way towards explaining the puzzle since any squeeze in informal sector incomes would depress demand in the formal sector, and this effect should have been sizable,” he further added.

Examining for other justifications, Mr Subramanian says that one probability was that people found ways around the demonetising with the opportunity that the manufacture was constant by ranging informal credit.

Lastly, people have shifted from using cash payment to e-payments such as debit cards and electronic wallets not remarkably or manifestly but to a certain extent.

He says “Or, there may be other, completely different explanations that have eluded my understanding of demonetisation, one of the unlikeliest economic experiments in modern Indian history.”

Mr Subramanian says that this is not totally convincing. After all, the indemnity harm was, in fact, preventable.

He stated, “Understanding the political economy of demonetisation may require us, therefore, to confront one overlooked possibility -that adversely impacting the many, far from being a bug, could perhaps have been a feature of the policy action. Not necessarily by design or in real time, but in retrospect, it appears that impacting the many adversely may have been intrinsic to the success of the policy.”