The Third anniversary

I had written a detailed review of the three years of the NDA Government for Swarajya. You can see it here.

A friend took exception my remark that the note-ban exercise may have shaved off more than a percentage point of growth in 2016-17. I still cannot believe that it is an unreasonable remark. When more than 80% of the notes in circulation are withdrawn, by value, it would have an impact on economic activity. The question is by how much and not if it would.

The March Monthly Economic Report of the Department of Economic Affairs provides us some numbers:

As per the second advance estimates of national income, released by the Central Statistics Office (CSO) on February 28, 2017, growth rate of Gross Domestic Product (GDP) at constant market prices was 7.1 per cent in 2016-17 as compared to 7.9 per cent in 2015-16.

The growth in Gross Value Added (GVA) at constant (2011-12) basic prices for the year 2016-17 is estimated to be 6.7 per cent, as compared to 7.8 per cent in 2015-16. At the sectoral level, agriculture, industry and services sectors grew at the rate of 4.4 per cent, 5.8 per cent and 7.9 per cent respectively in 2016-17. [Link]

As regards the growth rate of money supply, this is what the March 2017 economic report had to say:

Growth of Money Supply on year on year (YoY) basis as of 31st March, 2017 stood at 7.3 per cent as compared to a growth rate of 10.0 per cent recorded in the corresponding period in the previous year.

As regards the components of money supply, the growth of ‘currency with the public’ registered decline of 20.8 per cent as of 31st March, 2017 against growth of 15.0 per cent registered during the corresponding period a year ago.

The growth rate of time deposits with banks was 10.5 per cent as of 31st March, 2017 as against 8.8 per cent in recorded in the corresponding period a year ago. On the other hand, demand deposits increased by 19.5 per cent as of 31st March, 2017 as against 13.4 per cent during the same period last year.

Clearly, in a country in which almost all of the retail sales was paid for with cash and informal credit markets happened in cash, it is not that far fetched to believe that economic growth will have been adversely affected when the growth rate of currency with the public was -20.8% for the year ending March 2017.

It has always been the case that the note ban exercise would deliver upfront costs and benefits over time. As for benefits, the government has been focused on digital transactions and its tax implications. It has not done much to encourage formalisation of the economy. Not yet. Tax rates and tax administration, costs of formal operations (labour costs and compliance costs) all remain high and formidable. Hence, the disappointment that the government has not done enough for the benefits to start accruing. At least, not yet.

So, I do not have a problem with what I wrote about the ‘note ban’ exercise as part of my third anniversary appraisal of the government.


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