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Demonetisation was a massive, draconian, monetary shock: Arvind Subramanian


New Delhi, Nov 29: Former Chief Economic Advisor Arvind Subramanian has called Demonetisation a "massive, draconian, monetary shock" that accelerated economic slide to 6.8 percent in the seven quarters against the 8 percent recorded prior to the note ban.

Arvind Subramanian

Subramanian, who demitted the office of the Chief Economic Advisor a few months earlier said that he does not have a strongly-backed empirical view apart from the fact that the welfare costs, especially on the informal sector, were substantial.

In his upcoming book titled 'Of Counsel: The Challenges of the Modi-Jaitley Economy', Subramanian broke his silence on the November 2016 decision by Narendra Modi-led government and said that withdrawing 80% of the currency in circulation in one go, the real GDP growth was affected.

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"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was a massive, draconian, monetary shock: In one fell swoop, 86 per cent of the currency in circulation was withdrawn.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...In the six quarters before demonetisation, growth averaged 8% and in the seven quarters after, it averaged about 6.8% (with a four-quarter window, the relevant numbers are 8.1 per cent before and 6.2 per cent after)," Arvind Subramanian said.

"...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 said.

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Subramanian said that no country had taken such a step in "normal times", adding that other nationa would have either done it gradually or only during currency crisis, war or hyperinflation.

On November 8, 2016, the Prime Minister Narendra Modi announced the demonetisation of Rs 500 and Rs1,000 notes, in a major assault on black money and corruption. The massive cash crunch after the government's move adversely impacted the economy.

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