The paper says Q4 of 2016 saw a contraction in employment and nightlights-based output in India due to demonetisation.
New Delhi: Demonetisation lowered India’s economic growth by at least 2 percentage points in the quarter of its announcement, a new paper authored by four economists, including International Monetary Fund (IMF) chief economist Gita Gopinath, has said.
The paper, published by US-based National Bureau of Economic Research Monday, argued that both informal and formal sector activity was severely impacted in the immediate aftermath of Prime Minister Narendra Modi’s shock move announced on 8 November 2016.
There was a “contraction in employment and nightlights-based output due to demonetisation of 2 p.p. and of bank credit of 2 p.p. in 2016Q4 relative to their counterfactual paths, effects which dissipate over the next few months”, the paper said.
The Indian economy grew at 7 per cent in the third quarter of 2016-17 and at 6.1 per cent in the fourth quarter of 2016-17 as demonetisation hurt sectors such as construction and financial services, among others.
Gabriel Chodorow-Reich, assistant professor at Harvard University’s economics department, Prachi Mishra, managing director, global macro research, Goldman Sachs, Abhinav Narayanan, manager-research at Reserve Bank of India (RBI), are the co-authors of the paper.
All four have issued a disclaimer that the paper has been authored in their personal capacity and doesn’t reflect the views of their organisations.
Also read: Demonetisation a massive draconian, monetary shock: Ex-CEA Arvind Subramanian
Cash supreme
The paper also argued that the districts which were more hurt by demonetisation had relative reductions in economic activity, faster adoption of alternative payment technologies, and lower bank credit growth.
It added that cash remains supreme in India.
“We conclude that while the cashless limit may appropriately describe economies with well-developed financial markets, in modern India cash continues to serve an essential role in facilitating economic activity,” the paper said.
However, in the aftermath of demonetisation, people did move to adopt alternative electronic payment methods, it added.
Also read: Shaktikanta Das, the man who spearheaded demonetisation, is new RBI governor
Sudden move
India cancelled the legal tender of high-value notes of denomination Rs 500 and Rs 1,000 with immediate effect after Modi’s announcement on 8 November 2016. Its stated objective was targeting black money and corruption, and removing fake currency notes from circulation.
However, the move led to “a 75% decline of currency in circulation” across the country, causing a serious disruption in economic activity.
The two denominations constituted 86% of the total currency in circulation. The cash shortage persisted for at least a couple of months as the government and the RBI weren’t able to replace the withdrawn notes with new currency quickly.