Daily Editorial Update with Vocabulary – Demonetization Shock

Contrary to the claims of government, the fears over economic
downturn due to demonetisation have proved to be a reality.  According to the latest estimates released by
the Central Statistics Office (CSO), in the last and fourth quarter of the last
financial year, the GDP growth rate decelerated to 6.1 per cent. This is almost
a percentage point lower than the provisional estimate in the last quarter.

The lower growth rate repudiates
the claims of the supporters of demonetisation. The Gross Value Added (GVA)
which is the much better indicator of the economic activity fell by 110 basis
points over the previous quarter to 5.6 per cent. This indicates that the
slowdown due to demonetisation was broad-based.

The note ban created an
artificial monetary contraction leading to economic recession. The worst impact
was felt in manufacturing, construction and financial services which recorded
significantly lower levels of growth in the quarter that followed
demonetisation. 

It is wrong to claim that there
was no adverse impact on the economy due to demonetisation, looking at the
aggregate growth data which hides more than what it reveals. The disaggregated
view provided by the sectoral growth data clearly establishes the debilitating impact of demonetisation.

The extent of slowdown in private
sector is much more emphatic. The
GVA growth data excluding the government sector show much sharper decline in
economic activity across various sectors.
The Finance Minister responding to growth data claimed that some
slowdown was visible even prior to demonetisation.

It is true. But, the government
cannot ignore equally truer fact that the economic slowdown was aggravated by
the manner in which the demonetisation was carried out.  It is easy for the government to blame it on
global factors. Indian economy is certainly impacted by a host of factors.

But, one cannot miss the crucial
fact that indiscriminate monetary contraction has strangulated the economic activity given the cash-rich character of
economic transactions in India.

This is evident from the data
which reveals that both gross fixed capital formation and private consumption
as a percentage of GDP slowed down in the last and fourth quarter of last
financial year as compared to the third quarter.

The aggregate numbers were only
an optical illusion as the GDP includes defence and public administration etc.,
which really do not indicate any economic activity. The so-called buoyancy in GDP growth rate was
primarily due to hike in defence spending and increased expenditure due to pay
hike for government staff.

All these days, the leaders of
government and their apologists have been rejecting the anecdotal accounts of
shrinking economic activity especially in the months after demonetisation. But,
now the official data itself acknowledges this.

Yet, drawing comfort from
self-seeking explanations does not augur
well for policy-making.  At least now,
the government should shed the inhibition and ideological rigidity and come out with a coherent action plan to kick-start
economy and trigger growth in the productive sectors of the economy.