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Govt’s ex-economic adviser says notes ban was draconian, monetary shock

NEW DELHI, Nov 29: Demonetisation was a massive, draconian, monetary shock that accelerated economic slide to 6.8 per cent in the seven quarters after it against the 8 per cent recorded prior to the note ban, says former Chief Economic Advisor Arvind Subramanian.

Breaking his silence on the November 8, 2016 decision of Prime Minister Narendra Modi, he says 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.

Though Subramanian, who quit the post earlier this year after a four-year tenure, has devoted a chapter in the upcoming book “Of Counsel: The Challenges of the Modi-Jaitley Economy”, published by Penguin, has continued to keep a studied silence on whether he was consulted in the decision-making process of demonetisation. The detractors of the government had said that the Prime Minister had not consulted the CEA on the crucial decision.

“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was a massive, draconian, monetary shock: In one fell swoop, 86 per cent of the currency in circulation was withdrawn.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 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),” Subramanian says in the chapter “The Two Puzzles of Demonetisation -- Political and Economic”.

The former CEA says he does not think anyone disputes that demonetisation slowed growth. Rather, the debate has been about the size of the effect -- whether it was 2 per cent points, or much less. “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.

Searching for other explanations, Subramanian says one possibility was that people found ways around the note ban with the possibility that the production was sustained by extending informal credit.

Finally, to a certain extent, people may have shifted from using cash to paying by electronic means such as debit cards and electronic wallets.

“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,” he says.

From the political aspect, the former CEA says that demonetisation was an unprecedented move that no country in recent history had made in normal times. The typical pattern had been either gradual demonetisation in normal times or sudden demonetisation in extreme circumstances of war, hyperinflation, currency crises or political turmoil (Venezuela in 2016).

According to him, the Indian initiative was, to put it mildly, unique.

Referring to the BJP’s victory in Uttar Pradesh assembly elections, shortly after demonetisation, he says it was widely seen as a verdict on the note ban.

One answer to the demonetisation puzzle has been that the poor were willing to overlook their own hardships, knowing that the rich and their ill-begotten wealth were experiencing even greater hardship: ‘I lost a goat, but they lost their cows’, he says. In this view, the costs to the poor were unavoidable collateral damage that had to be incurred for attaining a larger goal.

Subramanian says this is not entirely convincing. After all, the collateral damage was, in fact, avoidable.

“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,” he says.

50% ATMs in India may shut down by March, warns CATMi

MUMBAI, Nov 21: Nearly 50 per cent Automated Teller Machines (ATMs) may be shut down by March 2019 due to unviability of operations, hitting hard both urban and rural population, the Confederation of ATM Industry (CATMi) warned on Wednesday.

India has approximately 2,38,000 ATMs, of which around 1,13,000 ATMs, including 1,00,000 off-site and more than 15,000 white label ATMs, are expected to down their shutters, said a CATMi spokesperson.

“This would severely impact millions of beneficiaries under the Pradhan Mantri Jan Dhan Yojana who withdraw subsidies in the form of cash through ATMs, besides urban centres, resulting in snaky queues and chaos akin to post-demonetisation,” said the spokesperson.

He said the CATMi step is forced on account of recent regulatory guidelines for ATMs hardware and software upgrades, recent mandates on cash management standards and the cassette swap method of loading cash.

The measure will also result in huge job losses in the industry that would be detrimental to financial services in the economy as a whole.

India plans to export two million tonnes of sugar to China from next year

NEW DELHI, Nov 9: India plans to export two million tonnes of raw sugar to China from next year, the trade ministry said on Thursday, as part of efforts to trim bulging stocks of the sweetener and bridge a widening trade deficit.

Producers’ body Indian Sugar Mills Association and China’s state trader COFCO have already signed an initial deal for 15,000 tonnes of sugar, the ministry said in a statement.

Last month, the ministry said India was keen to sell more rice and sugar to China to help cut the widening trade deficit.

India’s export to China in 2017-18 amounted to $ 33 billion, while imports stood at $ 76.2 billion.

India is the largest producer of sugar in the world with 32 million tonnes production in 2018.

It produces sugar of all three grades- raw, refined and white.

“Indian sugar is also of a high quality and is Dextran free because of the minimum time taken from cut to crush. India is in a position to become a regular and dependable exporter of high quality sugar in significant volumes to China,” the ministry added.

 

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