PM Modi's demonetisation brings GDP down to 6.1 per cent: Top economists stand vindicated

Barely six months after demonetisation, India's Gross Domestic Product or GDP growth rate has slumped down to 6.1 per cent in the January-March period, lowest in more than two years. This growth rate was unexpected as the Central Statistics Office earlier in January had estimated 7.1 per cent growth as compared to the 7.6 per cent in 2015-16. With this March quarter report, India lost its status as the world's fastest growing major economy.

Last year, when the Prime Minister demonetised old Rs 500 and Rs 1000 currency notes it was feared that the country's economy would be severely hit. The opposition parties expressed their concerns over job loss and slow down in informal sector, but the government agencies maintained that impact would be short-term and marginal. Not only politicians but top-notched economists were also divided over the real effect of the demonetisation.

Now that we know how note ban has brought down India's economic growth rate to 6.1 per cent, it's time to go over and see what the economists had predicted and how accurate they are. However, the real impact could be much more as 'India's statistical machinery does not capture data on the informal economy on a regular basis'.

Fitch cut GDP growth rate to 6.9 per cent
Global rating agency Fitch earlier in January had lowered its GDP growth forecasts for India to 6.9 per cent from 7.4 per cent saying there will be 'temporary disruptions' to economic activity post demonetisation. The new forecasts came a day before the central government released GDP numbers for the July-September quarter of fiscal 2016-17.

HSBC predicted GDP growth down by 1 per cent
Global financial services major HSBC released a report after demonetisation and said: "India's economic growth is expected to fall by up to 1 percentage points over the next 12 months in the wake of demonetisation, while longer-term gains will depend on follow-up reforms." "Using the cash elasticity of GDP, we estimate that over a year, economic growth can fall by 0.7-1.0 percentage points, with the maximum impact in the immediate two quarters, which will see a large contraction in 'effective' money supply," HSBC said in a research note.

Dr Manmohan Singh predicted 2 per cent fall
Former Prime Minister Dr Manmohan Singh slammed the demonetisation move and called it a 'monumental mismanagement' that might bring GDP down by 2 per cent. "In my opinion that the way the scheme has been implemented will hurt agricultural growth in our country, will hurt small industry, will hurt all those people who are in the informal sector of the economy. And my own feeling is that the national income, that is the GDP, can decline by about 2 per cent as a result of what has been done. This is an underestimate," Dr Singh said.

Here's what other economists had to say

Kaushik Basu
Former Vice-President and Chief Economist of the World Bank Kaushik Basu had said that demonetisation's effect would be disastrous. "It (Demonetization) was poorly designed, with scant attention paid to the laws of the market, and it is likely to fail. So far its effects have been disastrous for the middle- and lower-middle classes, as well as the poor. And the worst may be yet to come," Basu wrote in The New York Times. In a recent article in the Indian Express, Basu again said demonetisation was 'a monetary policy blunder'. "India's GDP growth rate of around 7 per cent over 2016-17 is commendable; tribute goes to policy initiatives such as the GST and the new bankruptcy law. However, these policies, coupled with two global trends, should have propelled India to a growth rate of over 8 per cent, the kind it had achieved before 2008," Basu wrote.

Amartya Sen
Nobel laureate Amartya Sen said demonetisation was a gigantic mistake. He was speaking with India Today's Karan Thapar where he said: "It is a gigantic mistake, both in terms of its objective of dealing with corruption as well as the objective of one rapid jump of getting into a cashless economy." "I find no reasoning behind this decision. It will have adverse effects," he added.

Arun Shourie
Former economist at the World Bank Arun Shourie said demonetisation was the 'greatest blunder in economic policy for 70 years'. Speaking to NDTV, he said: "The stated objective of getting at black money, everybody would say is wonderful. But I don't think this is the strike, which has been well thought through. This is a strike not on black money. It is a strike on the legal tender of India, on the currency. It is a strike on cash transactions." Shourie further argued: "People who hold the black money or those who have black assets, they don't hold them in cash. One per cent of Indians hold 53 per cent of total assets in India. 10 per cent hold upto 85 per cent. Now these are the rich fellows, who will be having even larger proportion of the black money. They are not going to put the black money under the mattress."

Kishore Mahbubani
An Indian-origin academic and former Singapore diplomat Kishore Mahbubani said Indian economy would grow faster than China despite the temporary slowdown created by demonetisation. "Even if the demonetisation created a slowdown, it is not going to change the long-term momentum of where India is going with its economic growth," said Dean Kishore Mahbubani of the Lee Kuan Yew School of Public Policy at the National University of Singapore. "India will grow faster than China even after this (demonetisation) slow down. There is a lot of momentum in the Indian economy," Mahbubani further said.