MindRush 2016: Economists divided on GDP impact post demonetisation

The issue of demonetisation, which has grabbed headlines over the last one month, was the topic of an exciting discussion at the 4th edition of Business Today Mind Rush on Saturday with top economists presenting diverse points of view.

Arvind Virmani, Chairman, Policy Foundation, said the timing of the move was not the most conducive considering the volatility in the global economic scenario and rabi crop sowing. Prime Minister Narendra Modi had, on November 8, declared all Rs 500 and Rs 1,000 currency notes invalid. This has led to long queues for new currency notes at banks and ATMs and distress in economic activity.

"All the estimates that are being thrown around by economists on the impact on GDP growth are mere guesses. Economists make predictions based on past trends but there is no precedence to demonetisation in India," said Virmani. "What I can say to an investor right now is that there is a lot of risk and uncertainty. But what we can also say is, if you have taken a part of the currency out of the system, there will be an impact on economic activity, but once you inject it back, there should be full recovery."

The risk of what today appears to be a slowdown in consumption turning into a full-fledged recession was not discounted. Economist Arun Kumar said there is already an impact on the unorganised sector which will next impair the organised sector. This has impacted the agriculture sector too as mandis do not have the cash to pay farmers and hence the harvest is not reaching the wholesale market.

"What we know from reports is that discretionary spending is down, profitability of companies is hit and tax collection in December till now is also down," said Kumar. "The government is short on paper and ink to print the currency notes and if things do not improve in the next two-three months, banks will have a problem with non-performing assets and investment cycle will go down further. We will be staring at a recession."

Others were optimistic about the positive spinoffs to the economy due to the fillip to digitisation and cash-less economy and the crackdown on black money whose aim is to bring in more unaccounted wealth in the formal system.

"Eleven out of 13 economists that I have spoken to have said the impact on GDP growth will be less than 1 per cent. This is just a transitory phase," said Rajiv Kumar, Senior Fellow at Centre for Policy Research. "Undoubtedly the economic activity right now is dented, but when it gets fully formalised, there will be a one-time positive benefit too. This prime minister is not going to leave it (fight against black money) only at this. There is more to come."

The jury is still out on any radical change in the mindset of the people or the overall economy. The loudest round of applause was reserved for Subhashish Gangopadhyay, Managing Trustee at IDF, who stressed the need for more equitable laws to remove the possibility of corporates benefitting from special provisions.

"Why do we have laws like the CSR law that states anybody with a turnover of at least Rs 5 crore needs to set aside 2 per cent of its net profit for CSR? Why not have it for everybody, so that companies are not tempted to under-report and stay below Rs 5 crore so they don't have to comply with this?" Gangopadhyay asked. "We have to stop giving special support. Unless we do that, no amount of reform will help. We have to treat every citizen and economic entity equally."

With millions of Indians irrespective of their economic standing queued up outside the banks, perhaps some equity is being achieved.