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Demonetisation massive, draconian, monetary shock: Fmr CEA Arvind Subramanian

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The former Chief Economic Advisor (CEA) Arvind Subramanian said that demonetisation that saw nearly 86 per cent of the currency in circulation at the time being invalidated overnight, was ‘a massive, draconian, monetary shock’.

In his soon-to-be-released book, “Of Counsel: The Challenges of the Modi-Jaitley Economy”, Subramanian has reportedly devoted an entire chapter to demonetisation. “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was a massive, draconian, monetary shock: In one fell swoop, 86 per cent of the currency in circulation was withdrawn.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,” he penned in the chapter titled The Two Puzzles of Demonetisation – Political and Economic according to the news agency IANS.

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“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 said according to the report. While he claims not to have a strongly-backed empirical view he points to the fact that the welfare costs, especially on the informal sector, were substantial.

The book is an account of Subramanian’s rollercoaster journey as the CEA to the Government of India from 2014 to 2018. “With an illustrious cast of characters, this part-memoir, part-analytical writings candidly reveal the numerous triumphs and challenges of policymaking at the zenith, while appraising India’s economic potential through comprehensive research and original hypotheses,” said book’s publisher Penguin Random House India.


Though it has long been speculated that he was not consulted on the crucial decision, the news agency claims that Subramanian has continued to remain tight-lipped on the topic in his book.

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According to the former CEA, the real debate is not whether demonetisation slowed growth, but about the size of the impact – whether it’s 2 percentage points or less – since several other factors had affected growth in this period, especially GST, oil prices and higher real interest rates.

Extending other explanations, Subramanian said people may have found ways around the note ban with the possibility that the production was sustained by extending informal credit. Demonetisation, to a certain extent, may have also prompted people to switch from using cash to digital payments.

“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 added.

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Subramanian also makes it clear that from a political angle, demonetisation was an unprecedented, unique move – no other country in recent history had opted for such a sudden move in normal times, limiting the exercise to extreme circumstances like war, hyperinflation, currency crises or political turmoil, as in the case of Venezuela in 2016.

According to him, the BJP’s victory in Uttar Pradesh assembly elections, so shortly after demonetisation, was widely seen as a verdict on the note ban. This suggests that the poor were willing to overlook their own hardships [from the exercise], knowing that the rich and their ill-begotten wealth were experiencing even greater hardship, which he poses could be seen as one answer to the demonetisation puzzle.

Subramanian, who was appointed as CEA on October 16, 2014, for a three-year term and was given an extension last year. However, although his official contract was till May 2019, he resigned in July citing ‘pressing family commitments’. He is currently a visiting lecturer of public policy at Harvard University’s Kennedy School of Government and a senior fellow at the Peterson Institute for International Economics.

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