My paper on Demonetisation is now published at the Economic & Political Weekly as Demonetisation through Segmented Markets: Some Theoretical Perspectives.
The analysis therein concluded that there would be a decrease in real GDP over the next few quarters as all the adjustments forced by the demonetisation pan out. The extremely slow remonetisation of the economy on account of shortage of new cash and poor logistics only seemed to be reinforcing this conclusion. Therefore, the recently released GDP growth estimate of 7.1% does not make sense. It has surprised economists and political commentators alike. For example, Ajit Ranade expresses his surprise in the following tweet:
Expressing doubt about the estimates, Mihir Sharma at Bloomberg asks if the Indian data is going the Chinese way. So how do we explain this estimate when economists as well as the IMF predicted the growth to be down to 6%? The analysis put together by The Wire based on interviews of some economists suggests the following possible reasons:
- The downward revision of Q3 F16 growth is pushing up the growth estimate for the current quarter. This downward revision could be because of poor agricultural growth in 2015-16.
- Pile up of inventories in the distribution channels could have been recorded as increased consumption expenditure. This is the channel stuffing phenomenon where the wholesalers pushed goods down the distribution channel still probably expecting the sales to revive after remonetisation.
- The rich may have spent on big ticket commodities like cars. For e.g. Maruti Suzuki recorded some increase in revenue pushing durable consumption expenditure up.
- The official GDP estimates don’t really measure informal sector activity with accuracy and it is the informal sector (unconnected households and firms) that has been hit very hard by demonetisation.
If the above reasons are true, then the growth estimate would most likely be revised downward later as data catches up with the decline in economic activity. However, for now the BJP government and Prime Minister Modi could take all the credit for the improved growth and boost their political capital when it matters given the UP elections.