NEW DELHI: Economists believe the roots of the current slowdown besetting India were sown by the midnight announcement to demonetise some 86 per cent of India’s currency by value three years ago, though they also blame introduction of a flawed GST, the twin balance sheet crisis facing banks, the collapse of major NBFCs for the current economic impasse.
“There were a number of factors besides demonetisation, which hit the informal sector very hard … these included introduction of a new GST system of taxes with a lot of hiccups, a slowdown of the MSME sector, higher transaction costs etc., but demonetisation was the starting point,” said Prof Govinda Rao, former member, Prime Minister’s Economic Advisory Council.
“Our system does not capture data from the unorganised sector easily, but with revisions of GDP figures we will see that there was a sharp drop after that incident,” said Rao. A study done by Gita Gopinath of IMF, Prachi Mishra of Goldman Sachs and others entitled ‘Cash and the Economy: Evidence from India’s Demonetisation’, estimates there was a 2.2 per cent decline in economic activity in November and December 2016 and a 2-3 per cent reduction in jobs in the quarter after the note ban.
According to Labour Bureau’s Sixth Annual Employment-Unemployment Survey, the unemployment rate rose to a four-year high in 2016-17, when the government demonetised old currency notes. In 2017-18, the country’s unemployment rate stood at a 45-year-high of 6.1 per cent, according to the latest National Sample Survey Office’s periodic labour force survey.
“The fact is that the demonetisation compounded by the flawed introduction of GST and the NBFC crisis, besides a overall global slowdown has meant that jobs lost and demand slowdown, which occurred as a fall-out of the note ban has not only been reversed but continues,” said Prof Arun Kumar, Malcolm S. Adiseshiah Chair at Institute of Social Sciences, New Delhi.
The packages announced by the government are really addressed at the corporate sector, it does not repair the demand slowdown, which has its roots in the crisis in the unorganised sector, Kumar pointed out. The government has till now slashed corporate taxes and come out with sector specific packages such as for banking, automobile and realty, while the RBI has cut interest rates. “Both investment and consumption are declining and that is alarming,” said Rao.
Measures have not helped till now
These measures have not helped the downtrend till now. Industrial output growth in August contracted by 1.1 per cent and the output of eight core infrastructure industries contracted by 5.2 per cent in September. RBI also warned of the slowdown while reviewing the monetary policy in October. RBI cut its economic growth forecast for FY20 by 80 basis points to 6.1 per cent from the projection it made in August