Demonetisation Hit Growth But May Not Have Been Captured in Official Data, Says New Study

The note ban lowered the quarterly growth rate by at least 2 percentage points, but the lower output might not have reflected in national GDP data.

New Delhi: The Narendra Modi government’s note ban decision may have lowered the quarterly growth rate at the time by at least 2 percentage points, according to a new research paper co-authored by IMF chief economist Gita Gopinath.

The study uses a “new household survey of employment” and “satellite data on human-generated nightlight activity” and a number of other datasets to measure the effects of demonetisation at the district level.

It estimates that the note-ban also led to a decline in “nightlights-based economic activity and of employment of 3 percentage points or more in November and December of 2016 relative to the counterfactual path”. This, the study notes, led to “a decline in the quarterly growth rate of 2 p.p. or more”.

“…We conclude that demonetization caused a decline in national economic activity of roughly 3 p.p. or more in November and December 2016 relative to a no-demonetization counterfactual,” the National Bureau of Economic research paper, which has not been peer-reviewed but has been “circulated for discussion and comment purposes,” states.

“If trend growth in India was 1.5% per quarter (6% per year), then our estimates imply an absolute decline in economic activity of about 0.5% in 2016 Q4 from the previous quarter. This follows from the 3% decline in November and December and no impact in the pre-demonetization month of October,” a footnote in the study notes.

Also read: Modi Government Admits it Never Studied the ‘Impacts, After-Effects’ of Demonetisation

In addition to Gopinath, the paper’s co-authors also include economist Prachi Mishra, who used to head the RBI’s strategic research unit, and Abhinav Narayanan, a current research economist at the RBI. Harvard professor Gabriel Chodorow-Reich is the lead author.

The research paper’s conclusion also examines why such a “decline in output” would not show up in India’s GDP data, an issue it attributes to the problems with measuring informal economic activity in the country.

National data is “volatile…making it difficult to discern a single break-point around demonetisation”, it notes, adding that official statistics also don’t capture the informal sector very well.

This is a point that has been emphasised by the other Indian economists like Arun Kumar.

“Moreover, our measures of real activity have the advantage over official GDP of directly incorporating informal sector activity. The informal sector in India is estimated to account for 81% of total employment (ILO, 2018) and 44% of total output (CSO, 2018) and is especially cash-intensive,” the paper notes.

“While the level of official GDP includes an estimate of informal sector activity derived from a quinquennial household survey, quarterly changes in GDP do not reflect any direct measurement of informal sector activity. Thus, our results also point to the likelihood of an absolute decline in economic activity at the end of 2016 not captured in official statistics,” it adds.

Longer-term impact needs more data

The paper however cautions that its assessment of the near-term impact lends itself only to November-December 2016, as the “cross-sectional differences dissipate in the months following demonetisation”.

“There may be longer term advantages from demonetization that arise from improvements in tax collections and in a shift to savings in financial instruments and non-cash payment mechanisms. Evaluating these long-term consequences requires waiting for more data and an empirical strategy suited to the study of longer term effects,” it notes.

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