India says cash ban hits growth

January 31, 2017
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India’s government says its controversial decision to withdraw high-value bank notes from circulation, that sparked long lines at ATMS, has hurt the economy as it lowered its growth forecast/AFP

, NEW DELHI, India, Jan 31 – India’s government acknowledged Tuesday that its controversial decision to withdraw high-value bank notes from circulation has had an “adverse impact” on the economy as it lowered its growth forecast.

In an annual survey published on the eve of the budget, the government said “the adverse impact of demonetization on GDP (gross domestic product) growth will be transitional” while Finance Minister Arun Jaitley said it would have significant implications for GDP.

Overview
  • By painting demonetisation as a blitz on corruption and cash-hoarding that will ultimately boost tax revenues, Prime Minister Narendra Modi has so far escaped a major backlash.
  • While there were massive queues outside banks in the weeks afterwards, they have now subsided while limits on withdrawals have eased.

In the survey, the government lowered its growth forecast for 2016-17 to 7.1 percent, down from 7.6 percent in the previous fiscal year.

But the survey said the “estimate is based mainly on information for the first seven to eight months of the financial year”, in other words before the shock move in November to pull all 500 ($7.30) and 1,000 rupee notes from circulation representing nearly 86 percent of the cash in the system.

Jaitley said he expected cash supplies would be fully “replenished” by the end of March and the economy should then “revert to normal”, projecting growth in 2017-18 to be in the range of 6.75 to 7.5 percent.

The survey by the government’s chief economic advisor, Arvind Subramanian, said the so-called demonetisation scheme had a series of negative impacts, including job losses and a decline in income for farmers.

“Growth slowed as demonetisation reduced demand … and increased uncertainty,” said the survey.

It did however say that the scheme “could be beneficial in the long-run” if it leads to a fall in corruption and fewer cash transactions that are mainly designed to avoid paying taxes.

By painting demonetisation as a blitz on corruption and cash-hoarding that will ultimately boost tax revenues, Prime Minister Narendra Modi has so far escaped a major backlash.

While there were massive queues outside banks in the weeks afterwards, they have now subsided while limits on withdrawals have eased.

India’s central bank announced late Monday that it would ease some of the restrictions on cash withdrawals although most savers are still only allowed to withdrawal a maximum of 24,000 rupees in cash each week.

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