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The GDP Number Will Not Capture the Full Negative Impact of Demonetisation

Feb 8, 2017


The Economic Affairs Secretary Shaktikanta Das recently told The Hindu Business Line: "There are no statistics on the impact of demonetisation. What people are talking about are impressions and presumptions."

What Das means here is that there is no official data which can help tell us the impact that demonetisation has had on the Indian economy. And he is more or less right about it. What we have are news-reports and private surveys, with which the government has nothing to do.

Take the case of this news-report in The Times of India on the glass and bangle industry in Firozabad in Uttar Pradesh. The report quotes a union leader as saying: "Around 65% of bangle factories are still shut. A majority of those which are operating are exploiting workers. A large number of factories have lowered wages in the range of Rs 30 to Rs 50 per day from the Rs 400 per day that an average worker used to get. Workers are forced to work for long hours and even on Sundays and are being threatened when they raise their voice. They are openly told that scores of others are waiting to work in their place." This is not official data but just an on the ground newsreport.

Or take the case of a survey carried out by All India Manufacturers' Organisation(AIMO), which has projected a loss in revenue of 55 per cent and a drop in employment of 60 per cent before March 2017, for small businesses. As The Indian Express reports: "The AIMO represents over 3 lakh micro, small scale, and medium and large scale industries engaged in manufacturing and export activities."

Or take the case of another survey, the Assocham's Bizcon Survey, which says: "Demonetisation of high value currency notes would leave quite a negative impact on SMEs, rural consumption and job creation in the immediate run."

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Again, these are private surveys and have got nothing to do with the government or its data.

Or take the case of what Raju Shetti, an MP from the Swabhimani Paksh. Shetti, who is an ally of the BJP, recently told The Indian Express: "The rural economy is majorly cash oriented and is not ready for cashlessness. Post demonetisation many farmers had called me to complain how the traders were forcing them to take withdrawn notes - the government had not put proper mechanism in place."

Again, this is something an MP thinks on the impact of demonetisation. It's got nothing to do with government data.

Or take the case of the troubles being faced by power projects. As a report in The Financial Express points out: "Though power sector entities initially gained from the facility opened after demonetisation to pay utility bills in scrapped banknotes, latest performance reports from various transmission projects show that numerous construction sites are facing constraints. In the monthly progress report of inter-regional/inter-state transmission schemes published by the Central Electricity Authority (CEA), various such projects have cited demonetisation as a reason behind the delays." This is the first case where we can say that there is some government data to show the negative impact of demonetisation.

Lest I be accused of cherry-picking only negative news-reports, there have been non-negative reports on the impact of demonetisation as well. Let me highlight a few of these as well. Ajay Kaul, CEO of Jubilant FoodWorks, told ET Now that the impact of demonetisation on their business was constantly coming down.

A report in the Mint says: "Cement makers have survived the demonetisation shock quicker than expected with the southern markets affected the least, several manufacturers and analysts said. A full recovery may not be far either."

Or take the case of cargo handled by ports. "Cargo handled by major ports after demonetisation has shown a growth in comparison to the same period last year," Shipping Minister Mansukh Lal Mandavia told the Rajya Sabha in a written reply to a question.

The impact of demonetisation on company earnings also seems to have been limited in the period of three months ending December 2016. As a report in the Mint points out: "A Mint analysis of 94 of the BSE500 companies shows that 55 have reported earnings that met or beat estimates. The ratio is little changed from the September quarter."

Now what is the difference between the two set of examples that I have written about? The negative newsreports are largely around businesses in the informal sector. On the other hand, the non-negative newsreports are around businesses in the formal sector.

Hence, to that extent the Economic Affairs Secretary Shaktikanta Das, quoted at the beginning of this piece is right. There is no official data that shows that the informal sector is in a bad shape after demonetisation. In fact, as the economist Esther Duflo told the Mint sometime back: "We do not know that yet and we might never know. This is because there is no effective mechanism to measure GDP creation in the informal economy. I was told that informal economy GDP is calculated by indexing it to the formal economy GDP. If that is the case, we might never know the exact magnitude of loss."

This is something that the Economic Survey authored under the Chief Economic Adviser Arvind Subramanian, points out as well. As the Survey points out: "It is clear that recorded GDP growth in the second half of FY2017[October 2016 to March 2017] will understate the overall impact because the most affected parts of the economy-informal and cash based-are either not captured in the national income accounts or to the extent they are, their measurement is based on formal sector indicators. For example, informal manufacturing is proxied by the Index of Industrial Production, which includes mostly large establishments. So, on the production or supply side, the effect on economic activity will be underestimated."What does this mean? It means that the informal sector is not captured in the gross domestic product (GDP) numbers. If it is, then it is indexed to the formal sector. This basically means that the size of the informal sector is captured in the GDP number based on the size of the formal sector. If the formal sector number is not impacted, then the informal sector is not impacted either, at least theoretically.

So, therefore the GDP numbers in the time to come may not capture the negative impact of demonetisation totally. As the Economic Survey puts it: "The impact on the informal sector will, however, be captured insofar as lower incomes affect demand for formal sector output, for example, two wheelers."

Given this, as Duflo puts it: "The government might use these figures to argue that there was no significant setback." In fact, as Das's statement at the beginning of this piece shows, it already is.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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10 Responses to "The GDP Number Will Not Capture the Full Negative Impact of Demonetisation"


Feb 10, 2017

Does the man on the street understand all of this scholarly analysis of the devastation caused by this 'surgical strike' on the economy? No, he still thinks that Modi has done something bold to hurt the entrenched rich and so will continue to vote for him.


vinayak Bhat

Feb 9, 2017

If Demonetisation is so bad, government will not even try going for it. They have a good set of economists who are good with their theory and thinking. Finmin Jatley has hinted at return of approx 10L crore black money or high deposits in his budget speech. Then why are you writing so much non-sense against it. Few industries use it to cover up. Do you think people stop brushing tooth, using soap or stop smoking because of deMo? I havent seen anyone stopped buying a set of new clothes because of this. Buses to nearby places are as full as ever. Then why blame something which helps the country. I feel your articles are missing the target now-a-days. Pls stop blame game.


Maheep Kapur

Feb 8, 2017

Virtually all old ₹1000 and ₹500 notes are back in the banking system. This obviously includes the money which was keeping undeclared businesses going. Today there is no restriction in drawing cash from current accounts, which are used, or should be used, for business. There has never been any restriction on transferring money from any Savings bank account to any other account. So there should be no impact of the demonetisation on any aspect of business EXCEPT demand at retail level. While this, in turn, can lead to some under-employment, it does NOT explain reduction of hourly rates of earnings of labour.
Sub-contractors in construction activity have also reduced payouts to workers by 50-60 percent, while still getting the same extent of work done. Traders are forcing farmers to sell their produce at unseasonly lower prices, without a corresponding fall in vegetable prices in the retail markets. Citing demonetisation for all this is quite illogical.
Are small-scale trading, service and manufacturing businesses now trying to run their businesses drawing lesser money from accounts, to avoid questioning by Income Tax dept about their earlier level of business operations? And their employees including contract employees including daily wage workers are bearing the brunt of this unethical money-tightening?
The problem is not demonetisation, it is the fear of being caught out by Income Tax and Excise depts, under prodding of the current GOI.
As a corollary, does it mean that 50-60 percent of all informal-sector economy is unrecorded business? And do we all have any idea of how that is to be remedied?


Ashok Kothare

Feb 8, 2017

I always doubt GDP calculations. There is no standard calculation available and we notice economist coming with varied GDP value in same condition. I suggest the along with GDP we should consider GDS (gross domestic sell) so that the real condition of economy of the society we can assess. Ratio of GDP/GDS will show true position of market and economy. Your commends please.

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Feb 8, 2017

If these small manufacturers were doing such roaring business before demonetisation, why were they not paying taxes ?

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J K Mathur

Feb 8, 2017

9889823842 It is true that there are no firm reports on the impact of demonetization on the economy. There is only anecdotal evidence in the from of statements made by various interested parties, like ministers who are anxious to show that dem. was a correct step to eradicate corruption.There is need for collection of official as well as informal data by the NGOs to make an assessment that may be credible.Up till now, the govt. has failed to give any reliable appraisal of the monumental measure taken in the shape of demonetization.However, stray reports coming thru word of mouth and informal channels indicate that the small and tiny sector has suffered heavily as it depended mainly on cash transactions. Small units in industrial towns like Ludhiana, irozabad, Tirpur and other places have hardly any business. The organized sector may be largely unaffected as they are able to do cashless transactions.The govt. should see the realities of the situation and go about cashlessness rather gradually; it cannot be thrust upon the unwilling public who have genuine difficulties.

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R Tayal

Feb 8, 2017

Dear Vivek, Can't say the same of other media & journalists, but I expect fair & balanced coverage from you. Only 2 points : first it seems amazing that while adverse impact of demonetization has been splashed ad-nauseum, a balanced view warrants a proportionate coverage of its positive impact both short & long term. Secondly, the sources quoted by you & others to highlight the adverse impact on informal sector, are mostly the affected party themselves so there may be an inherent tendency for them to exaggerate (can't rebut them straightaway but it is a distinct possibility, which any honest journalist must factor in or at least make a small effort to broadly validate). And they too are stating their impressions & not any compiled data. When you say that informal sector isn't accurately measured in India's GDP, you are only stating a need to correct this anomaly, which can only happen by moving it to a less cash environment. This is not to belittle their difficulties but only to allow objective & dispassionate debate, and a way forward.

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Feb 8, 2017

I don't know what to make of the untiring efforts of Vivek to bad-mouth demonetisation (DeMo) ... must be in-bred hate or some personal grudge. I have no patience to count, but this must be the 40th or 50th article painting dismal picture of Indian economy due to DeMo. Well and good.

My take -

1. OK, let me get this straight, tomorrow if the Govt. were to come up with a GDP growth figure of 7.1%, Vivek will say, it is actually 6.5% (or even less) because slowdown in informal economy is not truly reflected in the GDP number. Fine. But, it is neither here nor there, unless we have clear-cut parameters to measure growth in informal economy - how was it before DeMo, how is it now, how will it be next quarter, and so on?

2. From day one, anybody with a sane mind would have known (and was duly accepted by Govt. spokies) that short-term effects of DeMo will be seriously negative on the informal sector, consequently also on the over-all economy. But our star economists don't want to leave any chance to beat their drum on this count again ... and again ... and again.

3. Agreed that large parts of our economy are dependent on cash, and they are affected badly due to cash-crunch. But once the cash situation improves (which it seems to be doing already), the needs that were met by cash before DeMo will not disappear altogether. The demand got suppressed for a few months, but the demand will definitely resurface. So, to keep shouting that the economy has been dealt with a body blow FOREVER is to be either short-sighted or just plain stupid.

4. There are businesses like POS terminals, digital wallets (and many others) that benefited due to cash shortage, same as there are large business-areas that got affected negatively. The balance is definitely tilted towards those losing heavily due to DeMo, but to keep harping only on the negatives, without looking at the long-term benefits, is ... (see last sentence in point 3 above).

5. So, we have reams of data thrown at us, trying to prove that having large amounts of cash in an economy does not necessarily mean there is large tax evasion. But does it mean we close our eyes to rampant tax evasion in our cash economy - politicians, bureaucrats, doctors, lawyers, ...? Does it mean an elected Government should not try to dissuade such tax evasion, because the economy will be temporarily affected badly?

6. Suddenly, Vivek got inspiration and became active to initiate petition seeking transparency in funding of political parties. Good thing. I seem to have missed such active concern during UPA decade!

7. I had a good opinion of Ajit Dayal and Equitymaster because he and the group claimed to follow honest and non-corrupt methods in its working. Ajit also was often seen sermonizing others on their failings. From the tone of writings in Vivek's columns and various commentators in `5 Minute wrap up' for the last few months, I get the impression that the present government is perhaps the most corrupt and insensitive in 7-decades long history of our independence, and Modi has driven the economy into a large black hole due to his policies, from which it will take decades to recover.

When people work with an agenda, their credibility goes for a tailspin!

Sorry for the long rant. I am just a simple person, not a star economist.

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Rajendra Modak

Feb 8, 2017

Vivek is commenting on the impact of demonetisaton on the informal sector and its impact on GDP. He mentions that since the informal sector numbers are not available demonetisation impact on GDP cannot be measured. While this may be correct, when Govt declared the GDP numbers prior to demonetisation, Vivek used to ridicule the numbers saying that they were wrong. What about the positive numbers of the informal sector which were not getting captured in the GDP then. Why Vivek never bothered to comment at that time. Vivek has blinkered view on the Indian economy moreso after BJP has come to power. While every person can have a view based on his ideology or his political inclinations, when we analyse stock market, these views need to be kept aside and only the corporate numbers must be looked at.

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Feb 8, 2017

The government can magnanimously accept the failure of demonetization or failure in predicting the impact on SME sector and farmers. How long they will hide under digital india or black money. It may be a good plan but poorly executed. Apart from that Indians are very good bypassing violating laws particularly to save few rupees more.

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