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  • 5 things to note in RBI’s report on impact of demonetization

    The Indian Prime Minister Narendra Modi announced demonetisation of 86% of the currency in circulation on November 8, 2016. The action was taken to hit at corruption, black money, counterfeiting and terror financing.

    The actual impact of the move has been much discussed and analysed. Information, however, was sparse. Even the Reserve Bank of India couldn’t quantify the impact in time for their monetary policy review. Until recently, that is.

    A few days back, the RBI published a preliminary report on the macroeconomic impact of demonetisation. Here are 5 points to note:

  • Transient impact

    The Indian economy has been adversely affected by the demonetization drive, the RBI report said. However, this impact was short-lived in most sectors of the economy. The months of November and December 2016 witnessed the greatest challenges. But the impact moderated significantly around the year-end. By mid-February, the impact dissipated by a large extent, the RBI report said.

  • Impact on productivity

    One of the lead indicators of economic activity and growth in the country is Purchasing Managers’ Index (PMI). It measures the increase or decrease in orders, inventories, employment and production for manufacturing and service companies. It thus indicates the economic health of the manufacturing and service sectors. Demonetisation affected company productivity, the RBI said. This can be seen in the decline in manufacturing PMI to 49.6 in December from 54.5 in October. A PMI reading under 50 indicates negative growth, while a reading over 50 indicates expansion. However, the PMI data crossed the 50 again in January. This indicates the reduction of impact in the new year. The PMI in services sector followed a similar trend.

  • Sectors affected

    The impact of demonetization was visible mostly in the construction and real estate sector, the RBI report said. Labour-intensive areas such as textiles, gems, jewellery have also been affected. This was primarily due to the shortage of cash in circulation. However, the strong growth in sectors such as manufacturing, agriculture, electricity, and mining ensured that the overall impact on Gross Value Added (GVA) growth was modest, the RBI said. GVA is defined as the measure of the the total value of goods and services produced in an area, sector or industry. So, a higher GVA growth value is good for the economy.

  • Impact on private consumption

    Automobiles, consumer durables, FMCG and real estate are well-known cash intensive sectors. Naturally, they were affected by demonetisation. In the month of November, sales in the automobile sector declined by 5.5% year-on-year. The poor run continued with an 18.7% and 4.7% decrease in the months of December and January. However, the sector bounced back quite well in the subsequent month with a sales growth of 0.9% YoY. However, the consumer durables sector was not as affected. It witnessed an increase in demand after demonetisation. GDP data shows that Private Consumption Expenditure (PCE) increased to 10.1% in the third quarter ended December 2017, from 5.1% in the July-September quarter. PCE is the expenditure incurred on consumption of goods and services by households across the country.

  • Positive impact in the medium-long term

    While demonetization has certainly had some amount of negative macroeconomic impact, this is not long lasting, as per the RBI report. With remonetisation of the currency notes and lifting of cash withdrawals, banks can now go back to the pre-demonetisation rules. Normalcy can, thus, ensue. But more importantly, demonetization is expected to have a positive impact in the medium-to-long term. People could shift towards digital payment ecosystem. This can help reduce black money and also include more sections of the country in the formal financial sector.

    • The RBI’s report on the macroeconomic impact of demonetization  Read more

    • Indian GDP growth in third quarter faster than expected despite note ban  Read more

  • Rs. 1,900 Crore

    One of the biggest positive outcomes of demonetization was the increase in the number of digital transactions in the country. For example, the value of Unified Payments Interface (UPI) transactions increased to ` 1,900 crore in February from ` 19 crore in November. There has been an increase in other modes of digital transactions such as NEFT and IMPS too.