Did the Indian economy suffer only temporary hiccups from the abrupt withdrawal of high-value currency notes in November 2016? Until recently, the Government and quite a few commentators were convinced that it did. Macro-economic data releases such as the first advance GDP estimates (which retained real gross value added, or GVA, growth at 7 per cent for FY17), agricultural output (which showed a sharp increase), quick estimates of the IIP (which showed a turnaround in January) and inflation indices flagged no untoward trends. However, recent data suggest that the celebration may have come a tad too early. Data releases since late May have been suggesting that demonetisation may have had insidious second-order impacts which are yet to be fully understood. Recent data showing a moribund investment leg of the economy and deflationary trends in agri-produce, suggest that key growth engines of the economy took a hard knock in the January-March quarter of 2017.

Provisional GDP estimates released on May 31 acknowledged that growth in the GVA fell sharply in Q4 FY17 to 5.6 per cent, after holding up at 6.7 per cent in the note ban quarter. This moderated GVA growth for the full year to 6.6 per cent, a 130 basis point slump from FY16. It was some heavy lifting by the government and a rebound in agricultural output that sustained even the 6.6 per cent growth. But more recent inflation data suggests that the farm sector prosperity indicated by the GDP numbers may be nothing more than a mirage. Both CPI and WPI inflation rates have slipped to multi-month lows in May, driven mainly by an unusual slump in food prices. Vegetable prices are down 13 per cent year-on-year, pulses have declined 19 per cent and fruits/oils are up just 1-2 per cent in a year, reinforcing the collapse in incomes that has had farmers up in arms across States. That prices for a wide range of crops should deflate in tandem during the pre-monsoon months of March to May, a seasonally inflationary period, suggest that factors other than the large harvest could be at play in depressing rural fortunes. One plausible explanation is that demonetisation delivered a body blow to the traditional distribution channels and marketing centres for agri-produce, leading to demand destruction. The uncertainty and de-stocking preceding GST is likely aggravating this problem. Wholesale trade channels for manufactured products faced a similar crisis in the post-demonetisation months, and were bailed out by the manufacturers. The RBI’s inexplicable reluctance to restore cash in the economy to pre-note ban levels, seems to be aggravating the cash crunch.

These trends call for the Centre to first acknowledge that demonetisation was not a non-event for the economy. It will need to conduct detailed impact assessments and formulate remedial measures. Staying in denial mode may well threaten both the fledgling economic recovery and the NDA’s own electoral prospects for 2019.

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