Note ban to shave off GDP growth by up to 0.5 pc

Demonetisation will shave off the economic growth for the current fiscal by 0.25 per cent to 0.50 per cent though it will have long-term benefits for the economy by reducing interest rates and eliminating corruption, besides bringing in more activities in the formal sector.

The cash squeeze, following junking of high value notes of Rs 500/1000 on November 8, 2016, the Economic Survey for 2016-17 said, "will have significant implications for GDP, reducing 2016-17 growth by 0.25 to 0.50 percentage points compared to the baseline of 7 per cent."

The Survey has, however, projected the growth rate for 2017-18 at 6.75-7.5 per cent. For the current fiscal, the GDP growth has been estimated at 6.5 per cent, lower than 7.1 projected by Central Statistics Office earlier this month.

It expressed hope that the remonetisation exercise will eliminate cash squeeze by April 2017, while asserting that the adverse impact of demonetisation on GDP growth will be transitional.

"Once the cash supply is replenished, which is likely to be achieved by end-March 2017, the economy would revert to the normal," the document said.

The costs of demonetisation include contraction in cash money supply and subsequent, albeit temporary, slowdown in GDP growth, while the benefits to the economy will be in the form of increased digitalization, greater tax compliance, reduction in real estate prices, increase long-run tax revenue collections and GDP growth.

It further said that effective cash in circulation fell sharply although by much less than commonly believed – a peak of 35 per cent in December, rather than 62 per cent in November since many of the old high denomination notes continued to be used for transactions in the weeks after November 8.