21 Feb 2017
" In spite of demonetisation, India remains one of the fastest-growing major economies."
Sanjeev Bajaj, CEO ANZ India
New banknotes could not be printed fast enough to replace the old ones, and so limits were put on the amount of cash that could be withdrawn. These restrictions were lifted on March 13, marking the end of the major implementation of this massive project.
It is now time to pause and reflect on the impact, India’s resilience, as well as its ability to bounce back to normality after the disruption of the cash shortage.
According to an estimate from the International Monetary Fund, the effects of that disruption were expected to dissipate by March.
This is perhaps surprising, considering it was only November when Prime Minister Narendra Modi told the nation 500 and 1000 rupee notes would no longer be legal tender to fight the “festering sores” of corruption, black money, terrorism and fake currency.
From midnight the same day, 86 per cent of the cash in the economy was affected, and because there was little warning – because advance notice may have given criminals time to find loopholes – some disruption was inevitable.
“In spite of all these efforts there may be temporary hardships to be faced by honest citizens. Experience tells us that ordinary citizens are always ready to make sacrifices and face difficulties for the benefit of the nation,” Modi said in his speech announcing the changes.
At the extreme end of this, there were media reports of deaths – for example, elderly people waiting in bank queues – were directly attributed to demonetisation.
Less extreme were reports of children being held back from school because their parents needed them to work for them because they did not have the cash to employ their usual casual labour.
Many were faced with the choice of hoarding bank notes before the deadline to exchange them ran out, or spending them. Many chose to keep the cash for essentials like food, rather than give away their last notes to others.
For some workers paid in cash, they could have then missed out on more work because they needed to spend half a day in a bank queue to deposit the old notes while they were still legal tender.
Recent reports suggest small businesses have been impacted, with a dramatic drop in activity, and jobs appear to have been cut by a third.
Despite these figures, however, GDP estimates released in February were encouraging. India’s GDP estimate for fiscal 2017 (to the end of March this year) was 7.1 per cent, which was higher than many expected.
This was also in line with the Central Statistics Office’s original estimate from January, with the government’s stance being there had not been any adverse economic impact from demonetisation.
According to ANZ Research, this GDP figure can be expected to be adjusted downward when the revised numbers are released in May 2017.
ANZ Research also notes this GDP number does not fully capture data from the informal economy where the impact of demonetisation would have been felt more keenly.
This perhaps explains the difference in opinions about the impact of demonetisation, with some saying it did have an impact while others have been keen to point out in spite of demonetisation, India remains one of the fastest-growing major economies.
Despite the differences of opinion about the perceived and real disruption, and the impact, perhaps the more balanced view is the human mind is innovative when people are presented with no choice and have to adapt.
In many respects India seems to have adjusted well considering the monumental scale of the task at hand, and life has mostly returned to normal.
In what has been a story of resilience, life seems to be back to normal and the demonetisation period has been faster than anticipated.
Sanjeev Bajaj is CEO ANZ India
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
21 Feb 2017
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