Note-ban led to a three percentage point decline in GDP: NBERhttps://indianexpress.com/article/business/economy/note-ban-led-to-a-three-percentage-point-decline-in-gdp-nber-5499626/

Note-ban led to a three percentage point decline in GDP: NBER

The report, however, said that while it had a short-term impact on economic activity and credit growth, there may be “long-term advantages from demonetisation.”

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The Indian economy grew at 7 per cent in the third quarter of 2016-17 and at 6.1 per cent in the subsequent quarter. In 2016-17, the Indian economy grew by 7.1 per cent and at 6.7 per cent in 2017-18.

Two years after the government announced demonetisation in November 2016, a paper released by National Bureau of Economic Research states that demonetisation resulted into a 3 percentage point decline in national economic activity in November and December 2016 and a 2 percentage point decline in credit in the fourth quarter of calendar 2016.

The report, however, said that while it had a short-term impact on economic activity and credit growth, there may be “long-term advantages from demonetisation.”

The paper authored by Gita Gopinath along with Gabriel Chodorow-Reich, Prachi Mishra and Abhinav Narayanan said, “Demonetisation caused a decline in national economic activity of roughly 3 p.p. or more in November and December 2016 relative to a no-demonetisation counterfactual. Similarly, the effect on credit implies a 2 p.p. or more decline in 2016Q4. These effects dissipate over the few months.”

The Indian economy grew at 7 per cent in the third quarter of 2016-17 and at 6.1 per cent in the subsequent quarter. In 2016-17, the Indian economy grew by 7.1 per cent and at 6.7 per cent in 2017-18.

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The paper, however, also pointed that demonetisation may have long term advantages. “There may be longer term advantages from demonetisation that arise from improvements in tax collections and in a shift to savings in financial instruments and non-cash payment mechanisms. Evaluating these long-term consequences requires waiting for more data and an empirical strategy suited to the study of longer term effects,” the report said.

The paper further said that districts that experienced severe demonetisation had relative reductions in economic activity, faster adoption of alternative payment technologies and lower bank credit growth.

According to the paper, note ban also led to a decline in nightlights-based economic activity and a 3 percentage points or more drop in employment generation in November and December of 2016 relative to the counterfactual path.

Adding that cash remains plays an important role in facilitating economic activity India, the paper said that while cashless limit may appropriately describe economies with well developed financial markets, in modern India cash continues to serve an essential role in facilitating economic activity.

The authors used a new household survey of employment and satellite data on human-generated nightlight activity to measure demonetisation’s effects at the district level.

Gita Gopinath, who is one of the authors of the paper is India-born Harvard professor, is set to take charge as the chief economist at the International Monetary Fund (IMF) next month.