Economic output in the current quarter may get affected, with the government’s demonetisation drive temporarily hitting commercial activities in some sectors, Commerce and Industry Minister Nirmala Sitharaman conceded on Wednesday.

But the economy will expand subsequently as the Reserve Bank of India is releasing more cash now and banks have greater supply, the Minister told BusinessLine in an interview.

This is probably the first acknowledgement by a Union Minister of the negative fallout of demonetisation on the GDP — although Sitharaman was quick to add that it would not last long.

“It is only the first week or ten days (following the demonetisation announcement) when there was (a) real hard demand for lower denomination or for ₹500 notes, which gradually came into the market. That week, commercial transactions would have taken an impact. But I think revival will happen. This quarter, there may be an impact on the outflow. It will protract after that,” Sitharaman said.

The government withdrew ₹500 and ₹1,000 notes as legal tender from November 8 in an effort to flush out black money, and began replacing them with new ₹500 and ₹2,000 notes. A full replacement, however, will take some time; this has resulted in a cash crunch.

A ‘body blow’ to industry Others, however, see a rather more grim impact from the government’s move. The sudden demonetisation drive has served a “body-blow” to the entire industrial sector, and the worst hit will be small and medium enterprises (SMEs), said Biswajit Dhar, Professor, Jawaharlal Nehru University (JNU).

“It is very clear that the impact of the demonetisation drive on demand had not been thought out by the government. It is difficult to assess the extent to which GDP will be hit and the duration, but definitely SMEs will be hit the most, and will take a while to recover from the dip,” he said.

Warning that a massive supply constraint was on the cards, Dhar said this would be a double whammy for exporters, who are already facing demand constraints.

The short-term loss to the economy could be at least ₹12 lakh crore or 8 per cent of GDP, according to R Kavita Rao from the New Delhi-based think-tank National Institute of Public Finance and Policy.

“If ₹3 lakh crore is being extinguished, as is often quoted in media reports, and, say, half of it is used for transactions, the corresponding GDP loss to the economy would be ₹12 lakh crore since, currently, GDP is about eight times the currency in circulation,. This will amount to about 8 per cent of GDP when compared to GDP for 2015-16,” Rao said in a post on the NIPFP website.

Sitharaman also pointed out that the government was taking steps specifically to address the problems of people in rural areas.

“After having heard a lot about agriculture workers and rural areas not receiving as much cash as they would want, the Finance Ministry yesterday reviewed the situation... I am given to believe that in the rural areas, there will be more cash flowing,” Sitharaman said.

Related Topics
comment COMMENT NOW