The shadow of the black economy is receding
The formalisation of the economy after demonetisation brought in many gains
Shock therapy can work, but not without leaving some burn marks. The World Bank’s latest India Development Update attempts to make another assessment of the impact of the Narendra Modi government’s demonetisation experiment. It does not shy away from saying that demonetisation caused considerable distress among informal sector workers. But its general conclusion is that ‘notebandi’ had many more pluses than minuses and its negative fallout was limited. Part of the reason for this was simple luck: A normal monsoon helped cushion the rural economy. The report looks at the velocity of M1 money supply, a way to measure the number of transactions in cash, bank accounts and normal places people keep their money. The velocity fell from 5.7 to 5.6 between the last quarter of 2016 and second quarter of 2017. The bank predicts a sharp rebound in velocity in the coming quarters.
The report says that the GDP growth rate dipped but only marginally during the demonetisation period. It estimates GDP growth rate was at 7.3% in the first half of the fiscal year and dropped one-third of one percentage point in the second half. However, the bank admits it has no clear means to calculate the impact on the informal sector. There are clues to the degree of turmoil in this sector. Demand for jobs in the formal sector by February matched the entire demand of 2016. This is a clear sign of how many jobs were lost during demonetisation. However, this also underlines a key advantage of demonetisation: It is helping push India out of the shadow of its black economy.
Formalisation of the economy has numerous gains. There are many who speak in favour of the informal sector. But the poor man’s economy has a crucial flaw. Because of its static productivity and technology levels it keeps its inhabitants in poverty. If India’s economy is substantially whitened, demonetisation will be remembered as the act that began the process.