Thursday, March 02, 2017

Demonetization and Growth in India’s GDP

from MR "India’sGDP figures were just released and lo and behold they are great! Quarterly growth for Oct-Dec (demonetization, the banning of 86% of India’s cash, hit on Nov. 8) was 7% on an annual year over year basis. Many analysts and critics had predicted a significant slowdown. Prime Minister Modi took the opportunity to take a dig at economists like Amartya Sen who had sharply criticized demonetization saying “Hard work is more important than what Harvard thinks.” (Sen teaches at Harvard). Modi’s BJP party also seems to be doing well in the important elections in Uttar Pradesh suggesting a second term for him."
A more Detailed report expresses doubts apart from the doubts about data:Basically, and to continue the update, the main idea here is not that the GDP figures are being fiddled, but that either the impact from demonetisation was not as severe as expected, that there are unique reasons such as cash in hand or inventory buildupsexplaining the elevated figure, or that official statistics are failing to capture the negative growth effects on the informal sector — which accounts for about 40 per cent of India’s GDP but provides 75 per cent of employment, per the FT.
The questions then are to what extent that will ever be captured in the GDP series or if its weight on the series has been exaggerated by those who expected a lower print.
For what it’s worth, the reporting we’ve done in and around Mumbai, including in textile mills above the city, would seem to confirm that for some industries there has indeed been a massive falloff in demand and a resultant drop in employment.
While small traders in Mumbai say that business is returning, the mill owners we talked to outside the city said they had seen some 80 per cent of their business fall away immediately after demonetisation, and it was only very slowing coming back. Some went further, showing us mothballed machines and suggesting their industry would never fully recover."

1 comment:

L said...

The smaller business people like my local sabzi wallah, our neighbourhood Udupi hotel, stationer, hardware store, all told me that their business had gone down sharply. The hotel fellow gave figures...he used to do business for 40,000 per day, but had now gone to 9000/10000. He could not fire his employees because he would need them when business returned, but did not have money to pay them that month. The sabzi wallah said he was selling about half of what he used to. All this is not getting reflected in the GDP calculations is it?
The larger question then is when we say the GDP is high, it may or may not mean small businesses are doing well since they don't count in the economy. If they don't count, why would anything be done for their benefit in any govt policy?