Social impact of demonetisation may have been greater: World Bank

The World Bank has said the social impact of demonetisation may have been greater as the informal economy was likely to have been hit especially hard. However, the Bank said the impact of demonetisation on the informal economy was difficult to measure and greater data availability, especially on labour markets, is needed to better gauge the social impact of such policies in the future.

In its India Development Update released on Monday, the Bank said there were “statistical issues that mask some of the impact of demonetisation on measured economic growth in Q3 (third quarter of 2016-2017).” The government had on November 8, 2016 announced that existing Rs. 500 and Rs. 1000 banknotes, corresponding to 86 per cent of India’s currency in circulation by value, had been “demonetised” – that is, ceased to be legal tender.

Noting that demonetization caused an immediate cash crunch and that activity in cash-reliant sectors was affected, the Bank said India’s GDP growth slowed to 7% per cent year-on-year during the third quarter of 2016-2017 from 7.3 per cent in the first quarter. As a result, a modest slowdown is expected in the GDP growth in 2016-2017 to 6.8 per cent. According to the Update, growth is expected to recover in 2017-2018 to 7.2 per cent and is projected to gradually increase to 7.7 per cent in 2019-2020.

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The Bank said: “While the macro-economic impact of demonetisation has been relatively limited, the distribution of costs is uneven as the informal economy is likely to have been hit especially hard.” The report said although the informal economy may account for only 40 per cent of (India’s) GDP, it employs 90 per centy of India’s workers, and the disproportionate impact of demonetisation on India’s informal sector suggests that it would have affected those workers the most. The poor and vulnerable are more likely to work in informal sectors such as farming small retail and construction, and are less able to move to non-cash payments, the Bank said.

Demand for guaranteed employment up to February 2017 exceeded the full year of 2015-16 and rural consumption (in particular, sales of two-wheelers) contracted sharply in November, it said. However, it said, in the long-term, demonetization has the potential to accelerate the formalisation of the economy. The implementation of the GST is a key complementary reform that will support formalisation, as firms have a strong incentive to register with GST to obtain input tax credits, the Update added.

Frederico Gil Sander, Senior Country Economist, World Bank, and the main author of the Update, said: “Private investment growth continues to face several impediments in the form of excess capacity, regulatory and policy challenges, and corporate debt overhang. However, the recent push to increase infrastructure spending and to accelerate structural reforms will eventually drive a sustained rebound of private investments.”

A special focus of the Update was on the low female labour force participation in India. India has one of the lowest female participation rates in the world, ranking 120th among the 131 countries for which data are available. According the Bank’s assessment, India’s potential GDP growth can go up by a full percentage point if half the gap in female labour force participation rate with Bangladesh or Indonesia, is closed. In Bangladesh, 33 per cent of their labour force working in industry is women whereas in India it is only about 17 per cent, the Update said. The key to close the gender gap is to create more jobs, especially regular salaried jobs that are flexible and can be safely accessed by women, the Update said.

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