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Demonetisation threw up political, economic puzzles: Arvind Subramanian
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SME Times News Bureau | 10 Dec, 2018
Drawing the link between demonetisation and GDP numbers, former Chief
Economic Advisor Arvind Subramanian has said the puzzle thrown up by the
note ban has a dual aspect - whether its impact as seen in the GDP
numbers reflects a resilient economy, and if the growth figures pose
questions about the official data collection process itself.
In
an interation with IANS, Subramanian, currently teaching at Harvard
Kennedy School, and here for the launch of his book "Of Counsel: The
Challenges of the Modi-Jaitley Economy", published by Penguin, referred
to the chapter "The Two Puzzles of Demonetisation -- Political and
Economic".
He also referred to the other "puzzle" posed in his
book -- that of divergence in regional economic development in India
despite equalising forces like migration and economic growth -- a
dynamic of the states, he says, which runs against the logic of
competitive federalism.
"Through my new book, I am drawing
attention to the puzzle, the big puzzle of 86 per cent reduction in cash
after demonetisation, and yet the impact on the economy was much less,"
he said.
"The puzzles essentially spring from the fact of why
the measure was politically successful, and why GDP was affected in such
smaller measure... Is it because we're not measuring GDP correctly, not
measuring the informal sector, or is it the underlying resilience in
the economy?" he said.
"In the six quarters before
demonetisation, growth averaged 8 per cent and in the seven quarters
after, it averaged about 6.8 per cent (with a four-quarter window, the
relevant numbers are 8.1 per cent before and 6.2 per cent after),"
Subramanian has written in his book.
"The key to this would lie
in a comprehensive understanding of both the polity and economy of
India, about how people vote, for instance," he said.
He
referred to the ongoing controversy on the NITI Aayog's presence at the
release of the GDP back series data by the Central Statistics Office
(CSO) with a change of the base year, lowering the country's economic
growth rate during the previous UPA rule.
"I think the
calculation of GDP is a very technical task and technical experts should
do the job...institutions that don't have technical expertise should
not be involved in this," he said.
"Economists would naturally
raise questions when the parameters vary so much and yet growth remains
similar. It is not so much about credibility of the data as about the
data generating process itself and of the institutions that carry it
out," he added.
To a query on whether he was a participant in
the decision-making process on demonetisation, the former CEA said: "As
I've said in the book, it is not a Kiss and Tell memoir...that is for
gossip columnists."
Asked about the recent tiff between the
government and the Reserve Bank of India (RBI), Subramanian said the
autonomy of RBI must be protected because the country will benefit by
having strong institutions.
"I have myself advocated that RBI
should play a pro-active role, but its surplus funds should not go
towards routine financing of spending and deficit financing -- that
would amount to raiding the RBI," he said
The government's
differences with the RBI centres on four issues -- the former wants
liquidity support to head off any credit freeze risk, a relaxation in
capital requirements for lenders, relaxing the Prompt Corrective Action
rules for banks struggling with accumulated NPAs, or bad loans, and
support for micro, small and medium enterprises.
Central to the
liquidity issue was the government's demand that the RBI hand over its
surplus reserves by making changes to the "economic capital framework".
On
the RBI board, which has a majority of government nominees, the former
CEO said: "I think that part of maintaining a real autonomy is not to
politicise the board. The board should not be politicised. Not only it
must not be done, it must not be seen to be done either."
On the
other puzzle of domestic divergences in development, he said the reasons
could be historical in the form of the unequal impact of British
colonialism in different regions of the country.
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