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Arvind Subramanian: ‘Demonetisation Was A Massive, Draconian, Monetary Shock’

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| November 29 , 2018 , 17:11 IST

Former chief economic advisor Arvind Subramanian in his new book 'Of Counsel: The Challenges of the Modi-Jaitley' attempted to explain why demonetisation was seen as a political success soon after its implementation.

At the time (early 2017), the election in Uttar Pradesh—India’s most populous state and the world’s eighth-largest ‘country-that-isn't’—was widely seen as a verdict on demonetization, arguably the salient policy action of the government, personally and forcefully articulated by the prime minister.

Breaking his silence on the decision of Prime Minister Narendra Modi on November 8, 2016, he said that he did not have a strongly-backed empirical view apart from the fact that the welfare costs, especially on the informal sector, were substantial. 

Subramanian, who had quit the post earlier this year after a four-year tenure, wrote, "Demonetisation was a massive, draconian, monetary shock: In one fell swoop, 86 per cent of the currency in circulation was withdrawn."

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“The real GDP growth was affected by the demonetisation. Growth had been slowing even before, but after demonetisation, the slide accelerated."

"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 wrote in the chapter "The Two Puzzles of Demonetisation -- Political and Economic".