The Economic Survey 2017-18 seems to suggest that the negative impact of demonetisation on the Indian economy may have finally come to an end. The Economic Survey, which is tabled in the Parliament ahead of the Union Budget, reviewed that the cash-to-GDP ratio had stabilized, which suggested a return to equilibrium.
The Economic Survey also said that India's GDP was set to grow 7 - 7.5 percent in 2018-19, an increase from its prediction of 6.75 percent growth this fiscal. The survey cited exports and imports data to claim that the demonetisation effect was now over.
"The behavior of manufacturing exports and imports in the second and third quarters of this fiscal year has started to reverse. The re-acceleration of export growth to 13.6 percent in the third quarter of FY2018 and deceleration of import growth to 13.1 percent, in line with global trends, suggest that the demonetization and GST effects are receding. Services export and private remittances are also rebounding," the survey said.
The Economic Survey said that demonetization had led to Rs 2.8 lakh crores less cash and Rs 3.8 lakh crores less high denomination notes in the Indian economy.
"The evidence is that since about June 2017 the trend in currency is identical to that pre-demonetization (Figure 22). The stabilization also permits estimation of the impact of demonetization: about Rs 2.8 lakh crores less cash (1.8 percent of GDP) and about Rs. 3.8 lakh crores less high denomination notes (2.5 percent of GDP)."
The survey acknowledged that the fight against corruption, which led to steps such as GST implementation and demonetization, had affected cash-intensive sectors in the economy.
"While there are significant social and economic benefits to attacking corruption and weak governance, addressing those pathologies entails challenges. In the case of the GST and demonetization, informal cash-intensive sectors of the economy were impacted," the survey said.
Even though the impact of demonetization was mostly over by mid-2017, the implementation of the GST created fresh challenges in the informal sector.
"Demonetization temporarily reduced demand and hampered production, especially in the informal sector, which transacts mainly in cash. This shock largely faded away by mid-2017, when the cash-GDP ratio stabilized. But at that point GST was introduced, affecting supply chains, especially those in which small traders (who found it difficult to comply with the paperwork demands) were suppliers of intermediates to larger manufacturing companies," the survey said.
It added: "Beginning March-April 2017 until September 2017, export growth decelerated while import growth accelerated sharply, a pattern not observed in other Asian emerging economies or the world as a whole. This suggests that the economy experienced a competiveness impact in the demonetization/GST periods".
More importantly, the survey noted income tax collections had touched new high with demonetization and introduction of GST.
"Government measures to curb black money and encourage tax formalization, including demonetization and the GST, have increased personal income tax collections substantially (excluding the securities transactions tax). From about 2 percent of GDP between 2013-14 and 2015-16, they are likely to rise to 2.3 percent of GDP in 2017-18, a historic high," the survey said.