There is a broad consensus that the ongoing shortage of cash following Narendra Modi’s demonetisation move will hurt economic activity in the next two quarters
India has a Rs150 trillion economy. There is a broad consensus that the ongoing shortage of cash following the decision of the Narendra Modi government to withdraw bank notes of high value will hurt economic activity in the next two quarters. Mint reported on Thursday that truck rentals, a good dipstick gauge of economic activity, were down by a quarter on key routes. However, analysts at Credit Suisse point out that street-level activities such as mobile recharges have bounced back after two days of disruption.
Former prime minister Manmohan Singh said in Parliament, “National income could decline by 2% as a result of what has been done”—which implicitly means Rs3 trillion of lost output. Some Congress leaders later clarified that he meant a 2 percentage point decline in growth. Private sector economists estimate that economic growth will be one percentage point lower than expected. All this is in the realm of debate. What is not is this: The longer the delay in releasing enough cash to lubricate daily transactions, the deeper will be the damage.