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Economic Survey: CEA lists 7 major reform achievements in past year- Why was demonetization excluded?

One day prior to Budget 2017, Finance Minister Arun Jaitley on Wednesday tabled the Economic Survey 2017 in the parliament. The report was authored by the Chief Economic Advisor Arvind Subramanian and provided a succinct summary of the economy, discussed policy measures and highlighted the economy’s outlook for the future. While Subramanian later took to twitter to announce the 7 major reform achievement over the past financial year, it comes across as a surprise that Narendra Modi’s radical economic measure of demonetization was not included in the list.

On November 8, Modi announced the demonetization of Rs 500 and Rs 1000 notes as legal tender and set December 31 as the deadline to exchange and deposit the defunct notes. His move to withdraw 86% of the currency from the economy created chaos, agitation, inconvenience on one hand but also garnered a lot of appreciation from those on his end of the political spectrum. While the Economic Survey listed GST, Bankruptcy Bill, Monetary Policy Committee, Aadhaar Bill, FDI liberalisation, Foreign Direct Investment (FDI) and promoting labour intensive sectors as the government’s top reform achievements, demonetization was excluded.

The 7 major reform achievements over the past year. #EcoSurvey Ch1

— arvind subramanian (@arvindsubraman)

Calling the impact ‘unusual’, Subarmanian stated that the currency declined sharply but deposits increased sharply too making it hard to estimate the impact of demonetization.

Demonetisation 3: Unusual. Currency declined sharply BUT deposits increased sharply- hence hard to estimate impact #EcoSurvey Ch3

— arvind subramanian (@arvindsubraman)

Demonetisation 4: Temporary ⬇️ in real GDP growth of ¼ – ½% pt relative to baseline. Growth back toward trend in FY18 #EcoSurvey Ch3

— arvind subramanian (@arvindsubraman)

As the table indicates below, the short-term effect of demonetization hit the economy as the cash declined sharply, led to job losses and decline in farmer income. Furthermore, it led to a lot of social disruption especially in cash sensitive sectors and also caused an overall increase in uncertainty as firms and households were unsure of the economic impact of the policy and its future implications. The government has conveyed the uncertainty in its long term impact stating that demonetization would have a positive effect on the GDP only if formalisation of the entire economy completes and corruption falls. Furthermore, credibility would be realised only if demonetization is accompanied by full complementary measures.