Negative impact of note ban transitory: Experts

However, the current slowdown could partially be attributed to implementation of the Goods and Services Tax (GST) introduced in July, they say. 

“While the aim of demonetisation to curb the use of black money was in line with the government’s broader reform agenda, the cash crunch it caused contributed to significantly lower real GDP (gross domestic product) growth in the March quarter,” Thomas Rookmaaker, Director, Sovereigns and Supranationals Group at Fitch Ratings, said. “This negative impact on growth seems transitory, just like the effect on growth, because of GST implementation in the July quarter,” he added. According to analysts at the rating agencies, economic growth in India would accelerate again in the second half of the year. 

“Demonetisation was a major structural change that the Indian economy underwent, which led to disruption on the demand and supply side and thereby the overall economy,” Kavita Chacko, Senior Economist, CARE Ratings, said. 

Chacko said economic performance, as seen from the quarterly GDP growth, saw a sharp deterioration since the third quarter (October-December) in 2016-17. “GDP growth (year-on-year) fell from seven per cent in Q3FY17 to 6.1 per cent in Q4FY17 and further declined to 5.7 per cent in Q1FY18, the slowest pace of growth in five years,” she said. This slowdown in the economy could partly be attributed to the disruptions caused by demonetisation. GST implementations too had contributed to the economic weakness, Chacko added.

Asked whether demonetisation has achieved its objective of curbing black money, Rookmaaker answered in the negative. “The fact that 99 per cent of the bank notes have found their way back to the RBI (Reserve Bank of India) seems to suggest that demonetisation was not very effective in rooting out black money and reducing the informal sector,” Rookmaaker said. 

“Implementation of the GST may actually be more effective in formalising informal business, as it seems to help draw small firms into the tax net,” he added. According to Rookmaaker, the bounce back is likely to happen in the second half of the year.