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Note ban slowed down GDP by 2% points in Q4 2016: Economist Gita Gopinath

The government’s note ban decision shaved off economic growth by at least 2 percentage points for the October-December quarter of 2016 in which the demonetisation move was affected, according to a research paper co-authored by eminent economist Gita Gopinath.

India-born Harvard professor Gopinath, 46, is set to take charge as the chief economist at the International Monetary Fund (IMF) next month.

The paper further said that districts experiencing more severe demonetisation had relative reductions in economic activity, faster adoption of alternative payment technologies and lower bank credit growth.

“Our results imply demonetisation lowered the growth rate of economic activity by at least 2 percentage points in the quarter of demonetisation,” said the research paper titled ‘Cash And The Economy: Evidence From India’s Demonetisation’.

The paper is published by US-based National Bureau of Economic Research (NBER) and its co-authors include economist Prachi Mishra, who had headed the strategic research unit at the RBI, Abhinav Narayanan, manager-research at RBI, and Harvard professor Gabriel Chodorow-Reich is the lead author.

According to the paper, note ban also led to a decline in nightlights-based economic activity and a 3 percentage points or more drop in employment generation in November and December of 2016 relative to the counterfactual path.

The Indian economy grew at 7 per cent in the third quarter (when demonetisation was implemented) of 2016-17 and at 6.1 per cent in the subsequent quarter. In 2017-18, the Indian economy grew by 6.7 per cent.

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).

The paper also noted that cash continues to serve an essential role in facilitating economic activities in modern India. It also pointed out that there may be longer term advantages from demonetisation that arise from improvements in tax collections and in a shift to savings in financial instruments and non-cash payment mechanisms.

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