by Meera Sanyal
In August 2018, the National Statistical Commission released a back-series calculation of data for comparative purposes that showed double-digit growth under the former UPA government. The government swiftly refuted this data stating that the back series were not ‘official estimates’.
In June 2017, the Union Minister in charge of the Ministry of Statistics and Planning, Sadananda Gowda, had announced that the base year of National Accounts Statistics was once again going to be revised to 2017–18.
In a press conference, Gowda explained, ‘The changes are being made in order to accommodate and factor the changes that take place in the economic scenario of the country… The ministry will undertake various steps in the next fiscal beginning April that will improve the statistical system that will help meet the data requirements in the emerging socio-economic scenario.’
The average citizen could be forgiven for wondering if all of these changes in calculation methodologies and base years were being done to obfuscate the data on the Modi government’s performance, particularly the impact of demonetization. The multiple changes made in the methodology – from economic growth and inflation to jobs and taxes – sparked a countrywide debate on the volatility in the Statistics Ministry’s estimates of GDP and the credibility of government data.
So, it was not much of a surprise that in April 2018, the RBI itself switched back to GDP as a measure to project its growth estimates instead of the GVA methodology.
In a remarkably candid research paper8 in May 2018, four RBI researchers, working under Monetary Policy Committee member Michael Patra, stated, ‘In view of multiple rounds of data revision, it may be confusing for data users to decide on the true state of the economy, and, more specifically, the real strength of the growth momentum.’ They went on to suggest that ‘It may be advisable for data users to read GDP growth numbers carefully along with other high frequency indicators of the real economy.’
Keeping the above caveats in mind, let us look at the GDP data released by the RBI and CSO for the Financial Year (FY) 2016–17, from which the impact of demonetization on economic growth can best be judged:
Table 2: India GVA Growth Estimates for 2016–17
Date Source Growth%
4 October 2016 RBI, 4th Monetary Policy Statement 7.6
7 December 2016 RBI, 5th Monetary Policy Statement 7.1
6 January 2017 CSO 1st Advance Estimate 7.0
8 February 2017 RBI, 6th Monetary Policy Statement 6.9
28 February 2017 CSO 2nd Advance Estimate 6.7
15 September 2017 RBI Handbook of Statistics 6.6
Source: RBI’s Macroeconomic Assessment of Demonetization dated 10 March 2017; Handbook of Statistics on the Indian Economy dated 15 September 2017; MoSPI Press Releases.
Table 2 shows that the RBI’s estimates of GVA growth for the year 2016–17 fell from an initial projection of 7.6 per cent to 6.6 per cent. Thus, as per the RBI’s estimates, demonetization cost the Indian economy one per cent in reduced growth for 2016–17.
The detailed estimates showed that growth was either stagnant or declined in all sectors other than in agriculture and public administration. In fact, as the RBI grimly commented in their Annual Report published in August 2017: ‘Absent the implementation of the 7th Central Pay Commission and One-Rank-One-Pension (OROP) for defence services embedded in government consumption, real GDP growth would have been lower by two percentage points.’9
Table 3: GDP Growth Estimates by Other Agencies
Agency2016–172017–18
Pre-demonetizationPost-demonetizationPre-demonetizationPost-demonetization
IMF 7.6 6.6 7.6 7.2
World Bank 7.6 7.0 7.7 7.6
ADB 7.4 7.0 7.8 7.8
Economic Survey, Government of India 7.0 to 7.75 6.5 to 6.75 6.75 to 7.5
Morgan Stanley 7.7 7.3 7.8 7.7
HSBC 7.4 6.3 7.2 7.1
Nomura* 7.8 7.1 7.6 7.1
Goldman Sachs 7.6 6.3 - -
ICRA 7.9 6.8 - -
CARE Ratings 7.8 6.8 - -
CRISIL - 6.9 - -
FITCH 7.4 6.9 8.0 7.7
BofA-ML 7.4 6.9 7.6 7.2
*Pertains to calendar year
Source: Macroeconomic Assessment of Demonetization RBI, dated 10 March 2017; Annex Table 2, p. 46.
Table 3 shows GDP growth estimates by other agencies such as the World Bank, IMF, credit rating agencies and leading banks for two consecutive years, highlighting the impact of demonetization.
The drop in GDP growth as a result of the note ban in these estimates averages 1 per cent for 2016–17 and 0.5 per cent for 2017–18.
In February 2018, the CSO and the RBI also lowered the economic growth projections for the year 2017–18 to 6.4 per cent and 6.6 per cent respectively (though this was partly attributed to the Goods and Services Tax [GST] rolled out in July 2017).
If we assume these figures, howsoever conservative, to be correct, then the cost to India of an average of even a one per cent lower growth for two consecutive years is equivalent to approximately `2.31 lakh crore (`2.31 trillion).10
Not surprisingly, government spokespersons sought to downplay the impact of demonetization on economic growth. As GDP growth for April–June 2017 dropped for the sixth quarter in a row to hit a three-year low of 5.7 per cent, BJP President Amit Shah, while addressing industrialists at a FICCI session in New Delhi on 9 September 2017, attributed this to ‘technical reasons’. ‘The Modi government has changed the way GDP is looked at, as it is not only limited to production, services, and infrastructure but also includes improving overall quality of life and social capital,’ he said.
In a strong rebuttal to Amit Shah’s statement, SBI research11 reported on 19 September 2017:
We certainly believe that we are in a slowdown mode since September 2016 and a slowdown that has been prolonged to Q1 of this fiscal year is technically not short-term in nature or even transient… While it is true that the economy has undergone too many structural breaks since November 2016 and that may have precipitated a transient slowdown, it will be unfair if we only call it transient. A slowdown in demand has only aggravated the situation.
Speaking in Davos in January 2018, former Governor of the RBI Raghuram G. Rajan said that a substantial part of the continuing growth slowdown in India was because of the after-effects of the demonetization decision of November 2016. ‘I would suspect that a substantial part of the growth slowdown was because of the effects of demonetization... Some of it was in the informal economy, which weren’t immediately captured, which we are seeing now. Businesses that have shut down, because they couldn’t survive that episode,’ Rajan said.
Only time will reveal the true long-term and residual impact of demonetization on India’s GDP, provided, of course, that statistics that finally get officially released are comparable! For the present, what we can say is that even based on the most conservative estimates, the impact on India’s GDP was definitely significant and negatively so.
Impact on Jobs
Prime Minister Modi’s promise in 2014 of ‘Achhe Din’ was embraced by the nation, in a large measure, based on his promise to create 1 crore (10 million) new jobs each year.12
Estimates of how many jobs are being created in India vary wildly. In 2018, government spokespersons claimed that 75 lakh (7.5 million) jobs were created in fiscal year 2017. Others contested13 both this data and its sources,14 claiming that only two lakh (2,00,000) jobs had been created and that the unemployment rate had risen to over 6 per cent in 2018.15
Just as in the case of GDP, the statistics released from time to time on jobs and employment data are often bewildering. Labour force estimates in India are drawn from four primary sources of employment data – household surveys, enterprise surveys, administrative data, and data from government schemes. Data on this number is hard to estimate accurately, mainly because a very large part of India’s labour force is in the informal sector.
As a consequence, there are large variances in most Indian employme
nt data. For example, the number of people employed in India in 2016 was estimated to be 512.76 million people by the World Bank,16 while CMIE estimated this number at 406.5 million.
Irrespective of the absolute numbers, the India Labour and Employment Report (ILER) 201417 highlighted two very important features about India’s labour market and employment conditions, which are quoted below:
An overwhelmingly large percentage of workers (about 92 per cent) are engaged in informal employment and a large majority of them have low earnings with limited or no social protection. This is true for a substantial proportion of workers in the organized sector as well. Over half the workers are self-employed, largely with a poor asset-base, and around 30 per cent are casual labourers seeking employment on a daily basis. About 18 per cent of those employed are regular workers, and amongst them less than 8 per cent have regular, full-time employment with social protection
Table 4: Workers in the Organized/Unorganized Sectors
WorkersUnorganized Sector %Organized Sector %Total %
Informal Workers 82.6 9.8 92.4
Formal Workers 0.4 7.2 7.6
Total 83.0 17.0 100
Source: IHD 2014
Table 4 shows the overwhelming importance of the unorganized sector in providing employment with 83 per cent of total employment in the country. It also shows that there are more informal workers in both the organized and unorganized sectors, pointing to the vulnerable nature of jobs of the vast majority of people who are employed.
As is typical for a poor and developing economy, most workers in India cannot afford to be unemployed, hence the level of open unemployment is quite low at 2.7 per cent.
This point is particularly important. The National Sample Survey (NSS), on which much of our employment data is based, defines ‘labour force’ as ‘those either working or actively seeking work’. However, in India, many people in the working age group (15–59 years) do not seek work, knowing there are no employment opportunities. As they do not seek work they are excluded from the official definition of ‘labour force’ and hence are not counted as unemployed! In the NSS 2011–12 survey, 339 million people in the 15–59 age group were not counted in the labour force and therefore, not among the unemployed either.
The desperate quest for jobs is reflected in the vast number of people who apply when job positions are declared ‘open’. For instance, in March 2018, 28 million people applied for 90,000 positions with the Indian Railways. In February 2018, 1.9 million people applied for a total of 9,500 positions of village administrative officers, typists and stenographers, in the state of Tamil Nadu. Amongst the job applicants were 992 PhDs and 23,000 MPhils!
In addition to the large numbers who are not counted in the labour force, studies – based on the NSS 2007–08 – estimate that there are 67–80 million migrant workers making up approximately one-sixth of the labour force.18 Many of these migrant workers pursue multiple occupations, for example, working as agricultural labour for part of the year and as construction workers for some months. One study notes that the same workers counted by the NSS as construction workers are counted by the Census 2011 as agricultural workers. As a result, the Census shows a rising workforce in agriculture while the NSS shows a declining one.19
It is clear, therefore, that arriving at an accurate estimate of jobs created or destroyed by demonetization is both difficult and complicated.
However, two reports have been widely quoted on the impact of demonetization on jobs, and seem to have been accepted by economists as providing a reasonably accurate picture.
The first, published by the AIMO in January 2017, was based on a survey of 10,000 respondents across India, including large, medium, small and micro enterprises engaged in manufacturing, trading and exports. As over 3,00,000 micro, small, medium and large-scale industries are represented by AIMO, this report is reasonably indicative and its findings are summarized in Table 5 below:
Table 5: Jobs Lost Due to Demonetization
Nature of Enterprise Job Losses
October–December 2016 Revenue Loss October–December 2016
Trading Organizations 45 % 55 %
Exporters 25 % 25 %
Medium and Small co.s 35 % 35 %
Large co.s 15 % 20 %
Source: AIMO report, January 2017
As is clear from Table 5 above, there is a direct correlation between the loss of revenues experienced and job losses, which is not surprising given that most of the workforce is contractual or informal. As the catastrophic effects of the cash crunch hit businesses, they took the logical, but harsh, action of swiftly laying off their workforce.
The second report by CMIE estimated that about two million jobs were lost between January and August 2017. CMIE’s estimates were based on consecutive waves of its Consumer Pyramids Household Surveys (CPHS), all-India household surveys over a sample size of 1,61,167 households, including 5,19,285 adults.
CMIE started capturing employment statistics in January–April 2016 when they estimated that the total employed workforce in India was 401 million. This included both the organized and unorganized sectors, and agricultural and non-agricultural sectors. Subsequent quarterly surveys showed a growth to 403 million in May–August 2016 and then to 406.5 million in September–December 2016. Post-demonetization, this number fell to 405 million in January–April 2017 and dropped by a further 0.42 million during May–August 2017, thus bringing the cumulative jobs lost to 2 million.
A further CMIE report in February 2018 disclosed that the estimated number of unemployed persons who are actively looking for a job almost touched 31 million in the week ended 25 February 2018. This is the highest count of unemployed since October 2016. This seems to suggest that labour that is entering the labour markets in search of jobs is not finding them in sufficient numbers.
The Quarterly Employment Survey20 data for the months of October–December 2016, which covers about five per cent of the workforce and hence is indicative, supported these observations showing that 1.13 lakh persons lost their casual jobs in the manufacturing sector, followed by 20,000 people who were laid off in IT/BPO sector.
India’s first Chief Statistician, economist Pronab Sen, explained in simple terms, devoid of jargon and statistics, the cascading effect of the loss of jobs on consumer confidence and GDP.21
In a society like India, a person’s insecurity arising from his fear of losing his job is less than his insecurity about his children getting jobs. If jobs are not being created, not only will he not get old age insurance that his children were to provide, he will have to provide for them in the future. The level of insecurity, in a sense, is doubled. When people become insecure about their children, they spend less and that has its impact on the economy. That is why the issue of employment is not just about employment, it is also about how people think of their future.
Given the critical importance of more jobs, it is not hard to see why demonetization was such a disaster – far from helping job creation, it caused a devastating loss of jobs. More importantly, it dented confidence across the economy, thus laying the ground for a deceleration in investments and lower job creation for a sustained period going forward.
Impact on Savings and Investment
Though many of us tend to focus on GDP growth rates and unemployment numbers, the levels of savings and investments in any economy are critical drivers of both economic growth and job creation.
Simply put, when people save, they can invest. Aggregated across an economy, household savings can be invested in capital goods, which can be used to produce more goods and services and create more jobs. This leads to a virtuous cycle – as more employment is created, more people have jobs and money to spend, thus boosting consumer demand. They also have more money to save, thus boosting investments and capital formation further.22
It is important to note that for capital formation to actually take place, three distinct though interdependent activities must precede it. The first is actual savings by individuals and h
ouseholds who must be willing to reduce current consumption and set aside money for saving. The second is the activity of finance and of financial intermediaries, through which savings (such as bank deposits, investments in bonds, equities, mutual funds, etc.) are made available to those engaged in the production of capital goods. The third is investment, whereby the savings made available through banks and financial intermediaries are actually put to use productively. Capital formation in any economy depends both on the intensity and efficiency with which these three activities are carried out.
Generally speaking, a higher level of savings leads to a higher level of investment and capital formation, which in turn leads to higher economic growth, national income and GDP. Several economists believe that the rate of capital formation should be above 40 per cent to achieve an ‘optimum rate of economic growth’.
The correlation between Savings, Investment, Capital Formation and Growth has been very evident in India. As noted in the Economic Survey 2018:23
India’s climb to about 10 per cent real GDP growth (in the 2000s) was accompanied by an unprecedented nine percentage point pick-up in domestic saving and investment rates. Specifically:
The ratio of gross fixed capital formation to GDP climbed from 26.5 per cent in 2003, reached a peak of 35.6 per cent in 2007, and then slid back to 26.4 per cent in 2017.
The ratio of domestic saving to GDP has registered a similar evolution, rising from 29.2 per cent in 2003 to a peak of 38.3 per cent in 2007, before falling back to 29 per cent in 2016.
From the above, it is clear that Indians have a high propensity to save, which is one of the great strengths of our economy. However, it is also clear that both savings and investment rates have been declining since 2007. The question is, did demonetization have any effect on either the Savings or Investment rate and did it accelerate or reverse this decline?
Impact on Savings
First let us assess the impact on Savings.
