The Reserve Bank of India’s Urjit Patel has pointed out that there’s general agreement that the effects, in the short term, of demonetisation will be a V shaped effect. This means, in the jargon, just what you would think it will mean, a short, possibly intense, negative effect and then a quick bounce back to the former state. The usual contrast is to either a U shaped, where the negative effects are longer lasting, or the L where they are permanent.
And of course it is in the longer term that the effects will be important:
Reserve Bank Governor Urjit Patel on Friday said India’s economic growth will make a "sharp V" recovery following the recall of old 500 and 1,000 rupee notes.
It’s pretty much impossible to come up with a rationale for it not being this way too. Whatever the chaos, the dislocation, it simply cannot last longer than the period of there not being sufficient cash to power the economy. So, even with no behaviour changes (like moves to more digital transactions lessening the effect of there not being enough cash etc) whatever that effect was or could have been is over by now (or perhaps a couple of weeks, when all restrictions are lifted).
For an economy that relies on public investment and private consumption to revive private investment and growth, the last round of official statistics on prices and industrial activity signal testing times ahead. First, industrial output plummeted by 0.4% in December 2016, led by a 2% decline in manufacturing (just five of 22 industries registered positive growth) and a 6.8% decline in consumer goods. Now, wholesale prices have risen at the fastest pace in two and a half years this January, at 5.25%. This is particularly noteworthy since the pace of price rise at the consumer level slowed to 3.2% in the same month.
We’d not want to insist that those effects are all about demonetisation but even if they were it is, as Patel insists, a temporary blip and not a large one:
"Almost everyone agrees that the impact is going to be a sharp ‘V,’ that we would have a downgrade of growth for a short period of time," Patel told CNBC-TV18 in an interview telecast Friday. "However the remonetization has happened at a fast pace and that was part of the plan."
The benefits of the unprecedented Nov. 8 decision to cancel 86 percent of currency in circulation will take time to fully play out and need more work to ensure they’re lasting, he said.
As above I obviously agree with the first point. As I do with the second one as well. For as I’ve been saying all along the most important effect is going to be the impact upon the belief in the institutions of the economy. That vast swamp of black money meant that many Indians just didn’t believe in the basic fairness of the economy. And you do have to have that belief before you’ll get the sort of savings and investment which will drive the economic growth off into the future. And it’s almost (almost, but not quite) true that it doesn’t matter whether demonetisation has actually drained the swamp or not, only that people can see that something is being done, the government knows and cares about it.
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