Demonetisation to pull down GDP growth: Montek Singh Ahluwalia

NEW DELHI: Demonetisation is likely to pull down GDP growth by 1-2 percentage points as it is disrupting economic activities, especially in the informal sector, said former Planning Commission Deputy Chairman Montek Singh Ahluwalia.

"The (economic) growth rate is going to be adversely affected. There is no question on that. Somewhere between one to two per cent," Ahluwalia said in an interview on TV channel India Today.

Earlier this month, the government demonetised currency notes of Rs 500 and Rs 1,000, replacing them with new Rs 500 and Rs 2,000 bills in an effort to root out black money and terror funding.

On the impact of the movw, Ahluwalia said, "The adverse impact will be the most on employment intensive part of GDP. The impact on employment proportionally will be more than loss on GDP. That will affect consumption and production. There will be ripple effect."

He also said," I have read in newspaper NITI Aayog Member Bibek Debroy saying the impact (of demonetisation) will be 0.1 per cent...I agree that it is hard to believe."

Elaborating further, he said, "It is not just inconvenience. It is scarcity of cash which is going to disrupt business and livelihoods in the informal sector which is large part of the economy. That will shrink economic activity for sometime....at least till March-end."

He further said, "Informal sector represents 45 per cent of GDP and accounts for 80 per cent of jobs. Most of the businessmen in informal sector get money from private lenders and in hundis. All of them are cash starved."

He also said, "There is no question that it is a very big shock. In very few cases, you see 86 per cent of currency is nullified and that will lead to a cash crunch."

On rooting out black money from the system, he said,"We need to make distinction between black income and black wealth. These are two different things."

He felt that there is also a need to check the generation of black money by taking steps like improving transparency on big financial transactions and modernising tax system by lowering tax rates and bettering tax administration.

He also suggested lowering of stamp duty on land registrations.

On GST he said, "Whatever emerged from the consolations of states (on GST) that it is very messy GST. There are too many rates. It is not consistent with the GST which will cut out corruption, misdeclaration and so on."

Ahluwalia also recommended that the government should have allowed well regulated cooperative banks to change currency notes because a large part of informal sector depend on those.