The Indian economy for the period April to June 2018, grew by 8.2 per cent, in comparison to the same period in 2017. Let’s take a look at Figure 1, which basically plots the economic growth (or growth in gross domestic product), for the period of four years that Prime Minister Narendra Modi has governed the country.

Figure 1:

Source: Ministry of Statistics and Programme Implementation.

What does Figure 1 say? It tells us that economic growth had fallen in the aftermath of demonetisation and reached a low of 5.59 per cent for April to June 2017. It has since bounced back.

What has changed? On November 8, 2016, the Modi government decided to demonetise Rs 500 and Rs 1,000 notes, in the hope of destroying a large amount of black money. In the process, 86 per cent of the currency in circulation became useless in one go.

In a country like India where 98 per cent of the economic transactions (in terms of volume) happened in cash, this was a recipe for a disaster. Let’s take a look at Figure 2, which basically plots the currency in circulation as a percentage of the gross domestic product (GDP) at current prices.

Figure 2:

Source: Reserve Bank of India.

What does Figure 2 tell us? It tells us that currency in circulation (or the cash in the financial system) used to be around 12  per cent before demonetisation. In the aftermath of demonetisation, as on March 2017, it fell to 8.8 per cent of the GDP.

In a country where economic transactions especially in the informal economy and agriculture, are largely carried out in cash, not surprisingly there was a slowdown in economic growth.

With not enough cash going around in the aftermath of demonetisation, economic transactions could not be carried out at the same pace, as they had been in the past.
As the cash in the system recovered between end March 2017 and end March 2018, the economic growth went up as well, with people having enough cash to carry out economic transactions.

As per the Reserve Bank of India annual report of 2017-2018, the currency in circulation to the GDP ratio had jumped to 10.9 per cent of the GDP as on March 31, 2018, from 8.8 per cent of the GDP, a year earlier.

This growth in cash in the system has continued post-March 2018. As of June 30, 2018, the currency in circulation to GDP ratio has jumped further to 11.3 per cent of the GDP.

What this tells us is that the cash in the system is working its way back to the level of 12 per cent of the GDP, as it was before demonetisation was carried out. And this is good news for the Indian economy. The effect of increasing cash in the system can already be seen in the agriculture sector, which still largely operates in cash. In the period of July to September, agriculture growth had fallen to 2.65 per cent per year. Since then, as the cash in the system has gone up, it has been increasing and for the period April to June 2017, was at 5.3 per cent.

This is good news. Industrial growth which had fallen to a low of 0.13 per cent between April to June 2017, has rebounded to 10.29 per cent, with manufacturing growing by 13.46 per cent annually. This clearly tells us that the informal part of the industrial sector is gradually getting back to work.

To conclude, the ill-effects of demonetisation are largely behind us. This hare-brained scheme put back economic growth by at least 18 months. Thankfully, even though publicly the Modi government continues to defend demonetisation, as far as their actions are concerned, they seem to be done with it. And that’s good for India.

(Vivek Kaul is the author of the Easy Money trilogy).