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India
01 Jun 2017

World Bank lauds PM Modi's demonetization move, in latest report

The World Bank's take on the demonetization

The World Bank's latest India Development Update included an assessment of PM Modi's demonetization move.

Interestingly, while acknowledging that the move caused severe distress among workers in India's informal sector, the report concluded that there were more positives than negatives resulting out of the demonetization.

World Bank CEO Kristalina Georgieva said that the move would, in the long run, foster a clean, digitized economy.

In context

The World Bank's take on the demonetization

The reforms are "profound"

"While demonetization has, in the short term, created some impact on businesses dependent on cash, in the long term the impact will be positive…The reforms India is targeting are profound," said Georgieva.

Fall in money supply unexpectedly small

Money supply

Fall in money supply unexpectedly small

The report, in a bid to analyze potential negative fallouts, looked at some indicators.

Among them was the velocity of M1 money supply, which dipped from 5.7 to 5.6 between the last quarter of 2016 and the second quarter of 2017.

Compared to expectations, this dip was remarkably small, indicating that India's inclination for "jugaad" found ways around the lack of physical bank notes.

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What is M1 money supply?

M1 money supply measures the most liquid portions of money supply in an economy - physical currency (notes and coins), checking accounts, demand depositions, and negotiable order of withdrawal accounts.

GDP growth

Remarkably small dip in GDP growth figures post-demonetization

India's GDP growth also fell right after the demonetization, but again, the dip was remarkably small said the World Bank.

India was growing at 7.3% at the beginning of the fiscal year, and only dropped by a third of one percentage point in the second half of the fiscal year post-demonetization.

Furthermore, while the informal sector was affected, the formal sector showed considerable resilience.

Indian economy showing positive signs, says World Bank CEO

"Our growth projection for India for this year is 7%. The signs are positive with the reform process underway and GST (goods and services tax) expected to be implemented soon," added Georgieva.

Demonetization paves the way for formalization of the economy

Formalization

Demonetization paves the way for formalization of the economy

While the World Bank admitted that it had no direct means to calculate the distress in the informal sector, it said that the move had a positive outcome.

Demand for formal jobs in the first two months of 2017 equalled that of the entirety of 2016, indicating the magnitude of jobs lost in the informal sector and the resultant move towards formalization.

Resultant benefits

Benefits of formalization in the long run

If, as the World Bank says, the demonetization has indeed initiated a shift towards formalization of the economy, there are plenty of benefits to be reaped in the long run.

Formalization of the economy would lead to better wages and working conditions, better productivity and investment, greater revenue generation for the government, less corruption, and more transparency.

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