Demonetisation downer: Market oriented policies rather than disruptions can help India formalise–10 11 2017

The first anniversary of Prime Minister Narendra Modi’s demonetisation announcement was marked by a sharp debate between government and opposition on its outcome. One consequence has been its adverse impact on the economy, particularly jobs. A national survey by Centre for Monitoring of Indian Economy estimates 1.5 million jobs were lost this year between January and April. Demonetisation has not been the only drag on the economy but it has been an important one. Their cumulative impact has shown up in the form of a slowdown in GDP growth rate every successive quarter since the beginning of 2016-17.

NDA says demonetisation represents a big push towards formalisation of the economy. As a goal this is unexceptionable. But it needs to be realised by removing constraints on the economy. Economic Darwinism through shock treatments is counterproductive. For example, a surge in current account deficit to 2.4% of GDP in April-June from 0.6% in the preceding quarter suggests imports have been beneficiaries and domestic producers sufferers from disruptions, thereby subverting ‘Make in India’.

The global economic environment has begun improving which ought to help us. Moreover, China’s competitiveness in employment intensive activities such as textiles and footwear has been blunted through wage increases. India’s informal sector stands to benefit if economic policy helps firms step into the space vacated by China. Not only will jobs be created, these firms will have a pathway to enter the formal economy. The government’s focus now must be on both designing specific policies for these sectors as well as more generalised reforms in areas such as labour, land, education and disinvesting PSUs. India can create more jobs and transform itself into a cleaner economy through market-oriented policies rather than radical disruptions.

via Demonetisation downer: Market oriented policies rather than disruptions can help India formalise

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