Decoding Arvind Subramanian's stand on demonetization: Did ex-CEA ever support note-ban?

Former chief economic advisor Arvind Subramanian has said that note-ban was a massive, draconian, monetary shock that accelerated economic slide to 6.8 per cent in the seven quarters. "Demonetization was a massive, draconian, monetary shock: In one fell swoop, 86 per cent of the currency in circulation was withdrawn. The real GDP growth was affected by the demonetization. Growth had been slowing even before, but after demonetization, the slide accelerated." 

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After announcing that he was quitting for personal reasons to return to the United States, Subramanian gave interviews to several news organisations but he never clearly shared his view on demonetization. 

In an interview with Times of India, he was asked if in his views demonetization was necessary. He said, "The fact that money came back is not an argument for saying those with black money were not punished. Was it right or wrong? Was it helpful or not? You may have to leave it to the historians, three, four, five years from now, to do a proper assessment."

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In an interview with Hindustan Times, he was asked: Some experts cite demonetization as the one big economic mistake the government committed during your tenure. Was it? His answer: That’s something I will let others answer. I would not like to comment on it.

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Commenting on the increased number of income tax returns as about 5.4 lakh taxpayers were added, Subramanian said, "It represents about 1 per cent of the taxpayers. The taxable income has not gone up by as much because many of these new filers are reporting a taxable income around the threshold. So, whether this increase in taxpayer will lead to increased taxes remains to be seen."

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Subramanian, who was participating in a panel discussion at the Delhi Economics Conclave, did not give any firm answer to a question whether he supported demonetization or had expressed his reservations. He, however, indicated that he would write a memoir in which he will disclose his views on demonetization.

"Why do you want to deprive my memoir of commercial value?" Subramanian said when a participant asked him if he had internally supported demonetization or expressed any reservations.

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Subramanian said that demonetization had made a temporary impact on the economy but it should get better as remonetisation progresses. "I think, we can see some signs of bottoming out and a recovery in the nominal aggregates which, in fact, did pick up in the fourth quarter," he said. 

On the fourth quarter growth of 6.1 per -- the slowest in three years -- Subramanian said, "It is quite consistent with what we expected in the survey because we said that if you did the arithmetic on the monetary aggregates in the fourth quarter, you would see it bottoming out and that, after all, is because of a temporary shock of demonetization. The economy could recover as remonetization is happening and since that's picked up pace, it should start perking up from now on."

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Subramanian said demonetization can be called successful only if the amount of currency in circulation comes down over time and there is an increase in tax compliance. 

"Before demonetization, the cash to GDP ratio was something like 12 per cent. Going forward, that should come down if demonetization is to be deemed successful. The general culture of non-compliance and illicit money creation should also improve through demonetization, which was trying to signal a regime shift that in future this behaviour will be less tolerated."

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The Economic Survey 2016-17 was tabled in Parliament on January 31, 2017, nearly 3 months after demonetization was announced. The survey authored by a team led by Surbramanian said demonetization resulted in widening of taxpayers' base and rise in household saving. The survey argueed that the move was indeed a necessary “radical”, historic” decision with “profound” impact on the India Economy.

“India’s demonetization is unprecedented in international economic history, in that it combined secrecy and suddenness amidst normal economic and political conditions,” it said. “In fact, India has given a whole new expression to unconventional monetary policy, with the difference that whereas advanced economies have focused on expanding the money supply, India’s demonetization has reduced it. This policy could be considered a “reverse helicopter drop”, or perhaps more accurately a “helicopter hoover."

"Taking seasonality into account it is found that there is a 0.8 per cent monthly trend increase in new tax filers (annual growth of nearly 10 per cent). The level of tax filers by November 2017 was 31 per cent greater than what this trend would suggest, a statistically significant difference," said the Economic Survey 2017-18 released by the government said. "This translates roughly into about 18 lakh (1.8 million) additional taxpayers due to demonetization-cum-GST, representing 3 per cent of existing taxpayers."

Besides, the survey said one of the main aims of demonetization and the Goods and Services Tax (GST) was to increase the formalisation of the economy and bring more Indians into the income tax net, which includes only about 5.93 crore individual taxpayers (filers and those whose tax is deducted at source in 2015-16).

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Giving a presentation on the Economic Survey 2016-17, the then Chief Economic Advisor said the remonetisation exercise could be completed in two to three months.

While talking about demonetization, Subramanian said, the aim of the action by the government to remove 86% currency (in value terms) in one fell sweep was to to curb corruption; counterfeiting; the use of high denomination notes for terrorist activities; and especially the accumulation of “black money”, generated by income that has not been declared to the tax authorities. 

However, while speaking about the extent and impact of demonetization, he said "forecasting its impact is hazardous." 

"There is a dip that can be clearly seen in real estate, sales, new launches. But then it will be good in the long run, as the aim of demonetization was also to bring down real estate prices," he said. The faster remonetisation takes place, the shorter and less severe will be the overall impact of demonetization, he added. Subramanian reiterated the government's stand on demonetization, saying that it "had short-term costs but holds the potential for long-term benefits.

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Speaking at the Mumbai LitFest, Subramanian talked about several issues but demonetization. When asked point blank about his views on the issue, he chose not to comment.

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Sharing DNA story,  Congress president Rahul Gandhi said "guilty will be investigated and punished."

Demo like Rafale was a crime against India & a huge scam. Parrikar distanced himself from Rafale to save his skin. Mr Subramanian is doing the same with Demo. I wonder why he didn’t resign when he disagreed so much? Don’t worry India, the guilty will be investigated and punished: Rahul Gandhi tweeted. 

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Congress leader and former Union Minister Kapil Sibal also took a dig at the government using Mr Subramanian's remarks. 

"Arvind Subramanian, erstwhile CEA of govt. said that Demonetization was a "massive, draconian, monetary shock" resulting in fall of GDP. Actual loss, not presumptive loss, because economy lost 1.5% of GDP was 2.25 lakh crores! But Modiji is boss, So 'no loss'," he tweeted.