Are We Done With The Demonetisation Blues?

It has been four months since demonetisation was announced. The government has not offered any mathematics or hard proof to show how and why it was good for the economy. One still wonders if it was ever a move against black money or a political ploy before some crucial state assembly elections. But there's enough data reflecting the damage done by the move.

The index of industrial production (IIP) for December 2016 contracted to a four-month low. Most of the brunt came as consumer durables output fell by over 10% YoY. The main reason for this fall was cash crunch led by demonetisation.

Also, the manufacturing sector witnessed a contraction of 2% YoY. As per an article in the Economic Times, as many as 17 out of 22 manufacturing sub-sectors reported contraction in December 2016. The slowdown here was also seen on the back subdued demand led by demonetisation.

Moving on to inflation...

The recent data retail inflation moderated to 3.17% in January. The decline was led by a marked fall in food inflation. While this came as a welcome breather, the same can be expected to rise as the cash situation turn normal. So when consumer spending normalises post demonetisation, we should all be on our guard for rising inflation.

Furthermore, as per the Assocham's Bizcon Survey, demonetisation is said to leave quite a negative impact on SMEs, rural consumption, and job creation in the short-term.

So the above data points suggest that demonetisation shocks are playing out. As things stand at present, there aren't many signs of growth recovery happening. We may have to wait for more clues in the approaching months to assess the full effect of demonetisation.

Nevertheless, it's evident that the government has messed up big time in this endeavor. Demonetisation was a poorly executed policy.