Demonetisation is a short-term challenge!

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The Chief Economic Advisor(CEA) to the Finance Ministry Dr. Arvind Subramanian believes that managing demonetisation is a short-term challenge for the next few weeks and months. He is also of the opinion that the Indian economy is “very stable” at a macro level.

Addressing the ASSOCHAM Interactive session in New Delhi recently, Dr. Subramanian said one of the challenges for the Indian economy in the short term is to manage the demonetisation fall-out  “How do we manage demonetisation in the next few weeks and months”, he said, adding however, that this would be a short-term phenomenon.

Referring to some important global developments like the latest hike in the US Federal Reserve rates and firming up of crude oil prices, he stated that the Indian economy is well- cushioned to cope up with these events.

On the hike in US interest rates, the CEA in the Finance Ministry said: “This was anticipated and expected. My own view is that on this the Indian economy is very well cushioned to absorb the impact of this. The RBI policy also took account of this in a very sensible way. There may be some short-term things. This is not something we need to worry about”.

Asked about the outflows from the emerging markets, he said: “After the US elections, there were already big fund flows from the emerging markets. However, given that India is in bright spot, the impact on us would be much smaller.”

As for the rising crude oil prices, he said there would be some ups and down. “If it persists there would be some implications but I don’t think oil prices are going to surge to a level which is difficult to handle for India”.

On the demand from the ASSOCHAM for lower rates in the goods and services tax (GST), Dr. Subramanian said the lower and simple taxes are always preferable but there was a strong case for inclusion of real estate and electricity into the GST value chain. He echoed the views express by ASSOCHAM president  Sunil Kanoria and several others senior members of its managing committee who shared their perspective about the state of Indian economy particularly after the demonetisation of high-value currency notes.

Listing the global challenges to be dealt with by the Indian economy, Dr. Subramanian said while the strengthening of US dollar would be of less concern, the main headwind can be felt in the form of weakening of Chinese currency and those of other competing economies.

He said it is not only the Chinese currency but also from Vietnam, Philippines and Bangladesh which would become more competitive. This could affect India’s competiveness in the export markets. He said if the Indian economy has to grow by 8%, then exports must expand by 15%.

But key factor to watch, in the unfolding global scenario, would be whether the developed countries would be able to ‘handle’ more exports especially that of services from developing countries like India.Dr. Subramanian also pointed out several key economic reforms undertaken by Indian economy in the recent past. This included passage of GST Constitutional Amendment Bill which he described as the “mother of all achievements”.

The other reforms included the passage of the bankruptcy law allowing easy exit, Adhaar bill making the direct benefit transfer schemes functional and institutionalizing of the monetary policy committee in the Reserve Bank of India (RBI).