Full remonetisation of economy in 1-2 months: Arvind Subramanian

New Delhi, Jan 31 (IANS) Indian government's Chief Economic Adviser Arvind Subramanian on Tuesday said that the full remonetisation of the country's economy will happen in the next 1-2 months and advocated quick removal of all cash withdrawal limits to expedite pick-up in growth.

"It's fair to say there have been short-term costs to demonetisation that were significant, especially in the informal sector. But the effect is temporary. As remonetisation happens, the economy will be back on track," Subramanian said.

"In a month or two, we should be close to full remonetisation of the economy," he said at a press conference here after the Economic Survey 2016-17 was tabled in Parliament.

"There should be fast remonetisation. Earlier we withdraw the limits on cash the better," he added.

Subramanian also said that demonetisation has encouraged transition to digitalisation, though it should be based on incentives and not forced upon people.

"I think the transition must be gradual and inclusive because a lot of people are not digitally connected. I am for doing it through incentives and not by force. Digitalisation has lots of benefits but can have costs because the poor don't have access to technology," he said.

The Chief Economic Adviser labelled the November 8 demonetisation as an "unusual and unprecedented" monetary experience and added that its impact should be judged cautiously.

"It was a very unusual experiment in monetary history. We should be cautious about assessing its impact. Demonetisation has affected different forms of money very differently," he said.

Demonetisation has led to reduced cash and increased supply of deposits simultaneously. As a consequence of that, the lending rate has come down by 90 basis points, he added.

"It is very unusual in its monetary consequences. It has reduced sharply, the supply of one type of money -- cash -- while increasing almost to the same extent another type of money -- demand deposits," the Economic Survey said.

The senior official said that in the short-run, if the world economy picks up, consumption catches up as remonetisation happens and exports increase, the pick-up in economy will be faster.

Subramanian said that the currency cash squeeze was less severe compared with common perception because the macro-economic indicators have been mixed.

While sowing of rabi crop is way better than last year and there is no blip in direct and indirect tax collections after November 8, there is a dip in real estate sector and banks credit has dropped.

"The overall picture is mixed. Any uncertainty from demonetisation needs to be addressed. But it holds the potential for long-term benefits. It would require follow-up actions to minimise the costs and maximise the benefits," he said.

Earlier, the Economic Survey 2016-17 said that demonetisation has had short-term costs but holds the potential for long-term benefits.

"The broad conclusion is that demonetisation will create short-term costs and provide the basis for long run benefits. Short-term costs have taken the form of inconvenience and hardship, especially those in the informal and cash-intensive sectors of the economy who have lost income and employment," it stated.

"These costs are transitory, and may be minimised in recorded GDP because the national income accounts estimate informal activity on the basis of formal sector indicators, which have not suffered to the same extent. But the costs have nonetheless been real and significant."

At the same time, demonetisation has the potential to generate long-term benefits in terms of reduced corruption, greater digitalisation of the economy, increased flows of financial savings, and greater formalisation of the economy, all of which could eventually lead to higher GDP growth, better tax compliance and greater tax revenues, it noted.