Business and Economy

Monetary policy of   pertains to controlling and regulating money supply and cost borrowing with twin objectives of price stability and economic growth.  The monetary authority of all modern economies (countries), typically the central bank, targets an inflation rate or interest rate to ensure price stability and general trust in the currency. The other goals of a monetary policy are usually to contribute to the stability of gross domestic product, to achieve and maintain low unemployment, and to maintain predictable exchange rates with other currencies.

Types of Monetary Policy

There are two types of monetary policy:

1. Expansionary Monetary Policy and 2. Contractionary Monetary policy

Expansionary Monetary Policy

When an economy is undergoing recession, expansionary monetary policy is used to stimulate the economy.  The monetary authority in an expansionary policy maintains short-term interest rates at a lower than usual rate or increases the total supply of money in the economy more rapidly than usual. It is traditionally used to try to combat unemployment in a recession. A lower interest rate leads to increased borrowing (due to low cost of borrowing ) and investment  by  businesses This increases aggregate demand (the overall demand for all goods and services in an economy), which boosts short-term growth as measured by gross domestic product (GDP) growth. Expansionary monetary policy usually leads to depreciation of currency of the country in question . In other words it diminishes the value of the currency relative to other currencies (the exchange rate).

Contractionary Monetary Policy

In  contractionary monetary policy, the monetary authority increases short run interest rates or in other words maintains short-term interest rates higher than usual in order to reduce borrowing (as it becomes costlier) This in turn slows the rate of growth in the money supply or even shrinks it. This slows short-term economic growth and lessens inflation. The contractionary monetary policy is resorted to curb high level of inflationary expectations or “cool down” an “over- heated economy” due to much higher aggregate demand than aggregate supply.However, it can lead to increased unemployment and depressed borrowing and spending by consumers and businesses, which can eventually result in an economic recession if implemented too vigorously.

Credit Policy

Credit is created on the basis of money supply. In a branch banking system operating with provision of a reserve ratio, every bank has to maintain an amount equal to reserve ratio out of its total time and demand deposits and the remaining part is lent out. This is how “reserve money” or “high powered money” creates “credit”. In economics, credit policy is government policy at a particular time on how easy or difficult it should be for people and businesses to borrow money and how much it will cost.

Money Multiplier or Credit Multiplier

Money multiplier or credit multiplier is a model that illustrates how banks can create money. The rate at which credit is created depends on the reserve ratio and the capital ratio for banks. The money multiplier or credit multiplier tells how the maximum amount the money supply could increase based on an increase in reserves within the banking system. Money multiplier closely related ratios of commercial bank money to central bank money (also called the monetary base) under a fractional-reserve banking system. In a fractional-reserve banking system, the total amount of loans that commercial banks are allowed to extend (the commercial bank money that they can legally create) when there are no leakages is equal to a multiple of the amount of reserves. This multiple is the reciprocal of the reserve ratio, and it is an economic multiplier.

In equations, writing M for commercial bank money (loans), R for reserves (central bank money), and RR for the reserve ratio, the reserve ratio requirement is that {\displaystyle R/M\geq RR;} {\displaystyle R/M\geq RR;}

 R/M{\displaystyle R/M\geq RR;} ≥ RR

the fraction of reserves must be at least the reserve ratio.

Taking the reciprocal,

M/R≤1/RR{\displaystyle M/R\leq 1/RR,}

 Which, yields {\displaystyle M\leq R\times (1/RR),}M≤R X (1/RR)

meaning that commercial bank money is at most reserves times (1/RR) which is the multiplier ignoring leakages into currency If banks lend out close to the maximum allowed by their reserves and there are no leakages into currency holdings, then the inequality becomes an approximate equality, and commercial bank money is central bank money times the multiplier. If banks instead lend less than the maximum, accumulating excess reserves, then commercial bank money will be less than central bank money times the theoretical multiplier.

High Powered Money

It is high powered money that creates overall money and credit supply in an economy. High powered money or powerful money refers to that currency that has been issued by the Government and Reserve Bank of India. Some portion of this currency is kept along with the public while rest is kept as funds in Reserve Bank. Base money or high powered money in a country is the total amount of bank notes and coins circulating in the economy. This includes:

• the total currency circulating in the public,
• plus the currency that is physically held in the vaults of commercial banks,
• plus the commercial banks’ reserves held in the central bank .

The monetary base should not be confused with the money supply, which consists of the total currency circulating in the public plus certain types of non-bank deposits with commercial banks.

If a country’s gross domestic product is declining or growing sluggishly, monetary policy can offset this with open market purchases of bonds, which expand the monetary base. This expansion of the base in turn leads to expansion of the money supply and to downward pressure on interest rates, which makes it less expensive for consumers to buy consumer goods and for companies to purchase new physical capital; the increase in these types of expenditure gives an upward push to gross domestic product. On the other hand, if gross domestic product is growing at an unsustainably high rate, threatening to cause an increase in the inflation rate, contractionary open market operations can be used to slow the economy down.

Objectives of Monetary Policy

• The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth.
• In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.
• The amended RBI Act also provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once in every five years. Accordingly, the Central Government has notified in the Official Gazette 4 per cent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent.
• The Central Government notified the following as factors that constitute failure to achieve the inflation target:(a) the average inflation is more than the upper tolerance level of the inflation target for any three consecutive quarters; or (b) the average inflation is less than the lower tolerance level for any three consecutive quarters.
• Prior to the amendment in the RBI Act in May 2016, the flexible inflation targeting framework was governed by an Agreement on Monetary Policy Framework between the Government and the Reserve Bank of India of February 20, 2015.

Monetary Policy Framework

• The amended RBI Act explicitly provides the legislative mandate to the Reserve Bank to operate the monetary policy framework of the country.
• The framework aims at setting the policy (repo) rate based on an assessment of the current and evolving macroeconomic situation; and modulation of liquidity conditions to anchor money market rates at or around the repo rate. Repo rate changes transmit through the money market to the entire the financial system, which, in turn, influences aggregate demand – a key determinant of inflation and growth.
• Once the repo rate is announced, the operating framework designed by the Reserve Bank envisages liquidity management on a day-to-day basis through appropriate actions, which aim at anchoring the operating target – the weighted average call rate (WACR) – around the repo rate.
• The operating framework is fine-tuned and revised depending on the evolving financial market and monetary conditions, while ensuring consistency with the monetary policy stance. The liquidity management framework was last revised significantly in April 2016.

Instruments of Monetary Policy

There are several direct and indirect instruments that are used for implementing monetary policy.

• Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).
• Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
• Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo auctions. Progressively, the Reserve Bank has increased the proportion of liquidity injected under fine-tuning variable rate repo auctions of range of tenors. The aim of term repo is to help develop the inter-bank term money market, which in turn can set market based benchmarks for pricing of loans and deposits, and hence improve transmission of monetary policy. The Reserve Bank also conducts variable interest rate reverse repo auctions, as necessitated under the market conditions.
• Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system.
• Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.
• Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.
• Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.
• Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe and liquid assets, such as, unencumbered government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.
• Open Market Operations (OMOs): These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.
• Market Stabilisation Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale of short-dated government securities and treasury bills. The cash so mobilised is held in a separate government account with the Reserve Bank.

The Monetary Policy Process

• Section 45ZB of the amended RBI Act, 1934 also provides for an empowered six-member monetary policy committee (MPC) to be constituted by the Central Government by notification in the Official Gazette. Accordingly, the Central Government in September 2016 constituted the MPC as under:
  1. Governor of the Reserve Bank of India – Chairperson, ex officio;
  2. Deputy Governor of the Reserve Bank of India, in charge of Monetary Policy – Member, ex officio;
  3. One officer of the Reserve Bank of India to be nominated by the Central Board – Member, ex officio;
  4. Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) – Member;
  5. Professor Pami Dua, Director, Delhi School of Economics – Member; and
  6. Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management, Ahmedabad – Member.(Members referred to at 4 to 6 above, will hold office for a period of four years or until further orders, whichever is earlier.)
• The MPC determines the policy interest rate required to achieve the inflation target. The first meeting of the MPC was held on October 3 and 4, 2016 in the run up to the Fourth Bi-monthly Monetary Policy Statement, 2016-17.
• The Reserve Bank’s Monetary Policy Department (MPD) assists the MPC in formulating the monetary policy. Views of key stakeholders in the economy, and analytical work of the Reserve Bank contribute to the process for arriving at the decision on the policy repo rate.
• The Financial Markets Operations Department (FMOD) operationalises the monetary policy, mainly through day-to-day liquidity management operations. The Financial Markets Committee (FMC) meets daily to review the liquidity conditions so as to ensure that the operating target of the weighted average call money rate (WACR).
• Before the constitution of the MPC, a Technical Advisory Committee (TAC) on monetary policy with experts from monetary economics, central banking, financial markets and public finance advised the Reserve Bank on the stance of monetary policy. However, its role was only advisory in nature. With the formation of MPC, the TAC on Monetary Policy ceased to exist.

The Chief Economic Adviser in the finance ministry Krishnamurthy Subramanian said (April 09, 2019) that the Non Bank Financial Companies are facing the problem of adverse asset-liability mismatch of firms and there are genuine fears that more non-banking financial companies (NBFCs) may default like IL&FS due to a growing liquidity crunch. According to him the issue is actually one of solvency and very few of them are solvent. He asserted that  the entire shadow-banking space needs to be “very tightly and carefully monitored” to ensure the crisis doesn’t recur or flare up. He added, “Assets of some NBFCs are long-dated while liabilities are short-term. When the going gets tough, those NBFCs that are not solvent enough find it difficult to roll over (payment obligation). So what is typically a solvency issue appears to have been a liquidity issue.”

He said that the role of credit rating agencies is very important perhaps because they help knowing which the firms in which insolvency problems are brewing. The onus of ensuring the quality of ratings lies solely with the rating agencies; they can’t just crib that companies didn’t provide enough information to them to be able to discharge their duty efficiently. Similarly, auditors, being the first line of information intermediaries, can’t complain they couldn’t detect irregularities early because they went by what the company’s management told them. Also, they must not be self-regulated, so the National Financial Reporting Authority (NFRA) has to be strengthened. Even some of the developed countries like the US were forced to shun self-regulation after the Enron scandal in 2001. The CEO prescribed the option of a seven-day default rule for lenders if the one-day default rule is too difficult to be implemented. However, such strict default-reporting mechanisms are essential, he viewed. Commenting on some of the mutual funds delaying full redemption for investors due to a delay in recovery of their funds lent to NBFCs, the CEA said investors need to be made aware of risks.

What is meant by NBFCs?

Non Bank Financial Companies are kind of nonbank financial institutions. The World Bank Group defines Non Bank Financial Institutions as follows:

“A nonbank financial institution (NBFI) is a financial institution that does not have a full banking license and cannot accept deposits from the public. However, NBFIs do facilitate alternative financial services, such as investment (both collective and individual), risk pooling, financial consulting, brokering, money transmission, and check cashing. NBFIs are a source of consumer credit (along with licensed banks). Examples of nonbank financial institutions include insurance firms, venture capitalists, currency exchanges, some microloan organizations, and pawn shops. These non-bank financial institutions provide services that are not necessarily suited to banks, serve as competition to banks, and specialize in sectors or groups.”

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).

A NBFC’s financial activity is taken as principal business when a company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income. A company which fulfils both these criteria will be registered as NBFC by RBI. The term ‘principal business’ is not defined by the Reserve Bank of India Act. The Reserve Bank has defined it so as to ensure that only companies predominantly engaged in financial activity get registered with it and are regulated and supervised by it.

Difference between banks & NBFCs

• NBFC cannot accept demand deposits;
• NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
• Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

Types of NBFCs

By the kind of activity they conduct NBFCs may be Asset Finance Company (AFC) , Investment Company (IC), Loan Company (LC), Infrastructure Finance Company (IFC; Which deploys at least 75 per cent of its total assets in infrastructure loans,and minimum net owned fund Rs. 300 crore; a minimum credit rating of ‘A ‘or equivalent  and a CRAR of 15%.), Non-Banking Financial Company  Infrastructure Debt Fund, Mortgage Guarantee Companies (MGC) etc.

Some Examples of NBFI

 Insurance companies underwrite economic risks associated with death, illness, damage to or loss of property, and other risk of loss. Another example is Contractual savings institutions (also called institutional investors) provide the opportunity for individuals to invest in collective investment vehicles in a fiduciary rather than a principle role. Collective investment vehicles invest the pooled resources of the individuals and firms into numerous equity, debt, and derivatives promises. The two two main types of mutual funds are open-end and closed-end funds. Open-end funds generate new investments by allowing the public buy new shares at any time. Shareholders can liquidate their shares by selling them back to the open-end fund at the net asset value. Closed-end funds issue a fixed number of shares in an IPO. The shareholders capitalize on the value of their assets by selling their shares in a stock exchange.

Market makers are broker-dealer institutions that quote both a buy and sell price for an asset held in inventory. Such assets include equities, government and corporate debt, derivatives, and foreign currencies. Once an order is received, the market maker immediately sells from its inventory or makes a purchase to offset the loss in inventory. The difference in the buying and selling quotes, or the bid-offer spread, is how the market-maker makes profit. Market makers improve the liquidity of any asset in their inventory.

Specialized sectoral financiers provide a limited range of financial services to a targeted sector. For example, leasing companies provide financing for equipment, while real estate financiers channel capital to prospective homeowners. Leasing companies generally have two unique advantages over other specialized sectoral financiers. They are somewhat insulated against the risk of default because they own the leased equipment as part of their collateral agreement. Additionally, leasing companies enjoy the preferential tax treatment on equipment investment.

Other financial service providers include brokers (both securities and mortgage), management consultants, and financial advisors. They operate on a fee-for-service basis. For the most part, financial service providers improve informational efficiency for the investor. However, in the case of brokers, they do offer a transactions service by which an investor can liquidate existing assets.

How the problems arose in NBFCs in India: The IL&FS’ Issue

Since August 2018, several NBFCs in India including debt-ridden Infrastructure Leasing and Financial Services (IL&FS), in which various corporates, as well as mutual funds and insurance firms, had invested through short-term instruments like commercial papers and non-convertible debentures (NCDs), has been defaulting on its several debt-obligations. The ongoing liquidity crisis in the NBFC industry is the result of asset-liability mismatch (ALM). Since the NBFCs cannot raise retail deposits from the general public, they depend on wholesale lending for their capital requirements. As a result, the cost of funds for NBFCs is higher than that of banks.

The biggest error that the majority of NBFCs and housing finance companies (HFCs) committed with regards to the real estate sector is that they ventured into long-term lending to builders and also into underwriting loans with very long-term repayment tenures. As a result, the NBFCs short-term borrowing was channelised towards financing long-term loans. They were heavily dependent on banks, mutual funds and private placements to meet their capital requirement as well as for refinancing of loans.

Driven largely by global factors – chiefly rising crude oil prices, rising interest rates in the U.S., and trade tensions – Indian interest rates started to rise. The yield on the benchmark 10-year government bond moved up from around 6.8 percent to over 8 percent in a period of about three months. Fresh inflows into mutual funds, especially into debt funds, slowed, and debt fund managers began to adopt a “wait and watch” policy on deploying fresh funds. Liquidity supply to NBFCs began to dry up rapidly. Fresh bond issuances by NBFCs declined and the costs of borrowing rose. All this preceded the spate of defaults by IL&FS.

Infrastructure Leasing and Financial Services (IL&FS) defaulted on short-term debt obligations.  According to the Ministry of Corporate Affairs (MCA), IL&FS’ borrowings from banks and financial institutions added to nearly Rs 63,000 crore as per the balance sheet of 2017-2018. There were concerns that many NBFCs could have their funds stuck in IL&FS debt instruments. Reportedly, approximately Rs 2 trillion ($27.23 billion) of NBFC and HFC debt was due for redemption by the end of December 2018. Also, funding costs of NBFCs were likely to go up and could lead to a sharp decline in their margins. And then the news of IL&FS defaults broke. It had two immediate implications. First, there was a fear of large scale redemptions in debt mutual funds. So some funds resorted to panic selling of debt securities which sent a negative signal to the entire market. Second, the defaults shattered faith in ratings of debt securities. IL&FS debt had the had the highest rating just a couple of weeks before the default. The rating was revised to the lowest default grade (“D”) after the default occurred. This raised doubts about the quality of other issuers assigned similarly high ratings. The reaction in the market was vicious. Yields on corporate bonds went up and the debt market almost stalled. The RBI acted quickly and took steps to inject liquidity via open market operations. Since then calm has returned to the market for securities of less than one year but the market for medium-term securities remains tight.

Steps taken to resolve NBFCs crisis in India

The central bank has been taking several initiatives, including intermittent open market purchase of government securities, ever since the occurrence of a series of payment defaults by IL&FS and its arms which had culminated in the Centre disbanding the entire board of the infrastructure company and appointing a new one in its place under the leadership of Uday Kotak.

On September 27, the RBI permitted  banks to avail higher liquidity with effect from October 1 as it had enhanced the Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) from the existing 11% to 13% of their deposits. Liquidity coverage ratio refers to highly liquid assets that financial institutions need to hold in order to meet short-term obligations. The Reserve Bank has also permitted banks to use government securities, equal to their incremental outstanding credit to NBFCs, over and above their outstanding credit to them as on October 19,to meet the liquidity coverage ratio requirement. This would be in addition to the existing FALLCR of 13% of NDTL and limited to 0.5% of the bank’s NDTL (net demand and time liability), the RBI said. The additional window will be available up to December 31, 2018, the notification said.

On October RBI The Reserve Bank of India (RBI) decided to increase the single- borrower exposure limit of banks for non-banking finance companies (NBFCs) which do not finance infrastructure, to 15% from the existing 10% of their capital funds. This was to remain effective till December 31. While the Reserve Bank of India (RBI) and the Government have taken steps to ring fence the NBFC crisis and support its financing needs by providing additional liquidity to banks and credit enhancement for refinancing needs.

Well known economist and Reserve Bank of India (RBI) Governor Urjit Patel resigned today (December 10, 2018).  He said that he has decided to “step down” from his current position effective immediately “on account of personal reasons”. The governor’s decision to resign came five days after the bi-monthly policy meeting, in which he refused to answer questions on the controversies surrounding the RBI’s autonomy. He also appreciated the support and hard work of RBI staff, officers and management saying that it had been the proximate driver of the Bank’s considerable accomplishments in recent years. He expressed gratitude to his colleagues and Directors of the RBI Central Board, and wished them all the best for the future. All sober officers like Urjit Patel claim personal reasons when they resign, but public and observers do not take such reasoning on its face value. The differences between the RBI and government came loudly in public domain in last few weeks. Resignation of the RBI government is no doubt partly because of irreconcilable difference between the approach of the RBI and government. Media reports were rife with speculation of Urjit Patel’s resignation following the government’s decision to invoke the never-used-before special powers under Section 7 of the RBI Act to initiate consultation on a range of issues such as the Prompt Correct Action (PCA) norms, RBI’s capital reserves, and liquidity problem in NBFCs.

To clear the cloud, few minutes after Urjit Patel announced his resignation, Prime Minister Narendra Modi tweeted praise for him, saying that he is “an economist of a very high calibre with a deep and insightful understanding of macro-economic issues”. The PM added, “He steered the banking system from chaos to order and ensured discipline. Under his leadership, the RBI brought financial stability”.

Former Governor of the RBI, Raghuram Rajan, reacting  on Urjit Patel’s decision to step down, said that the autonomy of the central bank should not be undermined. He said, “Believe resignation of RBI Governor Urjit Patel is a matter of great concern. Resignation by a government servant is a note of protest when faced with circumstances they cannot deal with” .  While refusing to speculate what led to Urjit Patel’s resignation, he advised the government to take “extreme care” in its relationship further with the RBI. “Need to understand what prompted this act by Urjit Patel”.

Urjit Patel was appointed the 24th governor of the RBI on September 2016 for a three-year term. He was heavily criticised for his silence on demonetisation, which was announced just two months after he took the position. Urjit Patel earlier served as a deputy governor of the RBI and was elevated to the governor’s position after Raghuram Rajan’s tenure ended.

The former Chief Economic Adviser (CEA) Arvind Subramanian, in an interview with the PTI,  called for an investigation by experts into the back series GDP data of India to clear doubts and build confidence in the country. He opined that the “puzzle” about the data needs to be explained. According to him, the institutions which do not have technical expertise in calculating the GDP data should not be involved in the process, apparently referring to the Niti Aayog. The well known economist also criticised demonetisation in his new book titled ‘Of Counsel: The Challenges of the Modi-Jaitley Economy’. He stressed the need to explain the issues involved in the back series data just to create confidence and eliminate any uncertainty or doubts. He also spoke on the controversy over the Niti Aayog’s presence at the release of the GDP back series data by the Central Statistics Office (CSO) last month. He opined that (only added) experts should have the main job of producing and explaining data.“I think this [calculation of GDP] is a very technical task and technical experts should do the task, institutions that don’t have technical expertise should not be involved in this.” It may be noted that data of past years using 2011-12 as the base year instead of 2004-05, the CSO last month lowered the country’s economic growth rate during the previous Congress-led UPA’s regime.

On the issue of demonitisation and Mr. Subramanian criticism of the policy after he demitted the office of the Chief Economic Adviser to the Government of India, he said that “this is not a Kiss and Tell memoir, that is for gossip columnists.” Referring to criticism that he did not speak on demonetisation when he was working for the government and now he is raising the issue to sell his book, Mr. Subramanian said that whatever people say, it is important to ananlyse why even after 86% reduction in cash [after demonetisation], there little impact on the economy; was it due to current GDP calculation method. It was important according to him to understand is it because “we are not measuring GDP correctly, or is it because our economy is very resilient,” Mr. Subramanian who currently teaches at Harvard Kennedy School remarked.

In the six quarters before demonetisation, growth averaged 8% and in the seven quarters after, it averaged about 6.8% [with a four-quarter window, the relevant numbers are 8.1% before and 6.2% after],” Mr. Subramanian wrote in the chapter “The Two Puzzles of Demonetisation — Political and Economic”.

On the recent spat between the government and the Reserve Bank of India (RBI) over a host of issues, Mr. Subramanian opined that the autonomy of the RBI must be protected because the country will benefit by having strong institutions. He, however added, “But, I think there must also be cooperation, consultation and everything. Both have to happen.”