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Economic Consequences of Demonetisation
The nature of money supply and its link with transactions in the economy are discussed, with necessary modifications on account of the presence of the unorganised sector and the black economy. This helps incorporate differentiation in the Indian economy that is useful to understand and analyse the impact of demonetisation.
Demonetisation, announced on 8 November 2016, has resulted in the withdrawal of the high denomination currency notes of ₹1,000 and ₹500 as legal tender. These are being slowly replaced by new currency. This has suddenly created a shortage of currency which has implications for the economy. The issue is whether the effects visible are short-term or long-term. Those who support the decision argue that there would be a temporary slowdown in the economy in the third quarter of 2016–17. Reports suggest that major sectors of the economy face a slowdown, be it agriculture, industry, services or the organised and unorganised sectors. The Reserve Bank of India (RBI) has taken a cautious stance in its recent monetary policy statement stating that due to the influences already visible in the second quarter, the economy would slow down by 0.5%, but due to the uncertainty created by the demonetisation, the full impact cannot be gauged at present.
Heart-rending accounts of people dying, of a father not being able to save his child because he could not get medical attention due to his inability to get new notes, or of people collapsing in the long queues at the banks have appeared. An economy which the government claimed as the fastest growing economy in the world is suddenly facing a crisis due to demonetisation.
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