Demonetisation and Indian Economy:Some Macroeconomic Challenges

The macroeconomic implications of the "Demonetisation" exercise has been studied on three board parameters of growth, distributional consequences, and the challenges it brought in for the Banking Sector. Concomitantly, an attempt has been made to evaluate the extent to which the stated objectives behind this exercise are justified. We found that it is beyond dispute as far as the immediate impact on growth is concerned. Given the size of the informal economy and the fact that India has been a cash driven economy, contraction in output during 2016-17 fiscal was inevitable. Other than the growth challenge, the Demonetisation exercise throws a far more important challenge bearing distributional consequences. The new interest rate regime that emerged during the post demonetisation period is likely to benefit some while leaving a large chunk of population worse off. Finally, the banks will find it difficult to manage the liquidity surge in the system. With increase in deposit growth and a decline in credit growth, it would be difficult for banks to manage their liabilities. The evaluation of its stated objectives suggests that it does not justify such a mammoth exercise, which is cost intensive and bears serious adversarial economic consequences. We have not endeavoured to examine the likely/claimed long term gains from the Income Tax authorities being able to track the addresses of the currency which has flowed into the banking system.