Demonetization Impeded Indian Economic Growth? Test of Hawtrey’s Theory of Business Cycles

Many national and international agencies blame demonetization as a major factor behind the deceleration in the growth rate of Indian economy in recent quarters. Such linkages of economic growth with monetary shocks have been well explained by Hawtrey’s monetary theory of business cycles. The present paper attempts to test Hawtrey’s theory in the context of demonetization in India. The results indicate that the Indian economy did experience fourteen growth-rate cycles over the period 1970 to 2017. Given that M3 takes an average 7 months lead in explaining the low growth (i.e., downswing) phase, the demonetization (i.e., fall in money supply) can be admitted as a lead because of falling growth rate of Indian economy.