ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Demonetisation and the Delusion of GDP Growth

Whilst demonetisation (combined with other measures aimed at crunching the size of the black economy) will yield benefits in the long term, we highlight the fact that the move undeniably affected the gross domestic product growth rate adversely in the short term. Moreover, increased tax compliance and the advent of the Goods and Services Tax regime could make a host of informal sector businesses unviable in the future.

The Modi-led National Democratic Alliance decided to demonetise 500 and 1,000 currency notes on 8 November 2016 thereby destroying the value of 86% of the currency in circulation in one stroke. This was unprecedented in every sense. No other country had ever experimented with such a policy measure to curb the size of the black economy. No other country had ever imposed on itself such a massive economic shock endogenously.

Whilst this move (combined with other measures aimed at crunching the size of the black economy) will yield benefits in the long term, we highlight the fact that the move undeniably affected the gross domestic product (GDP) growth rate adversely in the short term. Even as the negative impact appears obvious, the need to explain and quantify the same is necessitated by the fact that the countrys apex statistical body has declared that the GDP growth in the third quarter of 201617 (3QFY17) was recorded at 7.1% year-on-year (YoY) in real terms, which is just 10 basis points (or 0.10) slower than the GDP growth rate of 7.2% YoY recorded in the first half of 201617 (1HFY17).

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Published On : 20th Jan, 2024

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