❓Ask Duta: What does the new currency scheme mean for the economy?

  |   India News

Readers have asked about economic ramifications of demonetisation:

Former Chief Statistician of India Pronab Sen said with 86% of value of money in circulation, our economy will have to make do with only 14% of money in circulation for 2⃣ weeks at least, until when there are restrictions on withdrawing money. He surmised that it will impact a large number of cash transactions which will have a multiplier effect on the economy and most affected will be the informal sector, especially in rural India. He says "“This is likely to reduce GDP growth by one percentage point this year (2016-17),” His views seemed to be echoed by Prof.N.R. Bhanumurthy of the National Institute of Public Finance and Policy, said a decline in money supply will directly impact growth in the short run.

However, current Chief Statistician of India T.C.A. Ananth, said the disruption due to demonetization in the economy is unlikely to be significant and it is only a "transitory phenomenon".

The FM💰 at a recent press conference, ruled out any short-term impact of demonetization on growth, holding that it will rather benefit growth in the long run because “all this will impact the size of the GDP itself because more transaction that were happening outside the (formal) economy will get into the economy itself”.

However, both Sen and Prof. Bhanumurthy said demonetization will bring down inflation in the economy, though for different reasons. Overall it looks like the general consensus is there might be a short-term effect, with some possible decrease in GDP growth as well as decrease in inflation while there should be no longer term effect on the markets due to this scheme.