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Demonetisation: Let's compare the long term and the short term impact

BT Online     November 30, 2016

As the debate around demonetisation rages on in the country, the economists have expressed varied opinions on this unprecedented reform. Here is the long term and short term impact of government's move to make India a cashless economy.

  Short-term impact
 Long-term Impact
GDP Growth
GDP growth to be negatively impacted by 0.5-1% due to drop in consumptionWith a tax net widening after restriction on cash economy, GDP in the long-term likely to get a boost
InflationInflation likely to come down due to low demand owing to liquidity problemSince effect of lower demand can have a lagging impact on inflation, prices may remain flat or fall in the long term
Interest ratesWith Banks flush with cash, interest rates may come down in the short-termIf demonetisation boots formal banking and more cash continues to come in the system, interest rates may fall further 
G-sec yieldYields likely to fall as liquidity in the banking system means interest rates are likely to fall
Likely to remain flat to positive depending on how inflation plays out and how's the country's fiscal situation
Fiscal Deficit
Unlikely to have much impact as most of the gains (RBI surplus, higher tax collections, penalties) will accrue after FY2017. 
With likely increase in the size of formal economy, tax collections would improve improving the country's fiscal situation.

 


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