The impact of demonetization on Indian economy

Abstract

The demonetization strategy implemented by the Government of India on November 8th, 2016, was designed with the objective of eliminating illicit funds inside the economy and curbing the circulation of counterfeit currency, which were believed to be utilized for the purpose of financing acts of terrorism. Two further significant aims were to broaden the formal economy's scope and to make gradual progress in digital transactions. However, the implementation of this policy shock was deemed unjustified due to its potential to disrupt economic operations, particularly in the short term. The advantages and disadvantages of this approach have been subject to substantial deliberation and analysis within the realm of print media and policy discourse. However, it has been observed that there is a lack of empirical information about the influence of this policy shock on economic activity. Within the confines of this particular setting, employing econometric research, the current investigation has ascertained that demonetization did not provide a statistically significant influence on the general trajectory of economic growth. Instead, the repercussions were confined to certain sectors. Likewise, the effect of demonetization on inflation was particularly noticeable in relation to food costs only. However, a significant policy implication arising from demonetization is the transformative impact it has had on digital transactions in the years following its implementation.