How does demonetization impact on the GDP of India?

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Being a bank employ during 2016 demonetization

The impact of demonetization couldn’t be scaled to draw a conclusion, but its effect can be felt over all areas contributing to the nation’s GDP.  In fact, the main emphasis of this decision was to tie down the corrupting hands and dig out the black money back to society. Society here is a comprehensive term for a multitude of factors like development, economic growth, tax, stabilization, prices etc.

For those who don’t have much idea about GDP, it is a parameter that would suggest the health of a country. Basically, it is the monetary value of total goods and services channeled by the country in a certain period of time, usually a financial year.  Indian GDP took a petty hit in the backwash of demonetization, but the long term effects are patently going to be in favor of nation. To make things easy, if we break down the impact of demonetization over GDP, here is what you’ll find:

  • Black money was extracted from public via many means, which was supposed to flow across public’s hand. With destroying the underground carriage, now public sectors have enough cash in hand to invest in for public deeds, which definitely will reflect in GDP growth. The previous trend was solely one-sided in biasing the flow of white to black. But now all existing barracks to launder the black money has to shut down because no exchange is possible without a bank or RBI’s.


  • Many banks in India were struggling due to NPA’s or non-performing assets like bad loans, defaults etc. These bad loans will only account a fraction of the illegal money amassed in India. Once recovered banks shall close such liabilities, which is a straight point to GDP. Also, those defaulted study loans & agricultural loans might be allotted some waivers, which will be a solace for the struggling ones.


  • With demonetization, banks will turn into a sole heart of money pumping, legalizing all money transfers as accountable. This will terminate the business, services or productions that happen underground, which was once not accounted in GDP. They were the major contributors to black money and their hoarding. Now showing up such contributors will definitely pin and legalize them, thereby helping the GDP growth.


  • The immediate GDP impact might apparently seem to diminish as a result of demonetization. Some financial experts suggest a 0.5% drop, but the good news is that festival demand will compensate this drop for a while. The overall GDP is expected to skyrocket when the things are back on track. Many businesses had halted for a moment until the financial system goes back live. The new 2000 and 500 rupee currencies have to flow across the hands to bring back the order, whose upshot will be felt in statistics of GDP.


  • There is an expected price drop across all sectors, which will ensure the enhanced participation of public in those sectors. Real estate is one great example to quote for instance. With prices deflated back to actual numbers, ordinary people can think of investing in real estate thereby bringing back the economic Gold is also expected to feel a similar shockwave as and when the economy starts to run back on track.

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