Demonetisation may slow down the growth of GDP in the short-term

Aamir H Kaki 

The demonetisation move of the government, which has led to a cash crunch in the country, is likely to impact the economic activity in the short-term while the growth of GDP next year may decrease.

According to a recent report by Ambit Capital, the GDP growth of India is expected to slow down from 6.4% in the first half of this financial year by 0.5% in the second half, with a distinct probability of the growth contracting in the third quarter of this financial year. Based on this The Dollar Business correspondent spoke to Dr Asmi Raza Professor of Economics, University of Delhi intending to know his viewpoint. Dr Raza said, “Due to demonetisation, GDP will definitely slip a little in the short-term trying to readjust to the system. But it will have a positive impact in the long run. Earlier, a lot of black money was involved in economic activities, as a result, there was no clear reflection of ground reality."

When questioned as to when things could get streamlined, Dr Raza stated, “Initially there might be some hiccups but when things settle down after 6 months or a year, it will reflect the real productive capacity of the economy and will have a positive effect on the country’s economic activity.”

He further said that this would bring down the prices in sectors such as gold, diamond, jewellery, real estate, etc, He added, “Earlier, the prices in these sectors presented an inflated picture due to the involvement of black money. And that reflected in the GDP too. Now, the real picture would be reflected when all the black money disappears. So I feel that the demonetisation process will have a positive impact in the long run, maybe in a year or two. Initially, it might hamper the economy as it will take time to readjust to the things as everything needs to settle down. It will also need time to adjust to the market forces."

When asked about the impact on the banking system, Dr Raza pointed out that the money that has been deposited into the banks will definitely strengthen the system. “With high deposits in banks, the rate of interests on loans will definitely come down,” he added.