Will the recent demonetisation results in higher GDP? If so how much?

The impact of India's 2016 demonetization on GDP is complex and varied across different time frames and sectors. Here are the key points:

Short-Term Impact

• The immediate effect of demonetization was a significant contraction in economic activity. Estimates suggest that GDP growth was reduced by 0.5% to 3% in the financial year 2016-17 due to the cash crunch and its impact on various sectors, particularly those heavily reliant on cash transactions such as agriculture, construction, and small businesses124.
• Studies indicate that economic activity declined by at least 3 percentage points in November and December 2016, with a sharp fall in employment, output, and bank credit3.

Medium to Long-Term Impact

• Despite the short-term pain, many analysts and experts believe that the long-term effects of demonetization could be positive. The move was expected to improve tax compliance, reduce black money and corruption, and lead to better fiscal balance and lower inflation. These factors could contribute to sustained economic growth in the longer term124.
• However, the actual long-term impact on GDP growth is not uniformly positive. While some sectors and the overall economy began to recover, the growth rate did not fully rebound to pre-demonetization levels immediately. For instance, quarterly real GDP growth fell significantly and took time to recover5.

Specific GDP Growth Estimates

• Various agencies estimated the impact on GDP growth for the financial year 2016-17 and 2017-18. For example:
  • IMF estimated a reduction from 7.6% to 6.6% in 2016-17, with a recovery to 7.2% in 2017-182.
  • Other agencies like the World Bank, Asian Development Bank, and domestic institutions also predicted a similar reduction in GDP growth for 2016-17, followed by a gradual recovery2.

In summary, while the short-term impact of demonetization was clearly negative, with a reduction in GDP growth, the long-term effects are more nuanced. The economy did experience a recovery, but the extent to which GDP growth was enhanced in the long term is not clear-cut and varies by sector and economic indicator. The general consensus is that the short-term pain was significant, but there are potential long-term benefits that could support sustained economic growth.