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Q. Economic activity in the backdrop of demonetisation: After nearly a month of demonetisation of high value currency notes, comment status of economic activity.
Dec 05, 2016 Related to : GS Paper-3

Ans :


Nearly a months ago, central government withdrew legal tender status for Rs. 500 and Rs.1000 notes, have somewhat dampened the economic activity. Even while addressing the nation, Prime Minister has said that to some extent it will affect the economic activity, but it will affect the corruption and black money severely. 

Impact on economic activity-

  • Recently data released by some organisation, revealed that demonetisation had slowed buying activity and production across the board, and led to the weakest expansion in orders in four months. 
  • Some survey indicated that producers of consumer goods are among the worst hit, a signal that a key engine of India’s world-leading pace of economic growth, as  private consumption demand appears to be sputtering on account of the cash shortage.
  • That the impact is likely to extend beyond the current quarter, according to the downward revisions of growth projections announced by brokerages and credit rating agencies. 
  • The median reduction in GDP growth estimate for the year by the 13 forecasters indicates that the pace of growth will be slower by at least 50 basis points, with 2 of them dialling back the number by 1% point or more.

Main reasons-

  • With cash availability significantly impaired as a result of the sudden withdrawal of the high-value banknotes that constituted more than 86% of the currency in circulation a palpable impact has been felt across the entire economy. 
  • Similarly inadequate penetration of formal banking channels have affected the economic activities in small towns and villages, which are largely works on cash-based system.


The ban of high value currencies are intended towards curbing the black money, counterfeit currencies, terror financing etc. The well intended move was supposed to cause some impact in cash based economy, but inadequate arrangements have largely impacted our economic system. Nearly after one months of ban, it looks clear that it has much more impact on economic activity, than earlier predicted. 



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