Trade and Development Review, Vol 9 (2017)

Impact of Demonetisation on India: A Macro-theoretic Analysis

Ambar Nath Ghosh


The objective of this paper is to develop a macro-theoretic model to examine the likely impact of demonetization in India. It shows that its initial impact is on the unorganized sector of the economy. The unorganized sector will contract. This will, through both forward and backward linkages, bring about a contraction of the organized sector as well. The contraction in the latter will lead to further contraction in the former and so on. However, remonetization will reverse the process of cumulative contraction. The paper argues that demonetization is a harsh measure. It is particularly harsh on the poor and the weak. However, it is likely to leave most of the accumulated black wealth unaffected. To the extent it encourages digitization, it will hurt the lower middle class by destroying low skilled jobs. 

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