Demonetization and Growth in India’s GDP

India’s GDP figures were just released and lo and behold they are great! Quarterly growth for Oct-Dec (demonetization, the banning of 86% of India’s cash, hit on Nov. 8) was 7% on an annual year over year basis. Many analysts and critics had predicted a significant slowdown. Prime Minister Modi took the opportunity to take a dig at economists like Amartya Sen who had sharply criticized demonetization saying “Hard work is more important than what Harvard thinks.” (Sen teaches at Harvard). Modi’s BJP party also seems to be doing well in the important elections in Uttar Pradesh suggesting a second term for him.

The GDP statistics may be off, David Keohane runs down some numbers, but I think the basic story is that the people who were hurt most by demonetization simply didn’t generate much GDP to begin with.

Further studies will fine point the cost but I think it safe to say that we now know that the cost to GDP was low. The only question that remains is what was the benefit?