Effect of demonetization on the current economic slowdown and the links to IL&FS crisis

Abstract

The whole world has been stuck by the COVID-19 pandemic, which has adversely affected the economy. But, even before the COVID-19 pandemic induced economic downturn occurred, there were indications that there were some other related issues that had transpired, which had amplified the economic downturn effects. Focussing on the scenario before COVID-19 provides a context on the impending downturn: • GDP growth rate - 4.5 % in Q3 2019 (a 26-quarter low and declining since 5 quarters). • CPI growth shot up from 2.566 to 7.593 in just one year. • IIP fell to -4.3% and exports are also shrinking. All the indicators mentioned above point towards an economic slowdown in India since the 2016-17 Q1. This can all be linked back to the events set in motion by the demonetization in November 2016. Demonetization can be attributed as a major cause of the economic slowdown, which affected several sectors. Demonetization in November 2016 led to about ₹15.30 lakh crore cash deposited in the banks. This led to a cash crunch in the economy. This liquidity crisis impacted many businesses both in an organized and unorganized sector and led to a reduction in economic output, eventually leading to the economic slowdown.