The impact of India's demonetisation will most likely be significant GDP contraction, demand compression, possible deflationary spirals and even possibly a short-term recession. In the mid-term, this is the single biggest act of 'shock and awe' to the economy, in a long while.


The first round of impact is not related to currency being extinguished (currency not coming back to banks). It is related to currency being wiped out until it is replaced by new currency. This will lead to a compression in demand across the board. Even if you have potential purchasing power in the form of rupees which can be converted into the new currency, you can’t use the old currency and you don’t yet have the new currency, so you can’t buy.

All the daily-use sectors get affected first. To top it up, any sector that is seen as non-essential, or luxury, too will get affected, because whatever currency you have you will want to use on necessities. Pretty much every sector in the economy gets hit. I would expect automobiles to be hit, textiles to be hit, I would expect pretty much everything to be hit.
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