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An Analysis of India’s

Demonetization
Experiment and Its Impacts
Background
❑ On 8, November 2016, Indian Prime Minister Narendra Modi
announced without previous warning that the 500 and 1000 rupee
notes would cease to be legal tender.

❑ The 2 notes constituted 86% of India’s currency at the time

❑ People were given just 50 days to deposit the old notes into the bank

❑ The key reason given for the sudden action was that it was expected to
root out corruption and illegitimate activity involving untraceable cash
transactions

❑ A noteworthy fact was that key economic experts were not consulted
in arriving at the decision to demonetize
Impacts (1)
❑ As a predominantly cash based economy (with around 95% of
all transactions carried out in cash1), the sudden decision caused
a severe cash crunch with the hardest hit being in rural areas2
❑ Small businesses (which were predominantly cash based) closed
down as replacement currency notes were not immediately
available
❑ Social welfare programmes such as the Midday Meal Scheme
were also badly affected2
❑ 1.5 million jobs were lost as a result3 mostly from the informal
sector which has 90% of the workforce
❑ The Reserve Bank of India spent 79.65 billion rupees printing
replacement currency notes3
❑ Stock market crashed 1689 points immediately after
demonetization announcement but rebounded afterwards4
Source(s)
1. https://www.pymnts.com/cash/2018/india-economy-demonetization-digital-payments/
2. https://thewire.in/uncategorised/costs-demonetisation-tribals-schools
3. https://www.cmie.com/kommon/bin/sr.php?kall=warticle&dt=2017-07-11%2011:07:31&msec=463
4. https://en.wikipedia.org/wiki/Stock_market_crashes_in_India#2016
Impacts (2)
Chart: India inflation rate trends Chart: India GDP growth rate trends

❑ Inflation rate which had been dropping ❑ Economic growth slowed to 5.6% in
previously, continued to drop as a result 2017 as a result, but is now growing at
of reduced spend in a cash-based 2016 pre-demonetization rates and
economy. India lost its place as fastest growing
economy
❑ People held unto their lower
denomination notes which were now
precious as a result of lack of availability
of replacements for demonetized notes
Source(s)
1. https://tradingeconomics.com
Reasons for Demonetization vs Results
Reason Result
Result: Fail
• Only 6% of illicit income is stored as cash with most laundered via businesses, stocks and real
Combat illegitimate estate1
involving untraceable
cash transactions (black • In addition, within 10 months, 99.3% of cash in the cancelled denominations had been
money) deposited into banks2.
• Holders of large amounts of cash who wanted to remain undetected utilized brokers to
deposit their cash in banks
Combat tax evasion and Result: Pass
improve income tax • 62% increase in the number of people who filed for tax returns between Nov 2016 and Nov
collection efficiency 20173
Result: Fail
• Cash to GDP ratio dropped from 12.09% to 8.75% immediately following demonetization as a
Transition India to a result of the cash crunch. Several people signed up for and used alternate payments channels
cashless society during the period4
• As April at 2018, the cash to GDP ratio was back up to 11.3% due to a lack of trust in e-
payment systems and increased availability of cash5
Result: Pass
Improve political
standing of ruling party • One of PM Modi’s campaign promises was to root out corruption. At the time of the
(BJP) elections, the demonetization policy was very popular among voters, resulting in a strong win
for the BJP party during the midterm elections
Source(s)
1. https://www.hindustantimes.com/india-news/cash-has-only-6-share-in-black-money-seizures-reveals-income-tax-data/story-JfFuTiJYtxKwJQhz2ApxlL.html
2. https://www.cnbc.com/2017/09/01/indias-demonetized-currency-back-in-the-system-but-can-we-still-call-it-a-success.html
3. https://www.ft.com/content/d3134d5a-4d17-11e8-8a8e-22951a2d8493
4. https://qz.com/india/1284590/indias-use-of-cash-is-back-to-the-levels-before-demonetization/
5. https://www.pymnts.com/cash/2018/india-economy-demonetization-digital-payments/ ; https://www.bloombergquint.com/business/chart-cash-to-gdp-ratio-approaches-pre-demonetisation-levels
Macroeconomic Impacts of Demonetization
❑ GDP growth rate slowdown to 5.6% and India lost its place
as fastest growing economy
❑ Business closures due to cash crunch
❑ Over 1.5m jobs lost
❑ Increased government expenditure as a result of cost to
produce new currency bills

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