A Year Later: Impact of Demonetization on the Indian Economy

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impact of demonetization on the Indian economy

On Nov 8 2016, India, in an effort to curtail black money, canceled 86% of the currency in circulation.  Currency worth Rs.15.44 Trillion was demonetized and new notes were printed to remonetise the economy. As anticipated, the immediate impact of demonetization was a cash crunch in the first few months. Usage of credit/debit card and digital wallets increased as an alternative to cash during this time.

The main goals of demonetization were curbing black money and eradicating counterfeit currency which was funding terror outfits. The exercise was also expected to digitize the economy faster by decreasing the parallel cash economy and increasing digital transactions.

It has been a year since the decision has been taken. This is a good time to look back and analyze the outcome of the decision.

Impact of Demonetization

Let us look at the data and assess the impact of demonetization on

  • Black Money
  • Counterfeit Currency / Terrorism
  • Digital Economy
  • Gross Domestic Product (GDP)
  • Printing Costs of Currency

Black Money

India had a huge black money economy which transacts in cash and stays away from the tax net. The idea of demonetization was to disrupt this by demonetizing the 86% of the value of currency in circulation. There was an expectation that most of the black money will not get converted into new currency. There were several restrictions imposed on converting currency notes to prevent the conversion of black money.

Let us look at some metrics that indicate the impact of demonetization on black money

  • Currency Returned : How much of the black money was never returned and flushed out of the economy?
  • Tax Collections : Did the amount of tax collected increase faster than normal?

Currency returned

There was an expectation that most of the black money would not return to the banks. This would have brought a huge gain to the government as the currency notes that are not returned are not a liability anymore. There were several restrictions put in place to prevent people turning in unaccounted money.

As of June 30 2017, currency worth Rs. 15,280 Billion in demonetized notes has been returned to RBI. This is 98.96% of the total value of demonetized notes in circulation on Nov 8, 2016.

  • Value of currency notes canceled: Rs. 15,440 Billion (source: Minister of State, Finance in Rajya Sabha )
  • Value of currency notes returned: Rs. 15,280 Billion
  • Value of currency not returned: Rs. 160 Billion

This is 1% of the currency demonetized and 0.1% of the GDP. This is much lower than initial expectations of total black money in the country.

However, IT Dept has said that it is probing suspicious transactions from the demonetization period and we may eventually catch black money.

Source: RBI’s annual report

Tax collections

Income tax compliance was expected to increase as people shunned away from black money and took to the formal economy.

Personal Income Tax Collections 2001-02 to 2016-17
  • Personal income tax collection increased from Rs. 287,637 Cr in 2015-16 to Rs. 349,270 Cr in 2016-17.
Personal Income Tax Year on Year Growth% 2001-02 to 2016-17
  • Tax collections increased in 2016-17 by 21% but this was within normal range observed in previous years.
  • We had 3 continuous years with 25% + growth from 2004-05 to 2007-08.
  • There is no significant gain in tax collections due to demonetization.

Source: Dept of Income Tax

Counterfeit Notes / Terrorism

The other goal of the exercise was to break the financial backbone of the terror groups operating in the country. Terror groups are known to operate using counterfeit currency often printed in Pakistan. The idea was to deem all the fake currency worthless and make it difficult to print counterfeit currency in the future by adding additional security features in the new currency design.

Counterfeit Notes caught 2016-17

  • Value of counterfeit currency detected in 2016-17 is almost insignificant at Rs. 42 Cr.
  • Counterfeit currency by itself has no impact on the economy. The bigger goal here is to curtail terrorist activities.

Terror related fatalities 2005 – 2017

  • Terror related fatalities decreased in 2017 to 654 (updated up to Oct 29 2017, projected to be 785 for the full year ) from 898 in 2016.
  • This decrease is in line with long term trend and does not seem to be affected by demonetization.

source : South Asian Terrorism Portal 

Digital Economy

Demonetization was expected to catalyze India’s adoption of digital tools and reduce dependence on physical cash.

Let us see how it impacted the usage of credit/ debit cards, mobile wallets and the currency in circulation.

Card transactions at Point Of Sale (POS)

  • Card transactions (Credit + Debit) at POS were at Rs 717 Billion in August 2017 compared to Rs. 441 Billion in Aug 2016. i.e. a growth of 63%.
  • In the previous year card transactions grew from Rs. 335 Billion in Aug 2015 to Rs. 441 Billion in Aug 2016. i.e. a growth of 32%
  • Card usage grew at twice the rate observed in the previous year.

Mobile Wallets

  • Mobile Wallet transactions more than doubled in a month after demonetization from Rs. 33 Billion in Nov 2016 to Rs. 74 Billion in Dec 2016. They provided a viable alternative to cash at the peak of cash crunch.
  • The transactions on Mobile Wallets have stabilized at around Rs. 70 Billion per month.
  • Year on year growth from Aug 2016 to Aug 2017 is 136% compared to 130% during Aug 2015 to Aug 2016.
  • Demonetization catalyzed the Mobile Wallet acceptance but the long term impact is fairly small.

Currency in circulation

  • Currency in Circulation (CIC) is down to Rs. 16,465 Billion as of Oct 20, 2017 compared to Rs. 17,590 Billion on Oct 21 2016. i.e a drop of Rs 1,125 Billion or 6.8% of Oct 2017 number.
  • If we take into account the annual trend in currency circulation we would have been at Rs. 19,850 Billion. So the actual drop is Rs. 3,385 Billion. This is 21% of the Oct 2017 number.
  • At end-March 2017, CIC amounted to 8.8 percent of GDP, down from 12.2 percent in the previous year.


Gross Domestic Productivity – GDP

Demonetization caused a short term drop in productivity due to cash crunch. But what exactly was this loss in GDP over the last 1 year?

GDP growth %

Source: RBI

  • GDP growth in 2016-17 slowed down to 6.62% from 7.94% in 2015-16.
  • The GDP in 2016-17 is Rs.1,378 Billion lower than where it would have been if it grew at 7.94%.
  • We cannot conclusively attribute the slowdown in GDP growth to demonetization. There are several other factors which have an impact on the GDP and it is not possible to piece out the impact of demonetization accurately.

Printing Costs of New Currency

The government had to collect all the old notes and replace them with new ones. This meant we ended up printing a lot more money this year than in a normal year. This is the most direct cost of demonetization. There are several indirect costs which we are not getting into here.

  • The cost of printing doubled from Rs. 34.21 Billion in FY 2015-16 to Rs. 79.65 Billion in FY 2016-17.
  • The incremental cost due to demonetization was Rs. 35.44 Billion until March 2017.

RBI is still printing currency at a faster pace than normal so this number would have increased by now.

(source: RBI Annual report https://rbi.org.in/SCRIPTS/AnnualReportPublications.aspx?year=2017)


The Wins:

  • Increase in Card transactions by 63% and mWallet usage by 136%.
  • Decrease in Cash in the economy by 21%.
  • Currency that was not returned: Rs. 160 Billion.

The Fails:

  • Incremental printing cost for new currency: Rs. 35.44 Billion.
  • Tax collections have not shown any significant improvement.
  • No measurable impact on terrorist activities.
  • Slow down of GDP growth. The actual impact is difficult to assess.


  • Black Money: IT Dept is pursuing suspicious transactions from the demonetization period and this will determine how much black money we are able to recover.

Demonetization was a humongous exercise. There were several challenges in the implementation which reduced the intended impact. The short-term pain was certain and felt throughout the economy. The benefits are not very apparent yet but there are some small gains.

RBI is still counting the notes and Income Tax Department is pursuing suspicious transactions during the period. It will not be easy to identify and pursue all these transactions and will require the tremendous political will to accomplish this. However, on the positive side there are signs that digital transactions have increased. This can have a lasting positive impact on the economy.




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