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On 8 November 2016, the Government of India announced the demonetization of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series. It also announced the issuance of new ₹500 and ₹2,000 banknotes in exchange for the demonetized banknotes. Prime Minister Narendra Modi claimed that the action would curtail the shadow economy, increase cashless transactions and reduce the use of illicit and counterfeit cash to fund illegal activity and terrorism.

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Looking back at this about five years later (1/12/2021), how has this move affected India and did it achieve the different goals it set to achieve?

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The effects have been mixed. India is such a large and diverse country that it won't be possible to say if this was a Good Thing or a Bad Thing.

The goal was to force money that was being used in a black (or grey) economy back into the financial system, and to take money from criminals who could not validly exchange the old notes for new ones. In this goal it partially succeeded. (Rasel 2019)

There has been an increase in tax returns - as previously undeclared transactions have become traceable. There has been an increase in purchases of bonds, as people have shifted from using cash as a reserve of money. This is generally positive. (Rasel)

On the other hand, while some of the unaccounted wealth of India was kept in stores of 500 and 2000 rupee notes, more was in the form of gold, real estate, or money in undeclared foreign bank accounts. Demonetisation did not address these aspects of the black/grey economy. (Hosain, 2019)

The negative effects were not felt evenly across the population. For richer city dwellers, the effects were fairly benign. The use of credit cards and bank transfers was established in these groups. The urban banks coped quite well with the exchange. The negative effects were felt most keenly in the countryside. The timing coincided with a peak in the farming year when the harvest is followed by the purchase of seed and winter sowing. The rural economy was strongly cash-based. Farmers lost a lot of wealth, and those losses continue, despite measures to try to alleviate them.

Small and medium enterprises also lost out. Some didn't survive. This, of course, opened up gaps in the market for new entrants. Surely in some cases this hastened the end of businesses that were moribund, and provided space for revitalisation. But for the owners and employees of those companies, the effects can have been catastrophic.

Individually one can look at the psychiatric health of the nation. The effect of a stressor such as demonetization can push some into a psychological crisis. For individuals, the effects can be still continuing. (Enara,2018)

Sources

Rasel, Rasel and Hosain, Sajjad and Sultana, Ayrin and Kabir, Humayun, Demonetization in India: An Evaluation (August 14, 2019). Asian Journal of Economics, Business and Accounting 12(2): 1-12, 2019, Available at SSRN: https://ssrn.com/abstract=3437167

Hosain, Md Sajjad. "Demonetization Debate: A Policy Review" Asian Journal of Law and Economics, vol. 10, no. 2, 2019, pp. 20190005. https://doi.org/10.1515/ajle-2019-0005

Enara A, Gowda MR. The enigma of demonetization and the unexplored consequences. Indian J Psychiatry. 2018;60(1):6-9. https://doi.org/10.4103/psychiatry.IndianJPsychiatry_196_17

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