Demonetization:3.

10 JULY 2023

8.0: Digitization:

8.1: In a pair of National University of Singapore working papers, show that demonetization led to a permanent increase in the use of digital transactions, especially among the young. Even two years after the event, those who switched to digital transactions have not returned to cash payments. A Harvard University working paper, finds that post-demonetization, customers who switched to digital payments on e-commerce platforms—instead of cash-on-delivery—spend more per transaction and are less likely to return their purchases. A Northwestern University working paper finds a 60% permanent increase in fintech payments after demonetization.

“The permanent increase in digital payments represents a significant move towards formalization of India’s economy. As this phenomenon is more pronounced among the young, who will grow over their career into higher wage earners, this change will persist. As digital economies exhibit significant network effects, these gains from demonetization will enhance the contribution of the formal economy and thereby increase the country’s tax base.”

8.2: This has come true.

8.3: A report describes the effects on the digital economy: “Demonetization of November 2016 caused the volume of digital transactions to shoot up on impact, while simultaneously causing a drop in the volume of traditional transactions… digital transactions have consistently exceeded traditional transactions both in levels and growth rates since 2017."

8.4: This also has come to stay.

8.5: As demonetization was a move against those who had aggregated wealth by stealth, examining the redistributive effect of demonetization is crucial. A study has been conducted to find that the districts that experienced large increases in deposits were poorer and worse-off on several widely-used socio-economic indicators. Yet, these districts were the ones that recorded higher levels of economic activity in the year-and-a-half that followed. Using a longitudinal survey of household expenditures and incomes, they also find that poorer households had larger increases in expenditures and incomes in the following 18 months. These findings, which carefully control for various confounding factors, thus demonstrate its benefits accruing to the poor.

All these academic studies rely on evidence from large samples and thereby avoid the biases that can result from inferences based on anecdotes. Furthermore, by using careful econometric techniques to control for various confounding factors, they enable robust inference.

9.0: Other effects:

9.1: Supreme court’s stand:

The Supreme Court of India, while refusing to stay the demonetization move, soon after itwas introduced, had asked the Modi government to file an affidavit detailing the steps being taken to ease the inconvenience to the general public.