India’s demonetisation woes, a year on

One year on, the situation is beginning to stabilised

Jake Read

Development, Economics | South Asia

12 February 2018

At 8:15pm on the 8th of November 2016, Indian Prime Minister Narendra Modi appeared on live television to announce that the two highest banknote denominations of the Indian Rupee had become worthless. Citizens had until the New Year’s Eve of 2016 to either bank deposit their 500 and 1000 Indian Rupee (Rs) banknotes (~AUD$10/$20 respectively) or swap them for lower banknotes at registered banks.

86% of India’s cash value had been abruptly wiped out in one speech, with India’s central bank destroying the now-defunct banknotes from the next day. Prime Minister Modi announced that bearers of the bills also had the option to trade old banknotes to a new replacement series of 500rs and 2000rs bills.

These bills were however initially scarce: 24 billion notes were subject to withdrawal and, according to RBI Deputy Governor R. Gandhi, just over 1 billion new notes were printed in time. Subsequently, the rest of the year was followed by mass queues, severe currency shortages, national protests and reportedly, even a number of casualties due to exhaustion from queues and crowd rushes.

One year on, the situation has stabilised and to an extent, cash flow has returned to India.


Prime Minister Modi’s ‘war on black money’ campaign was part of a promise to curtail the plague of hidden markets upon the government’s economic management. A major objective was to digitalise the economy and to force the creation of more transactional paper trails.

In 2017, Credit Suisse estimated 90%-95% of Indian transactions were cash conducted and few were ever formally recorded. Merchants of all income levels were stashing their bills to avoid their tax obligations and holding ‘unaccounted’ wealth. Counterfeit banknote numbers were also unacceptably high.

To combat this underground money market, Prime Minister Modi implemented a range of policies on top of demonetisation, including introducing federal GST, cancelling tens of thousands of shady business registrations and broadcasting government support behind digitalising banking.

The drastic policy aimed at curbing cash hoarding was Prime Minister Modi’s 2016/17 pièce de résistance, temporarily stripping the population of cash in favour of account credit – which leads us to the cash situation of 2017/18 India.


Jake Reed - Indian cash

Pictured: Low-valued, sparse 100 Rupee bill distributed to holders of 500 and 1000 Rupee bills following demonetisation (Jake Read)

Indian (Cold, Hard) Cash

Upon India’s demonetisation, 100 Rupee (AUD$2) became the next highest banknote (followed by 50rs, 20rs, 10rs and 5rs). Holders of the 500 and 1000 Rupee bills had no choice but to wait in lines for hours to accept stacks of the low-valued, now-sparse 100 Rupee bills. If lucky, they were able to access new 500 and 2000 Rupee (AUD$10/$40) bills. As the months passed, the number of  100 Rupee bills increased and were soon followed by the introduction of 200 Rupee (AUD$4) banknotes in August 2017.

Cash will remain king in India in the long-term future despite the government’s large scale efforts towards digital payments. Before demonetisation, the Reserve Bank of India registered 17.9 trillion Rupees worth of “currency with the public”. In a matter of weeks, this dramatically halved to under 9 trillion Rupees. RBI public data shows that week-by-week, the currency supply increased as Indian money printers worked tirelessly to print more new bills. One year later, the figure stands at 16.3 trillion Rupees, plateauing below pre-demonetisation levels.

The Indian government has heralded demonetisation a success – pointing towards the fact that while 99% of the 500/1000rs bills were handed in, cash demand in the Indian economy dropped to a new low. This indicates that instead of using cash, more Indians have been pushed into electronic payments and mobile wallets. Monthly Indian debit card transactions even rose 58% to 345.7 billion rupees in the eight months after demonetisation, from 219.4 billion rupees before demonetisation.

In the post-demonetisation “Digital India” era of increased transparency, enrolling into the Indian government’s biometric database has been mandatory for submitting tax returns, spending/transferring over 50,000rs and for opening new bank accounts. This has led to 99% of Indians being digitally recorded as of the 2016/17 Financial Year, another measure at targeting India’s hidden cash markets.

Prime Minister Modi and his government, albeit with harsh backlash, plan to continue their program of ‘phasing out’ cash reliance – at least until next year’s federal election. The newly introduced 2000rs bills is considered inappropriate for frequent, everyday transactions. India is now reserving its cash for smaller purchases, with electronic payments increasingly becoming the preference of Indians for both their expensive and cheaper transactions.

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