"On 8 November 2016, Prime Minister Narendra Modi announced the “demonetisation” of high-value currency notes. When it became clear the ex ante goals of reducing corruption and black money were unlikely to succeed, attention shifted to a range of possible ex post facto rationales for the move. Numerous commentators, including the two of us, argued that one such goal would be to push the economy towards greater formalisation, and, relatedly, to push the financial sector towards greater digitisation and a reduced reliance on cash. This broad rationale was then quickly picked up by the Modi government and its supporters.
Now that sufficient time has elapsed, it is possible to bring data to bear on the specific question: Has demonetisation succeeded in making India a “less cash” society? To our regret, as we both had hoped the answer would be in the affirmative, the answer is clearly “no”.
The chart above tells the tale. It plots currency in circulation (CIC) as a share of broad money (M3) —henceforth, CIC/M3—using monthly data from January 2012 to May 2018, the last month for which we have data. All data are sourced from the Reserve Bank of India (RBI). We should note that the choice of a different denominator, whether a different metric of broad money or nominal gross domestic product (GDP), does not materially alter the results we present below."
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