Home >News >India >The flawed concept of demonetization

Mumbai: It is evident that the decision to implement demonetization was thrust upon the Reserve Bank of India (RBI) as the ATMs ran out of cash while rules and notifications regarding withdrawals and deposits changed frequently, says Amartya Lahiri, economist and former head of RBI think-tank Centre For Advanced Financial Research And Learning (Cafral), in his new study.

The research, which has added to the growing consensus about the failure of demonetization, uses data from different sources to highlight the disruption the reform has caused.

The fact that demonetization had limited impact on its stated goals is proof that it was poorly conceptualized, says Lahiri, who is currently professor at the University of British Columbia.

The most important goal of demonetization was to purge India of black money, but that did not happen as over 99% of demonetized currency returned to the banking system. Demonetization was also meant to bring more people under the tax net and drive up tax revenue. However, this effect was muted as both direct and indirect tax saw no marked deviation from its past trends. Neither did demonetization have a significant impact on digitization and counterfeit currency. Demonetization may have been successful in pushing up the number of digital transactions, but the value of transactions has not changed significantly.

In the short-run, demonetization hurt economic activity. Even after the additional deposits from demonetization, bank credit did not pick up. Similarly, labour market data also suggests that around 15 million people exited the labour force during this period. These effects could have been negated slightly with better conceptualization, the research suggests. The author argues that demonetizing just the 1,000 currency notes could have been less disruptive.

Also read: The Great Indian Demonetization

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