Demonetization and Movement Towards Digital Cashless Indian Economy

Abstract

One of the greatest painful, un-stabilizing self-imposed macroeconomic blows on the Indian economy occurred in the absence of a short-term crisis when the government decided to announce a major change in the macroeconomic environment by demonetizing the high value currency notes – of Rs 500 and Rs 1000. These two denominations ceased to be legal tender from midnight of 8th of November 2016. The reasons offered for demonetization are two-fold: one, to control counterfeit notes that could be contributing to terrorism, in other words a national security concern; and second, to undermine or eliminate the “black economy.” It has also been a step forward towards a digital cashless economy. In this study an attempt is being made to present a discussion on both the short- and long-run effects of demonetization. It attempts to throw light on the impact of some macroeconomic variables—GDP, sectoral composition, industrial production, inflation, employment—using secondary time-series analysis. The empirical analysis clearly reveals that contraction of currency in circulation was one of the most important factors responsible for decrease in GDP in India after the period of demonetization. Apart from the issue of transition, confronted by the banking system, the government initiative was needed to neutralize the short-term, medium-term, and long-term effects particularly on regularization of cash flows, withdrawals, income, employment, inflation, consumption, and production. Moreover, cyber and other digital security measures were also essential to curb any kinds of frauds and encourage people towards a more digital cashless economy.