Demonetization’s effect on “taste” for cash
Thanks to demonetization, argues JP Koning, Indians are holding around ₹2 trillion fewer paper rupees than they otherwise would have.
There is indeed some evidence that the shift out of cash has been captured by digital finance.
The demonetization gap
By: JP Koning – American Institute of Economic Research
Demonetization and its macroeconomic effects
Scholars and observers remain skeptical that demonetization has achieved its goals: the government saw little to no fiscal gain from demonetization, and it is not yet clear that levels of corruption, terrorism, or tax evasion have changed. But demonetization had a substantial and immediate impact on the Indian economy: In the two months following demonetization, the Indian money supply halved. This led to a sharp drop in economic activity and job losses throughout the country. Demonetization appears to have accelerated the decline in India’s economic growth as GDP growth, fell from an average of 9.1% in the first three months of 2016, to an average of 5.7% in April–June 2017.
The Political Impact of Monetary Shocks: Evidence from India’s 2016 Demonetization
Authors: Rikhil R. Bhavnani, Mark Copelovitch
From: University of Wisconsin–Madison
Which industries benefited?
Dharmapala and Khanna examined how the stock market reacted to demonetization:
- A statistically significant market reaction of between -2% and -4% for real estate firms apparently due to a relatively small amount of tax evasion prior to demonetization
- Banks experienced on average a positive and statistically significant abnormal return of about 3% to 7%. The market believed that demonetization would lead to a substantial and persistent shift in the form of savings, from unaccounted-for cash to bank deposits.
- State owned enterprises experienced a positive and significant response of about 2% to 6% probably due to beliefs that the Modi governmente sent a (quite costly) signal about its seriousness in curtailing corruption
Stock Market Reactions to India’s 2016 Demonetization: Implications for Tax Evasion, Corruption, and Financial Constraints
Authors: Dhammika Dharmapala, Vikramaditya S. Khanna
From: University of Chicago, University of Michigan
