[Epistemic status: I’m more uncertain about the costs and benefits of demonetization than I was in 2016, but I still think it did more harm than good and this data seem to vindicate that.]
In 2016, the Indian government “demonetized” eighty-six percent of its currency notes—₹500 and ₹1,000 banknotes. In other words, it declared them to no longer be legal tender. The logic was two-fold: (1) Reduce tax fraud and tax evasion by being able to more effectively track black money. (2) Move toward a society that was more cash-free and more based on digital transactions, which are easier to track, less vulnerable to theft, and increase the central bank’s control over the money supply.
I have written two articles criticizing this in the past. One, which I wrote for Feminism in India, was suggesting that it had a disproportionate negative short-term impact on women and the LGBTQ+ community. The other, written for my previous blog, was a more generic criticism. My epistemic status, as indicated above, is now more uncertain.
New data from the RBI suggest that the “demonetization gap”—that is, the difference between the amount of cash in circulation prior to demonetization and the amount of cash in circulation now—has shrunk substantially. Here’s JP Koning on Twitter. This seems to suggest that demonetization has been largely ineffective in achieving outcome (2), at least.
H/T: This was in Marginal Revolution’s links for May 9, 2019.