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The adverse consequences of India’s demonetisation

Categories : Cash is efficient, Costs of cash versus costs of electronic payment instruments
January 23, 2017
After the rash decision to demonitise the Rs 500 and 1000 notes, the Indian economy has been suffering the consequences of an economic standstill.
Communication Team / Equipo de Comunicación

After Indian Prime Minister Narendra Modi’s surprise demonetisation on November 8, 2016 of the Rs 500 and 1000 banknotes – which account for 86% of all rupees in circulation – the country is still suffering. This sudden move led the economy to a complete standstill as the population spent days lining up at banks scrambling to exchange their old “worthless” notes and deposit them in a bank account. In addition, most of the ATMs had not been reconfigured to distribute the new banknotes.

Investors and consumers seem to have been shaken by this change. Fast-moving consumer goods decelerated about 1.5% in November, while firms’ investment proposals decreased from 2.4 trillion rupees ($35 billion) per quarter to 1.25 in the one that ended last December. As a consequence, corporate-credit growth fell to its lowest level in 30 years, and annual GDP growth is predicted to decrease half a percentage point, from 7.3% in 2015 to less than 7% for the 2016 fiscal year.

Narendra Modi stated that the main purpose of this measure is to fight corruption and tax evasion. The withdrawal of these two notes is also supposed to boost the economy as banks gain liquidity from growing deposits. Finally, the government aims to move towards a “less-cash” India and promote the use of alternative electronic and mobile payment instruments in a country where cash currently accounts for 90% of all transactions.

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