Harvard, IMF researchers assess damage due to demonetisation, claim 3% drop in economic activity
The Narendra Modi government’s demonetisation move, which turned around 86 per cent of cash in circulation illegal tender overnight on November 8, 2016, led to a significant decline in cash, which lowered India’s economic growth and led to a reduction in jobs by at least 2-3 percentage points in the quarter of the note ban, a new study has found. The study shows that Indian districts that experienced more “severe demonetisation shocks” had much larger contractions in ATM withdrawals, and highlights its effects on the Indian economy. It also talks about the rise of alternative forms of payment options, including mobile wallets, after demonetisation.
The paper, ‘Cash and the Economy: Evidence from India’s Demonetisation’, written by Gabriel Chodorow-Reich, an associate professor of economics at Harvard; Gita Gopinath, the Economic Counsellor and Director of the Research Department of the IMF; and Prachi Mishra of Goldman Sachs and RBI’s Abhinav Narayanan, was done to highlight “the consequences of demonetisation in the cross-section of Indian districts”.
Talking about the effects on economic activity, the paper says the economic activity declined by 2.2 percentage in November and December 2016. “To reach this number, we first cumulate the cross-sectional effects on employment and nightlights over districts. Next, we argue that this calculation provides a lower bound for the aggregate consequences of the cash decline. Such a lower bound arises in our model due to cross-district trade. Combining these two results yields a decline in nightlights-based economic activity and of employment of 3 pp or more in November and December of 2016 relative to the counterfactual path, which translates into a decline in the quarterly growth rate of 2 pp or more,” it said.…
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