A quick overview on demonetization in India and how it affected the Indian economy 1 year later

1. Demonetization
By: Amit Kapadia

2. Have you
seen these?

3. Demonetization in the United States
 1933 - President Roosevelt removed the U.S.
from the Gold Standard to manage currency
quantity and stimulate the economy to
recover from the Great Depression. The
Treasury would still convert dollars for gold
for foreign governments to maintain
confidence in the dollar.
 1969 - Federal Reserve Bank stopped
distributing larger denomination notes (over
$100) due to the arrival of more secure
interbank transfer technologies.1
 1971 - President Nixon ended the practice of
allowing foreign governments to exchange
gold for dollars to prevent sapping of U.S.
gold reserves.2

4. What is
Demonetization?
Definition- Denouncing a
currency as legal tender, or when
a particular form of currency is
withdrawn from circulation.
Purpose- To reduce one or more
of the following:
 Inflation
 Tax Evasion
 Counterfeit Money

5. Demonetization Around the World
Demonetization has
occurred in various
countries over the years.
Countries include: United
States, Britain, Australia,
Pakistan, Nigeria, Ghana,
Zimbabwe, Venezuela,
Myanmar, North Korea,
Soviet Union, North Korea.
In November 2016, India again
enacted demonetization.

6. India: Demonetization 2016
 11/6/2016 - India voided 500 and 1000 rupee bills, which
represented 85% of cash in circulation.3 People had 1
month to exchange notes before they lost all value.
 Goal: Eliminate counterfeit money, push towards a
cashless society, and increase banking system usage.
 10 years ago, half of the population did not have a valid
form of ID and many did not have a bank account.4
 In 2009, government launched a nationwide project to
provide a 12 digit digital ID based on individuals’
fingerprints and retina scans. This project has reached
1.1 billion people.5
 To motivate bank account openings, the government
created payment banks and used them as a channel for
welfare benefits. Within 3 years, 270 million accounts
were opened.6
That is equivalent to over 80% of the U.S.
population opening an account in 3 years.

7. Indian Economy Before
Demonetization
Estimated that 90% of all business
transaction in India happens in cash and
less than 5% of India residents pay taxes.7
Lack of tax revenue causes issues for
the government.
Counterfeit cash is a major issue in India,
mainly because it is impossible to track.

8. Negatives
 Economy: Slowdown in quarterly annual
GDP growth.
 Struggles for the average person:
 Daily cash withdrawals were limited to
2,500 rupees ($40).
 With long lines at the ATMs and banks,
coupled with limited cash supply, many
people were not able to obtain cash.
 Small businesses run the Indian economy
and not all took credit/debit cards or
mobile payments.
 As a result, transactions slowed and
employers could not pay employees,
negatively impacting the economy.

9. GDP Growth Slowdown
 Without easy access to cash and limited availability of mobile payments or
credit cards, GDP growth suffered as spending in the economy slowed.
 India’s economic growth slowed to 5.7% at FY18 Q1, the slowest pace in
three years. A survey of economists by Reuters had forecasted GDP growth
at 6.6% for the same quarter.8
7.9
7.5
7
6.1
5.7
FY17 Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY18 Q1
GDPGrowth(%)

10. Positives
 Economy
 Forced to become less cash reliant overnight and focus on
electronic payment systems.
 Plans to mandate digital payments at gas stations, hospitals, and
universities.9
 With the increase of credit and mobile payments, more spending is
tracked, and therefore, more tax revenue to spur economic
development.
 Beneficiaries
 Mobile wallets - PayTM (Venmo Equivalent), has over 170 million
users consisting of consumers and small business, reported a 435%
increase in traffic.10
 Another payment application, backed by the government, that
can facilitate electronic transfers through a flip phone using
the 12 digit ID, is gaining traction.11
 The People - Illegal money is supposed to be flushed from the
system, because a person exchanging counterfeit funds would be
charged with fraud.

11. Cards and Transactions Growth
 In just 4 short months after demonetization (November 2016 to March 2017),
the amount of total cards (debit + credit), transactions, and transaction amount
soared.12
₹ -
₹ 500
₹ 1,000
₹ 1,500
₹ 2,000
₹ 2,500
₹ 3,000
₹ 3,500
-
200
400
600
800
1,000
1,200
Nov. 2014 Nov. 2015 Nov. 2016 Mar. 2017 Sep. 2017
TransactionAmount(RupeeBNs)
CardsandTransactions(MMs)
Total Cards Total Transactions Transaction Amount
2014-2016 YOY Avg Growth Growth from Nov 2016 to Mar 2017
Cards 31% 15%
Transactions 13% 25%
Transaction Amount -4% 62%
Demonetization

12. Cost of Cash
 Cash comes at a heavy cost.
 According to a Tufts University Study, the
cost of money is $200BN a year!
 The cost is attributed to ATM fees, theft, and
time spent traveling to obtain cash.13

13. One Year
Later
The debate on whether
counterfeit money has been
rooted from the economy is
ongoing.
Positives
• Cashless society is continuing to grow.
• Population with bank account and
identification has reached record
levels.
• Although it was a painful process,
people are happy the government is
fighting to curb counterfeit money.
Negatives
• Most of the population suffered.
• Costs associated with printing new
currency and recalibrating ATM
machines for new bills.
• GDP slowdown, 5.7% annual growth
in April to June quarter of this
year.

14. Food for Thought
 Although crypto/digital currency has not widespread, they
are growing.
 Appears that cash based transactions are on the decline.
 In June, the International Monetary Fund issued a staff
discussion note stating that banks should look to
cryptocurrency investments as a serious option.14
The People’s Bank of China has started testing its own
prototype currency, while Vietnam’s central bank may be
looking into the possibility of bitcoin.15
Barclays UK CEO has “been in discussions” about bringing
cryptocurrencies into play.16
The U.S. central banks are cautiously analyzing digital
currencies.
The Federal Reserve Board has stated there are
significant policy issues associated with digital currencies,
such as vulnerability to cyber attacks, privacy, and
counterfeiting.17

15. Sources
1. Treasury Resource Center, FAQS, Retrieved from https://www.treasury.gov/resource-center/faqs/Currency/Pages/denominations.aspx
2. The Week Staff (October 3, 2012), In Gold we Trust?, The Week, Retrieved from http://theweek.com/articles/471839/gold-trust
3. Chakravorti, Bhasker (March 14, 2017), Early Lessons from India’s Demonetization Experiment, Harvard Business Review, Retrieved from
https://hbr.org/2017/03/early-lessons-from-indias-demonetization-experiment
4. Wadhwa, VIvek (January 23, 2017), What the U.S. can learn from India’s move toward a cashless society, Retrieved from
https://www.washingtonpost.com/news/innovations/wp/2017/01/23/what-the-u-s-can-learn-from-indias-move-toward-a-cashless-society/?utm_term=.139f3a181fb6
5. IBID
6. IBID
7. Chakravorti, Bhasker (March 14, 2017), Early Lessons from India’s Demonetization Experiment, Harvard Business Review, Retrieved from
https://hbr.org/2017/03/early-lessons-from-indias-demonetization-experiment
8. Taborda, Joana, (August 31, 2017) Trading Economics, Retrieved from https://tradingeconomics.com/india/gdp-growth-annual
9. Chakravorti, Bhasker (March 14, 2017), Early Lessons from India’s Demonetization Experiment, Harvard Business Review, Retrieved from
https://hbr.org/2017/03/early-lessons-from-indias-demonetization-experiment
10. IBID
11. IBID
12. Reserve Bank of India, Bankwise Atm/Pos/Card Statistics, https://rbi.org.in/scripts/atmview.aspx
13. Chakravorti, Bhasker & Mazzotta, Benjamin, The cost of cash in the United States, The Flethcer School, Retrieved from
http://fletcher.tufts.edu/CostofCash/~/media/Fletcher/Microsites/Cost%20of%20Cash/CostofCashStudyFinal.pdf
14. He, et at., (June 2017), Fintech and Financials Services: Initial Considerations, IMF, Retrieved from http://www.imf.org/en/Publications/Staff-Discussion-
Notes/Issues/2017/06/16/Fintech-and-Financial-Services-Initial-Considerations-44985
15. Arnold, Alexandria, (June 28, 2017), Some central banks are exploring the use of cryptocurrencies, Bloomberg, https://www.bloomberg.com/news/articles/2017-06-
28/rise-of-digital-coins-has-central-banks-considering-e-versions
16. Karpal, Arjun (June 26, 2017), Barclays spoke to regulators about bringing bitcoin ‘into play’, CNBC, Retrieved from https://www.cnbc.com/2017/06/26/barclays-
bitcoin-regulators-fca.html
17. Curran, Enda & Skolimowski, Piotr, (August 29, 2017), Central banks can’t ignore the cryptocurrency boom, Bloomberg, Retrieved from
https://www.bloomberg.com/news/articles/2017-08-30/cryptocurrencies-are-new-barbarians-at-the-gate-of-central-banks

16. Sources for Images
 https://encrypted-tbn0.gstatic.com/images?q=tbn:ANd9GcQbTP09NEwfshoIgn9WJftvYrDArPv7f-eSWj-yBhC4ksknWvBi1w
 Inflation, Economic Times, https://economictimes.indiatimes.com/news/economy/indicators/from-11-to-2-2-five-charts-
explain-vanishing-india-inflation/articleshow/59227745.cms
 Tax Evasion, Stan Eales, https://www.cartoonstock.com/directory/t/tax_avoidance.asp
 Counterfeit Money, https://www.dreamstime.com/royalty-free-stock-photo-counterfeit-money-image4167735
 World Map, http://www.outline-world-map.com/political-white-world-map-b6a
 India Identification Card, India Today, http://indiatoday.intoday.in/story/10-things-to-know-about-aadhaar-card/1/457807.html
 Running Away from Tax Collector , Krauze Tax Huhne, ieyenews, http://www.ieyenews.com/wordpress/inversions-are-often-
last-stop-for-companies-avoiding-u-s-taxes/krauze-tax-huhne/
 Long Line at Bank, Hindustan Times, http://www.hindustantimes.com/rf/image_size_316x237/HT/p2/2016/11/11/Pictures/line-
at-banks_b3ccf184-a7f1-11e6-9005-31625660f15f.jpg
 Digital Currency, https://specials-images.forbesimg.com/imageserve/687488386/960x0.jpg?fit=scale