Report

Impact of Demonetisation on Indian

Economy.

Submitted From: Submitted To:

Ankush (23102015) Prof. Rakesh Kumar
Kushagr Kaushal (23102030)
Bhaumik Sethi (23102031)
Parmjot Singh (23102047)
Tanmay Guru (23102049)

PUNJAB ENGINEERING COLLEGE

(Deemed to be University)
25 March 2025

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 DECLARATION

We hereby declare that the report "Impact of Demonetization on Indian economy" is our
original work, which we prepared in good faith for academic purposes. The information in this
report is based on our investigation, analysis, and understanding of the subject.

We attest that all the data, facts, and figures in this report were taken from trustworthy, publicly
available sources and were appropriately referenced where necessary. Every piece of
information gathered from outside sources has been appropriately referenced in accordance
with academic standards.

To the best of our knowledge, no information in this report has been taken from any source
available or published on internet or in part from another source. We also want to express our
gratitude to our teacher and fellow students for their guidance and help in preparing this report.

Team members:
Ankush
Kushagr Kaushal
Bhaumik Sethi
Parmjot Singh
Tanmay Guru

Date: 25 March 2025

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 ACKNOWLEDGMENT

We sincerely appreciate the collective effort that has contributed to the successful completion
of this report on The Impact of Demonetisation on the Indian Economy. This project has been
an insightful learning experience, and we are truly grateful for the guidance, resources, and
teamwork that have made it possible.

This project would not have been possible without the guidance and unwavering support of
numerous individuals. First and foremost, we express our sincerest gratitude to Dr. Rakesh
Kumar, our mentor, whose expertise, thoughtful feedback, and encouragement guided us
through each phase of this research. His support was instrumental in shaping the project and
deepening our understanding of the subject.

We are also thankful for the various research materials, including academic studies,
government publications, news reports, and expert analyses, that have provided us with
valuable insights into the subject. These sources have helped us better understand the short-
term and long-term effects of demonetisation on different sectors of the Indian economy. The
statistical evidence, case studies, and expert perspectives have been instrumental in shaping
our conclusions.

Moreover, we recognize the significance of teamwork and collaboration in completing this

project successfully. Engaging discussions, brainstorming sessions, and shared problem-
solving efforts have helped us refine our perspectives and present a well-structured report. The
support and encouragement from one another throughout the process have played a crucial role
in overcoming challenges and ensuring clarity in our research.

This project has not only enhanced our understanding of economic policies and their real-world
impact but has also strengthened our skills in research, analysis, and teamwork. We are proud
of the knowledge we have gained and hope that our findings contribute meaningfully to
discussions on demonetisation and its economic effects.

Thank you.

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 Table of Content

List of Abbreviations……………………………………………………………….………..5
Abstract……………………………………………………………………………….…..….6

1. Chapter 1: Introduction ……………………………………………………….……7

2. Chapter 2: Review of Literature……………………………………………………8

 Need For the Study

 Research Gaps

3. Chapter 3: Research Methodology………………………………………..……….34

 Statement of the Problem

 Research Design
 Data Collection
a) Primary data
b) Secondary data

4. Chapter 4: Data Analysis and Interpretation……………………………..……...36

5. Chapter 5: Conclusion…………………………………………………...…………41

References………………………..…………………………………….……..…..…42

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 List of abbreviations
Abbreviation Definition

GST Goods and Service Tax

UPI Unified Payments Interface

RBI Reserve Bank of India

GDP Gross Domestic Product

BSE Bombay Stock Exchange

NIFTY National Index (Index of NSE)

SENSEX Sensitivity Index (index of BSE)

WPI Wholesale Price Index

NEFT National Electronic Funds Manager

ITR Income Tax Return

CRR Cash Reserve Ratio

FDI Foreign Direct Investment

ROI Return on Investment

GNP Gross National Product

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 Abstract
Demonetization, announced by the Indian Government on 8 November 2016, involved the
withdrawal of legal tender character of the ₹500 and ₹1,000 bank notes, which formed around
86% of currency in circulation. The main reasons were to end black money, abolish fake
currency, decrease corruption, and move towards a cashless and digital economy. The
unexpected policy action had far-reaching impacts on the Indian economy with short-term
disturbance as well as long-term structural change.

In Short term, demonetization resulted in a cash crunch leading to severe hits for small
businesses, the informal economy, and the daily wage earners, who used a large portion of cash.
Consumption and investment dipped short term, causing a growth slowdown in GDP.
Agricultural, retail, and manufacturing sectors suffered the brunt due to decreased availability
of cash. But the policy also resulted in higher bank deposits, a growth in digital payments, and
an expanded tax base as more transactions were formalized.

In the long term, demonetization helped towards more financial inclusion, robust digital
payment infrastructure, and better tax collection. The step complemented other economic
reforms, including the rolling out of the Goods and Services Tax (GST) and the drive for
financial digitization. Critics point out that the economic burden was more than the benefits,
as most of the demonetized currency re-entered the banking system, questioning the
effectiveness of containing black money.

This report offers a detailed evaluation of the economic effect of demonetization, considering
its successes and failures. Through the examination of macroeconomic indicators, sectoral
impacts, and policy implications, this research seeks to present a thorough understanding of
how demonetization redefined India's economic environment.

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 Chapter 1: Introduction

Demonetisation is a financial policy wherein a government withdraws certain currency notes

from circulation, often as a measure to address issues such as black money, corruption,
counterfeit currency, and tax evasion. On November 8, 2016, the Government of India made a
landmark decision to demonetise ₹500 and ₹1,000 notes, effectively rendering approximately
86% of the total cash in circulation invalid overnight. The primary objectives of this move were
to curb unaccounted wealth, promote digital transactions, and strengthen the formal financial
system. However, the abrupt nature of the implementation led to significant disruptions,
particularly in cash-dependent sectors like agriculture, small businesses, and informal labor
markets.

Given India's heavy reliance on cash transactions at the time, the sudden withdrawal of high-
denomination currency created liquidity constraints for individuals and businesses alike. Small
and medium enterprises (SMEs), daily wage workers, and rural communities, who primarily
transacted in cash, faced considerable financial hardships. Banks and ATMs were
overwhelmed with long queues as people rushed to exchange their old notes, while a temporary
decline in consumer spending slowed economic growth. Despite these immediate challenges,
demonetisation also encouraged financial inclusion by increasing bank account registrations,
boosting digital payment adoption, and improving tax compliance.

This report explores the broader impact of demonetisation on the Indian economy, analyzing
its effects on GDP, employment, banking operations, and digital financial systems. It also
examines the challenges faced by different economic sectors, assesses the effectiveness of the
policy in meeting its intended goals, and highlights key takeaways from its implementation.
By evaluating both its short-term disruptions and long-term implications, this study aims to
provide a well-rounded understanding of how demonetisation reshaped India’s economic and
financial landscape.

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 Chapter-2
Review of Literature

Overnight, ₹500 and ₹1,000 notes—86% of circulating currency—were invalidated, triggering

a liquidity crisis that disrupted cash-dependent sectors like agriculture, SMEs, and informal
trade. The policy aimed to combat black money, counterfeit currency, and corruption while
promoting digital finance. However, its execution exposed critical challenges: banks faced
liquidity mismatches, rural cash shortages paralyzed agricultural cycles, and GDP growth
plummeted to 5.7% in 2016–17. Despite these setbacks, the initiative spurred a 41.8% rise in
personal income tax collections and a 400% surge in digital transactions by 2017, reflecting its
dual role as a disruptive shock and a catalyst for financial formalization.

1.The RBI (2017) highlighted macroeconomic strains, including reduced liquidity and GDP
contraction, while acknowledging gains in tax compliance and digital adoption. Abhani (2017)
and Tandon & Kulkarni (2017) noted its short-term success in destabilizing cash-based black
money but questioned its long-term Effectiveness in Reducing Illegal Money. Financially,
the RBI’s detection of ₹410 crore in counterfeit currency and the surge in suspicious transaction
reports (480% increase) underscored mixed outcomes in combating financial crimes.

Need of the Study

Demonetization had two sides: it boosted tax collection and digital payments but also worsened
cash shortages and slowed GDP growth. These mixed results teach us about designing better
policies and managing risks. Adding GST around the same time made things harder, as both
policies together caused confusion in tax compliance and disrupted supply chains. To truly
grasp how such sudden moves shape financial habits, market confidence, and the shift to a
formal economy (especially in cash-heavy countries), a clear, step-by-step analysis is needed.

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Research Gaps
Three gaps dominate demonetization’s financial discourse. First, temporal limitations: most
studies focus on immediate impacts, neglecting long-term effects on tax compliance trends or
digital payment scalability.

Second, regional disparities: urban-rural divides in cash availability and banking access
remain underexplored, masking inequities in policy outcomes.

Third, policy synergy: the compounded effects of demonetization and GST on inflation,
formalization, and market confidence lack rigorous empirical analysis. Additionally, the
informal sector’s financial resilience—adaptations like informal credit networks or barter
systems—warrants deeper inquiry to understand grassroots survival strategies in liquidity
shocks. Addressing these gaps would refine future monetary interventions, balancing
disruption with equitable financial inclusion.

2. Impact of demonetisation on stock market

The 2016 Indian demonetization, aimed at curbing black money and corruption, triggered
significant volatility in the stock market. While initial reactions were marked by sharp
declines in indices like the Sensex and Nifty, subsequent studies reveal mixed outcomes,
necessitating a deeper understanding of its short- and long-term impacts on equity markets,
investor behaviour, and sectoral resilience.

Review of Literature
Existing research highlights demonetization’s dual impact on India’s stock market. Bhagat
and Sharma (2018) observed immediate declines in share prices and heightened volatility,
driven by liquidity crunches and investor divestment. Naveen et al. (2017) echoed these
findings, noting reduced earnings per share and price-to-sales ratios across 11 S&P BSE-500
firms, though dividend yields temporarily surged. Conversely, the study by Neelkamal (2022)
revealed that firms with pre-announced investment plans outperformed others, suggesting
resilience tied to strategic preparedness. Post-demonetization, indices like the Sensex and
Nifty eventually rebounded, buoyed by improved liquidity and investor confidence in long-
term reforms. However, smaller firms and cash-dependent sectors, such as banking and
manufacturing, faced prolonged distress due to disrupted cash flows.

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Need of the Study
The mixed outcomes of demonetization—initial market crashes followed by recovery,
sectoral disparities, and contrasting investor responses—underscore the need for a holistic
analysis. While short-term liquidity shocks are well-documented, long-term effects on market
stability, investor psychology, and structural reforms remain underexplored. Additionally, the
interplay between demonetization and concurrent policies like GST requires scrutiny to
disentangle their compounded effects on equity markets. This study is critical for
policymakers and investors to design risk-mitigation strategies and anticipate market
behaviour during similar fiscal disruptions.

Research Gaps

1. Long-Term Market Dynamics: Most studies focus on immediate impacts (e.g.,

liquidity shocks), neglecting long-term trends in investor confidence, sectoral
recovery, or integration of digital finance.

2. Sectoral Heterogeneity: Limited analysis exists on how cash-reliant sectors (e.g.,

SMEs, agriculture) versus digitally adaptable industries (e.g., fintech) navigated post-
demonetization challenges.

3. Behavioural Insights: The psychological impact on retail investors, shifts in risk

appetite, and adoption of alternative assets (e.g., gold, ETFs) remain understudied.

3. Impact of demonetisation on cashless payment

Review of Literature
Existing studies highlight demonetization’s dual role in India’s cashless transition. Roy
(2017) emphasizes its role in enhancing financial transparency and attracting foreign
investment through digitization. Mitra et al. (2017) identify critical prerequisites for digital
adoption, such as banking access, connectivity, and mobile penetration. Batra & Kalra (2016)
underscore resistance to digital wallets due to ingrained cash habits. Pahuja & Virk (2012)
stress the need for banks to evolve into "financial supermarkets" to support digital transitions.
Collectively, these studies acknowledge demonetization’s short-term disruption but highlight
persistent challenges like technological gaps and uneven adoption across demographics.

Need of study
The study addresses critical gaps in understanding the sustained impact of demonetization on

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cashless adoption. While prior research focuses on immediate transactional shifts, this
analysis delves into long-term behavioural trends, infrastructural bottlenecks (e.g., rural
connectivity), and socio-economic disparities in digital access. Additionally, it evaluates the
role of incentives (e.g., cashbacks) in driving adoption and identifies barriers like fraud risks
and merchant reluctance. Such insights are vital for policymakers to design inclusive digital
frameworks and for businesses to tailor fintech solutions.

Research Gaps

1. Regional Disparities: Limited exploration of urban-rural divides in digital adoption,

particularly in technologically underserved areas.

2. Long-Term Sustainability: Most studies focus on short-term transactional spikes (e.g.,

post-demonetization surge), neglecting long-term retention of cashless habits.

3. Behavioural Barriers: Inadequate analysis of psychological resistance to digital

payments among low-income and elderly populations.

4. Infrastructure Constraints: Scant empirical data on how poor internet connectivity and
limited POS terminals hinder cashless transitions in semi-urban and rural regions.

4.Demonetisation in India: Who Did It Hit the Hardest?" by Prachi Mishra et al. The
paper examines the demographic categories that were most hit by demonetization,
concentrating on changes in consumption and income.

The 2016 Indian demonetization, which made 86% of the country's money worthless overnight,
is a seminal event in monetary economics. Chodorow-Reich, Gopinath, Mishra, and
Narayanan's study "Cash and the Economy: Evidence from India's Demonetization" provides
an all-encompassing analysis of this event's influence on the economy. An awareness of the
imperative of this research and the prevailing research gaps allows for a gainful insight into the
wider consequences of such monetary policy.

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Need for the Study :

1. Unprecedented Monetary Experiment: Demonetization of such a scale was

unprecedented, touching a large and diverse economy. Understanding its short-term and
long-term implications is essential for policymakers and economists to realize the
possible implications of such future interventions.
2. Effect on Cash-Based Economies: India's economy, which is built with a large
informal sector, is highly dependent upon cash transactions. Understanding the impact
of a sudden scarcity of cash on economic activities, employment, and consumption
habits is crucial to analyze the vulnerabilities and strength of these economies.
3. Policy Evaluation: The major aims of demonetization were to control black money,
fake money, and encourage online payments. A review of how successful these efforts
have been offers lessons in the effectiveness of such policy initiatives in attaining
preferred economic results.
4. Theoretical Implications: Most economic theories tend to presume monetary
neutrality in the long-term perspective. A sharp monetary shock, such as
demonetization, provides a rare opportunity to try out such theories and gauge the true
impact of money supply on the economy.

Research Gaps:

1. Granular Data Analysis: There was limited empirical research on the localized impact of
demonetization before this study. Using district-level data, the authors offer a rich analysis of
how regions felt the economic impact in varying degrees depending on the intensity of cash
shortages.

2. Informal Sector Analysis: Most of the literature available was centered on the formal
economy, and the informal sector, which accounts for a large percentage of India's GDP and
employment, was usually ignored. This research fills that gap by examining employment
surveys and nightlight data to reflect informal economic activity.

3. Adoption of Alternative Payments: Although promotion of electronic payments was a

declared objective of demonetization, empirical data on the adoption and success of digital
payments was lacking. This study explores how areas with acute cash shortages improvised by
adopting greater use of alternative payments, highlighting lessons learned and successes in
becoming a less-cash economy.

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4. Dynamics of the Banking Sector: Previous studies did not adequately investigate how cash
shortages interplayed with bank activities, such as credit distribution and mobilization of
deposits. This research focuses on how demonetization shaped banking behavior in terms of
knowledge about the dynamics of the banking sector's reactions to monetary shock.

5. Short-Term vs. Long-Term Effects: While there were some studies that lingered on the
immediate consequences of demonetization, there was a lack of research on its long-term
effects. The authors compare the immediate reduction in economic activity with the later
recovery stages, providing a holistic temporal outlook.

Finally, the research "Cash and the Economy: Evidence from India's Demonetization" is critical
in comprehending the very inherent complexities of abrupt monetary policy shocks. Through
the bridging of the research loopholes highlighted above, it provides informative inputs on the
intricacies of cash-driven economies and presents empirical evidence that may inform future
policy action in the same context.

5.Macroeconomic Effects of Demonetization: Evidence from India" by Gabriel

Chodorow-Reich et al. The authors study the macroeconomic impacts of demonetization,
including its effects on GDP and employment.

India's 2016 demonetization, which made 86% of the country's money useless overnight, is an
important case study in monetary economics. The study "Cash and the Economy: Evidence
from India's Demonetization" by Gabriel Chodorow-Reich and others provides a detailed
analysis of the macroeconomic effects of this phenomenon, including factors like GDP and
employment. An understanding of the need for this research and the gaps in research that it fills
is an important insight into the larger implications of such monetary policy.

Need for the Study :

1. Unprecedented Monetary Policy Intervention: Demonetization of such magnitude was

unprecedented, touching a huge and heterogeneous economy. Examining its short-run and
long-run implications is essential for policymakers and economists to understand the possible
ramifications of such interventions in the future.

2. Effect on Cash-Based Economies: India's economy, with its large unorganized sector, is
greatly dependent on cash transactions. Research into the effects a sudden cash shortage has

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on economic activity, employment, and consumption trends is necessary in order to
comprehend the vulnerabilities and resilience of such economies.

3. Policy Evaluation: The main aims of demonetization were to control black money, fake
currency, and encourage electronic transactions. Measuring the success of these aims offers
lessons in the effectiveness of such policies in attaining preferred economic results.

4. Theoretical Implications: Conventional economic theories tend to assume long-run monetary

neutrality. But an unexpected and large-scale monetary shock, such as demonetization,
provides a natural testing ground for such theories and the actual impact of changes in the
supply of money on the economy.

Research Gaps:

1. Granular Data Analysis: There was very little empirical research on the localized impact of
demonetization before this study. Using district-level data, the authors offer a detailed picture
of how regions faced different levels of economic shocks depending on the severity of cash
scarcity.

2. Informal Sector Analysis: Most of the literature so far was on the formal economy, and the
informal sector, which makes up a considerable percentage of India's GDP and jobs, was largely
ignored. This research closes that gap by utilizing employment surveys and nightlight data to
measure informal economic activity.

3. Alternative Payment Adoption: Even though the facilitation of digital payments was cited as
a stated aim of demonetization, no empirical studies had been done on its adoption and success.
This study explores how areas where cash shortages were dire coped by ramping up the
utilization of alternative means of payment, throwing light on challenges and success of
moving toward a less-cash economy.

4. Banking Sector Dynamics: The dynamics between the scarcity of cash and banking
operations, including deposit mobilization and extension of credit, were not comprehensively
examined in earlier studies. This research investigates how demonetization affected banking
conduct, having implications for the financial sector's adaptation to monetary shocks.

5. Short-Term and Long-Term Effects: While some research has skirted around the short-term
consequences of demonetization, little research has been conducted on its long-term effects.

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The authors examine both the short-run decline in economic activity and the subsequent
recovery periods, providing a rich temporal insight.

In summary, the research "Cash and the Economy: Evidence from India's Demonetization" is
instrumental in comprehending the various implications of abrupt changes in monetary policy.
Through closing the above-discussed research loopholes, it provides insightful perspectives on
the nature of cash-based economies and supplies empirical evidence for future policy
considerations in such environments.

6."The Impact of Demonetisation on the Informal Economy" by Indrani Chakraborty

and Partha Ray. This study examines the impact of demonetization on India's informal
sector, where transactions primarily use cash.

India's 2016 demonetization, which nullified 86% of the country's currency in one night, had
significant effects on India's economy, especially its informal economy. This research titled
"The Impact of Demonetisation on the Informal Economy" by Indrani Chakraborty and Partha
Ray examines this crucial problem in detail. It is useful to comprehend the need for this
research and to recognize gaps in research that it fills with insights into the greater
consequences of such monetary measures.

Need for the Study :

1. Dominance of the Informal Sector: India's informal sector is enormous, covering a large part
of employment as well as economic activities. The sector largely depends on cash.
Demonetization's abrupt withdrawal of cash presented immediate challenges, which
necessitated an examination of its unique effects on the sector.

2. Policy Evaluation: While demonetization was intended to strike at black money and
counterfeit notes, its spillovers on the shadow economy required rigorous analysis. Identifying
these spillovers is important for policymakers to craft interventions that counterbalance
unintended effects on vulnerable segments.

3. Economic Stability and Growth: The informal sector contributes substantially to India's
GDP. Disruptions in this sector can have cascading effects on overall economic stability and
growth. Analysing demonetization's impact provides insights into the resilience and
adaptability of the informal economy during monetary shocks.

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Research Gaps :

1. Limited Empirical Evidence: There was limited empirical research available on

demonetization's effects on the informal economy before this study. This study bridges the gap
by presenting evidence-based analysis of how the sector was influenced.

2. Sectoral Analysis: Most existing literature analyzed the formal economy's response to
demonetization. This study shifts the focus to informal sectors like agriculture, small-scale
manufacturing, and services, offering a more comprehensive understanding of the policy's
reach.

3. Regional Disparities: The informal economy varies across regions. This study examines
how different areas experienced demonetization's effects, highlighting regional disparities and
the factors influencing them.

4. Adaptation Mechanisms: How informal enterprises coped with cash shortages—whether

by embracing digital payments, scaling down operations, or otherwise—was not well
understood before. This research illuminates these adaptation mechanisms.

In summary, "The Impact of Demonetisation on the Informal Economy" by Indrani

Chakraborty and Partha Ray is a seminal study that fills important gaps in the comprehension
of how big-bang monetary policies impact informal sectors relying on cash. By examining this
neglected segment, the study provides essential lessons for designing equilibrium policies that
foster economic growth without disproportionately hurting disadvantaged groups.

7."A Critical Appraisal of Demonetisation in India" by Rabinarayan Samantara and

Monika. The authors critically assess demonetization's objectives and its immediate
economic effects, including challenges in implementation.

Need for the Study:

Demonetisation, as implemented in India on November 8, 2016, was a landmark economic

decision that aimed to address multiple macroeconomic and policy issues. The primary
objectives were:

1. Curbing Black Money: The government sought to eliminate undisclosed income and
untaxed wealth that was hoarded in cash.

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 2. Eliminating Fake Currency: With the rise of counterfeit currency, particularly in
high-denomination notes, demonetisation was expected to strike a blow against illegal
financial activities.
3. Preventing Terror Financing: It was argued that terror outfits and organized crime
networks relied on illicit cash reserves. Demonetisation aimed to dismantle these
funding sources.
4. Promoting Digital Transactions and a Cashless Economy: A significant push toward
digital payments and financial inclusion was expected, reducing dependency on
physical currency.

While these goals were ambitious and theoretically impactful, their actual execution and
effectiveness required an objective assessment. The sudden withdrawal of 86% of the currency
in circulation created economic disruptions that needed a critical examination.

This study was necessary because:

 The immediate effects of demonetisation were widely debated, with strong arguments
both in favor and against it.
 The short-term impact on businesses, employment, and liquidity had not been
comprehensively documented.
 It was important to evaluate whether demonetisation met its intended objectives or led
to unintended economic hardships.
 The efficiency of the implementation process and the preparedness of financial
institutions needed scrutiny.

Research Gap:

While several studies had been conducted on demonetisation, many focused on singular
aspects, such as:

 Theoretical economic justifications for demonetisation.

 Its impact on specific sectors like real estate, small businesses, or agriculture.
 Policy recommendations for future demonetisation attempts.

However, gaps in existing literature included:

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 1. A Holistic Appraisal of Both Objectives and Execution: Many studies either focused
solely on the theoretical aims or on the difficulties faced. This study aimed to bridge
both perspectives—analyzing whether the government’s stated goals were met while
also assessing the execution challenges.
2. Short-Term vs. Long-Term Impact: Immediate economic consequences were widely
discussed, but a balanced analysis of both short-term disruptions and potential long-
term benefits was needed.
3. Challenges in Implementation: While most discussions centered around policy intent,
fewer studies critically examined logistical issues, ATM recalibration problems, bank
cash shortages, and the social consequences of demonetisation.
4. Gaps in Empirical Data: Many reports relied on anecdotal evidence. This study sought
to compile empirical data to provide a more structured evaluation.

By addressing these gaps, the authors contributed to a more nuanced understanding of

demonetisation’s actual impact, rather than relying on either political narratives or theoretical
economic models.

8."Impact of Demonetisation on the Micro Finance Sector" by Dr. V.R. Palanivelu and
S. Narmada. This paper examines how demonetization affected microfinance institutions
and their clients, particularly in cash-dependent sectors.

Need for the Study:

The microfinance sector plays a crucial role in financial inclusion by providing small-scale
credit to low-income individuals who often lack access to traditional banking services.
Microfinance institutions (MFIs) primarily operate in cash-intensive environments, where loan
disbursements and repayments are largely conducted in physical currency. Demonetisation,
which led to an immediate withdrawal of 86% of the cash in circulation, severely impacted this
sector.

The need for this study arises due to the following reasons:

1. Heavy Dependence on Cash Transactions:

 The clientele of MFIs, including small traders, farmers, and daily wage laborers,
rely on cash for their economic activities. The sudden demonetisation move

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 disrupted their ability to conduct transactions, affecting both loan repayments
and access to fresh credit.
 Unlike larger financial institutions that could transition to digital transactions
relatively easily, MFIs and their borrowers faced significant difficulties in
adapting to cash shortages.

2. Loan Repayment Disruptions:

 Since borrowers repay loans in small, frequent installments, demonetisation led

to an inability to meet repayment deadlines.
 This created financial distress for both lenders and borrowers, leading to rising
default rates.
 MFIs, in turn, faced liquidity shortages, making it difficult for them to sustain
their lending operations.

3. Impact on Financial Inclusion:

 One of the objectives of demonetisation was to promote digital transactions.

However, the question arises whether MFI borrowers, who mostly operate in
informal economies, could seamlessly transition to digital financial services.
 Understanding the adaptability and challenges faced by these low-income
borrowers is critical in assessing the long-term effects of demonetisation on
financial inclusion.
4. Operational Challenges for MFIs:
 Many MFIs experienced a significant decline in their collection efficiency
immediately after demonetisation.
 The operational framework of MFIs, including field visits by loan officers for
cash collections, had to be restructured due to the cash crunch.
 Some institutions attempted to switch to digital payments, but the infrastructure
and financial literacy among borrowers posed challenges.

Given these factors, the study aims to assess the extent to which demonetisation disrupted
microfinance operations and whether it contributed to a structural shift in the sector’s financial
model.

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Research Gap:

While various studies have analyzed demonetisation’s macroeconomic effects, fewer have
explored its sector-specific impacts, particularly in microfinance. The existing literature
primarily focuses on:

 The broader economic effects of demonetisation, including GDP growth, inflation, and
banking liquidity.
 Theoretical discussions on demonetisation’s intent versus its outcomes.
 The shift towards digital banking and electronic transactions at a national level.

However, the following critical gaps remain unaddressed:

1. Sector-Specific Impact on Microfinance:

 Most studies discuss demonetisation’s impact on formal banking institutions,

but there is limited empirical data on how MFIs, which operate on the fringes
of the formal economy, coped with the policy.
 This study fills the gap by examining how MFIs managed cash shortages, loan
defaults, and borrower distress during the immediate aftermath of
demonetisation.
2. Financial Vulnerability of Borrowers:

 The sudden disappearance of cash disproportionately affected those without

alternative financial resources.
 There is a lack of comprehensive research on how demonetisation impacted
borrowers who rely on daily cash earnings to sustain their livelihoods.

3. Transition to Digital Transactions:

 While demonetisation aimed to accelerate digital financial inclusion, the extent

to which MFI borrowers were able to transition to cashless transactions remains
underexplored.
 This study investigates whether microfinance clients adopted digital payment
methods or whether the policy led to financial exclusion due to inadequate
digital infrastructure and financial literacy.

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 4. Policy Implications for Future Economic Shocks:

 The study contributes to policy discussions on how future monetary policies

should be designed to minimize disruptions in cash-dependent financial sectors.
 It provides insights into the need for preemptive measures, such as phased cash
withdrawal strategies or better integration of microfinance into formal banking
channels, to mitigate economic shocks.

By addressing these research gaps, the paper by Dr. V.R. Palanivelu and S. Narmada provides
a deeper understanding of the unintended consequences of demonetisation on microfinance,
contributing to broader financial policy debates.

9.“Efficacy of Demonetisation in Eliminating Black Money”: An Analysis of Indian

Demonetisation November 2016" by T.P. Ghosh. The paper reviews demonetization's
effectiveness in curbing black money through data mining, tax collection improvements,
and public perception.

Impact of Demonetisation on Black Money and the Indian Economy

The Indian government’s demonetisation moves on November 8, 2016, aimed at eliminating

black money and counterfeit currency, stirred significant economic debate. While the
expectation was that a substantial proportion of black money would not return to the formal
banking system, nearly 98.96% of the banned currency eventually did, raising concerns over
the efficacy of the strategy. This study assesses demonetisation’s impact on tax compliance,
corruption, economic growth, and currency circulation.

Review of Literature Existing research presents a multifaceted perspective on

demonetisation’s effectiveness. Ghosh (2017) highlights that demonetisation failed in terms of
direct cash seizure but was instrumental in uncovering black money through data analytics and
Operation Clean Money. The RBI (2017) observed a significant rise in tax filings and financial
transparency post-demonetisation. Transparency International (2017) reported that despite
these efforts, India’s corruption ranking showed marginal improvement. Other studies indicate
a temporary economic slowdown, especially in the informal sector, with the GDP growth rate

21
dropping from 7.6% in 2015-16 to 6.1% in 2016-17. However, improved financial inclusion
and increased digital transactions were positive long-term effects.

Need for the Study While demonetisation was a bold policy move; its mixed outcomes
necessitate further analysis. Although initial liquidity shocks and economic distress were
widely documented, long-term structural shifts in tax compliance, corruption levels, and
financial formalisation remain underexplored. Additionally, the interplay between
demonetisation and other fiscal policies, such as the Goods and Services Tax (GST), requires
scrutiny to assess its overall impact on economic growth and capital flow.

Research Gaps

 Long-Term Financial Implications: While immediate economic disruptions are well-

documented, the sustained impact on tax revenue, banking sector liquidity, and
investment patterns needs deeper examination.
 Sector-Specific Effects: Limited studies differentiate between the effects on cash-
dependent industries (such as agriculture and small enterprises) versus digitally
adaptive sectors (like fintech and e-commerce).
 Public Perception and Compliance: Understanding behavioural changes among
taxpayers, informal sector participants, and small businesses in response to
demonetisation remains crucial.
 Effectiveness Against Corruption: The correlation between demonetisation and
changes in India’s corruption perception index is ambiguous and requires further
empirical validation.

By addressing these gaps, this study aims to provide policymakers and financial analysts with
a clearer understanding of demonetisation’s broader economic implications and guide future
monetary interventions.

10.“Efficacy of Demonetisation in Influencing GDP Growth”

This study examines the impact of demonetisation on GDP growth, highlighting liquidity
constraints, sectoral disruptions, and long-term economic effects. While industrial and

22
agricultural output initially declined (Krishna, 2018), financial inclusion and digital
transactions improved (RBI, 2017). GDP rebounded to 7.2% in 2017-18, showing gradual
recovery.

Demonetisation acted as both a shock and a reform catalyst, increasing tax compliance and
business formalisation. However, its interaction with GST needs further analysis to assess long-
term economic stability.

Impact of Demonetisation on GDP Growth in India

The 2016 demonetisation drive, which rendered 86% of India’s currency invalid overnight,
was a historic move aimed at combating black money and encouraging digital transactions.
However, its economic consequences, particularly on GDP growth, remain a subject of debate.
While the formal banking sector saw an influx of liquidity, the informal sector and cash-reliant
industries suffered significant disruptions. This study examines the short- and long-term
economic impacts of demonetisation on GDP growth, investment, and key sectors.

Review of Literature Existing studies present mixed outcomes of demonetisation. Krishna

(2018) suggests that while the liquidity shock slowed GDP growth initially, the economy
rebounded as digital transactions and formal banking deposits increased. The Economic Survey
(2017) reported a temporary decline in consumption and investment, particularly in agriculture
and small businesses. Meanwhile, industrial production data (IIP, 2016) revealed a contraction
of 1.9% in October 2016, reflecting the immediate shock to manufacturing and trade. The Asian
Development Bank (ADB) also revised India’s GDP growth forecast downward, citing
demonetisation’s disruptive impact on employment and demand. However, by 2017-18, GDP
growth rebounded to 7.2%, indicating a gradual recovery.

Need for the Study The long-term implications of demonetisation remain underexplored.
While its immediate effects on liquidity and consumption are well-documented, the structural
shifts in savings, digital transactions, and tax compliance need further analysis. Additionally,
the interplay between demonetisation and other economic reforms, such as GST, must be
assessed to understand its holistic impact on GDP growth. This study aims to provide insights
into how demonetisation influenced India’s economic trajectory beyond the initial disruption
period.

23
Research Gaps

 Sector-Specific Impacts: Most research focuses on aggregate GDP figures, but the
varying effects on agriculture, real estate, and manufacturing require deeper
examination.
 Informal Economy: Limited studies address the long-term integration of cash-
dependent workers and businesses into the formal financial system.
 Monetary and Fiscal Policy Interplay: The combined impact of demonetisation and
policies like GST on investment and tax revenues remains an area for further research.
 Consumer Behaviour: The shift from cash to digital payments and its influence on
long-term spending habits is still evolving.

By addressing these gaps, this study aims to provide a nuanced understanding of

demonetisation’s role in shaping India’s economic landscape and future policy directions.

11.Impact of Demonetisation on Banking Liquidity

This study examines demonetisation’s effects on banking liquidity, highlighting deposit surges,
interest rate changes, and financial stability. The invalidation of ₹500 and ₹1000 notes initially
caused a liquidity shock but later boosted CASA deposits, lowering borrowing costs.

Key Findings Sharma & Gaur (2017) noted increased bank liquidity, enabling lower lending
rates. The RBI (2017) implemented CRR adjustments and Market Stabilization Schemes to
manage surplus cash. While digital transactions grew, NBFCs and microfinance institutions
faced short-term stress.

Implications Demonetisation improved formal financial flows but disrupted cash-based

sectors, underscoring the need for adaptive banking policies.

Impact of Demonetisation on Liquidity in the Banking Sector

24
The 2016 demonetisation initiative, which invalidated ₹500 and ₹1000 currency notes
overnight, significantly affected liquidity in the banking sector. While aimed at curbing black
money and promoting digital transactions, the sudden influx of deposits reshaped banking
liquidity dynamics, interest rates, and credit availability. This study examines the immediate
and long-term effects of demonetisation on liquidity in the Indian banking sector.

Review of Literature: Existing research highlights mixed outcomes. Sharma & Gaur (2017)
noted a surge in CASA (Current Account and Savings Account) deposits following
demonetisation, with banks experiencing a 5-10% increase in CASA ratios. The Reserve Bank
of India (2017) observed a temporary contraction in liquidity due to high cash deposits but later
managed surplus liquidity through monetary policies like Cash Reserve Ratio (CRR)
adjustments. The Economic Times (2017) reported that interest rates on loans declined due to
increased liquidity, leading to more affordable credit. However, non-banking financial
companies (NBFCs) and microfinance institutions (MFIs) faced liquidity stress, as cash-
dependent borrowers struggled to make timely repayments.

Need for the Study :While the initial surge in banking liquidity post-demonetisation is well-
documented, its long-term impact on credit availability, lending rates, and financial inclusion
remains underexplored. This study aims to analyze how the liquidity boost influenced banking
profitability, monetary transmission, and consumer credit behavior in the years following
demonetisation.

Research Gaps:

 Long-Term Liquidity Trends: Most studies focus on short-term liquidity injections,

but the persistence of these effects on banking operations needs further analysis.
 Impact on Loan Growth: While lending rates declined, the extent to which
demonetisation spurred credit growth remains ambiguous.
 Digital Banking Adoption: The shift in consumer behavior from cash transactions to
digital payments and its influence on long-term banking liquidity is still evolving.
 Policy Adjustments: The effectiveness of RBI’s liquidity management tools post-
demonetisation, including CRR changes and market stabilization schemes, requires
further assessment.

25
By addressing these gaps, this study aims to provide a comprehensive understanding of
demonetisation’s impact on banking sector liquidity, informing future monetary policy
decisions.

12. "Impact of Demonetisation on SMEs in India"

Need for the Study:

SMEs are pivotal to India's economy, contributing significantly to employment and GDP. The
2016 demonetisation initiative, which invalidated high-denomination currency notes,
disproportionately affected SMEs due to their reliance on cash transactions. Understanding the
ramifications of demonetisation on SMEs is essential to:

1. Assess Financial and Operational Impacts: Evaluating how demonetisation

influenced SMEs' revenue, profit margins, and operational efficiency.
2. Identify Adaptive Strategies: Exploring the methods SMEs employed to navigate
cash shortages, such as adopting digital payment systems.
3. Inform Policy Formulation: Providing insights to craft policies that bolster SMEs'
resilience against similar economic disruptions in the future.

Research Gaps:

Despite various studies examining demonetisation's effects on SMEs, certain areas remain
underexplored:

1. Long-Term Effects: While immediate impacts have been documented, there is a lack
of research on the enduring consequences of demonetisation on SMEs' sustainability
and growth.
2. Regional Disparities: Most studies focus on specific regions, leading to a need for
comprehensive analyses that consider regional variations in impact.
3. Sector-Specific Analyses: Limited research delves into how different sectors within
the SME category were uniquely affected by demonetisation.
4. Psychological Impact: Few studies examine the psychological stress and mental health
challenges faced by SME owners during and after demonetisation.

26
 5. Comparative Policy Analysis: There is a scarcity of research comparing India's
demonetisation with similar initiatives globally, which could offer valuable lessons.

Addressing these gaps would provide a more holistic understanding of demonetisation's impact
on SMEs and guide the development of targeted support mechanisms.

13. "The Great Indian Demonetization" by Amartya Lahiri (2020)

Need for Study:

Demonetization is a major economic reform aimed at addressing issues such as black money,
counterfeit currency, and tax evasion while also promoting cashless transactions. In November
2016, the Government of India withdrew ₹500 and ₹1000 currency notes from circulation,
removing nearly 86% of the country’s cash overnight. The policy was intended to curb
corruption, increase transparency, and encourage the use of digital payments.

Amartya Lahiri’s (2020) research, The Great Indian Demonetization, critically examines the
effectiveness of this policy by analyzing its outcomes over a three-year period. The study
investigates whether demonetization met its intended objectives and explores the economic
disruptions it caused. Lahiri’s work highlights key economic indicators such as employment
rates, GDP growth, digital transactions, and tax revenues. His findings suggest that while the
policy had short-term consequences, including a contraction in economic activity and job
losses, its long-term success in achieving policy goals remains debatable.

This study is essential for understanding the broader economic implications of demonetization,
particularly its impact on financial inclusion, economic formalization, and digital transactions.
Given its significance, further research is required to assess the long-term effects of
demonetization and its role in shaping future economic policies.

Research Gaps:

While Lahiri’s study provides valuable insights into demonetization’s impact, there are still
several unexplored areas that require further research:

1. Long-Term Economic Consequences

27
Lahiri’s analysis focuses primarily on the short- and medium-term effects of demonetization,
covering a three-year period. However, its long-term consequences on economic stability,
financial markets, and overall economic growth remain uncertain. Future research should
investigate whether the economy has fully recovered and whether demonetization has resulted
in lasting structural changes.

2. Sector-Wise Impact

While the study evaluates demonetization from a macroeconomic perspective, it does not
provide a detailed analysis of its impact on specific industries. Sectors such as agriculture,
small and medium enterprises (SMEs), manufacturing, and retail were affected in different
ways. Since many small businesses and informal workers rely heavily on cash transactions,
they experienced significant financial strain. A more detailed sectoral study is needed to
understand how different industries adapted to the cash crunch and whether they benefited from
the shift to digital payments.

3. Employment and the Informal Sector

One of the key challenges faced during demonetization was the decline in employment,
particularly in the informal economy, which depends largely on cash transactions. While Lahiri
mentions a temporary reduction in economic output, there is limited data on how many
businesses closed or how many workers lost their jobs permanently. Further research should
focus on the long-term employment trends in the informal sector and whether workers
successfully transitioned to the formal economy.

4. Digital Transactions and Financial Inclusion

A major objective of demonetization was to accelerate the adoption of digital payments.

Lahiri’s study indicates an initial rise in electronic transactions following the policy
implementation. However, over time, the increase in digital transactions did not sustain its
momentum. Additional studies are needed to:

 Analyze why digital payment adoption slowed down after the initial surge.
 Assess whether government initiatives such as Unified Payments Interface (UPI) and
fintech innovations contributed to long-term financial inclusion.

28
  Understand behavioral factors that prevent individuals and businesses from fully
transitioning to cashless transactions.

5. Tax Compliance and Revenue Collection

One of the key motivations behind demonetization was to improve tax compliance and expand
the number of taxpayers. Lahiri’s findings suggest that this goal was not achieved to a
significant extent. However, further analysis is required to determine:

 Whether indirect factors, such as stricter financial regulations and tax reforms, had a
delayed impact on tax compliance.
 How demonetization influenced small businesses in terms of Goods and Services Tax
(GST) compliance and overall tax collections.

14."An Economic and Public Policy View of Demonetization in India" by Feler

Bose(2019)

Need for Study:

Demonetization, implemented in India in 2016, was introduced with the goal of reducing black
money, combating corruption, and transitioning towards a digital economy. The sudden
withdrawal of ₹500 and ₹1000 notes from circulation had far-reaching economic and policy
implications.

Feler Bose’s (2019) study critically examines the rationale behind demonetization by applying
public choice theory—a framework that suggests policy decisions are often influenced by
political motives rather than purely economic concerns. The study explores how various
interest groups, both domestic and international, may have played a role in shaping the policy
and evaluates the effectiveness of the move in achieving its intended objectives. Additionally,
the research discusses the Austrian school of economic thought, which highlights the
limitations of centralized decision-making in economic planning.

Another key aspect of the study is the examination of how demonetization impacted digital
transactions and financial inclusion. While the policy encouraged the adoption of electronic
payments, the long-term sustainability of this shift remains uncertain. Bose’s study provides

29
valuable insights into these economic and policy dynamics, making it a significant contribution
to the broader discussion on financial reforms in India.

Research gaps:

Despite the comprehensive analysis presented in Bose’s study, there are several areas that
require further research:

1. Long-Term Economic Consequences

The study mainly focuses on the immediate aftermath of demonetization. However, its long-
term effects on economic growth, employment, and income distribution need further
exploration. More research is required to assess whether the economy has fully recovered and
if any lasting changes have occurred in the financial sector.

2. Sector-Specific Impact

Bose’s research provides a macro-level evaluation of demonetization but does not explore its
impact on specific industries. Sectors such as agriculture, small and medium enterprises
(SMEs), and the informal economy, which rely heavily on cash transactions, were significantly
affected. Future studies should analyze how these industries adapted to the cash crunch and
whether they benefited from increased formalization.

3. Adoption of Digital Transactions

One of the key objectives of demonetization was to promote cashless transactions. Bose’s study
acknowledges the rise in digital payments, but further research is needed to assess whether this
transition was sustained in the long run. Key areas of investigation include:

 The extent to which digital transactions became a permanent part of consumer behavior.
 Challenges faced by small businesses and rural populations in adopting digital financial
systems.
 The role of government policies in ensuring financial inclusion for all economic classes.

4. Effectiveness in Reducing Black Money and Corruption

30
One of the major goals of demonetization was to eliminate black money and curb corruption.
However, Bose’s study does not provide strong empirical evidence to determine whether these
objectives were met. Future research should:

 Assess the extent to which unaccounted wealth was uncovered.

 Examine whether corruption levels declined after demonetization.
 Analyze how new methods of tax evasion may have emerged post-demonetization.

5. Banking Sector and Liquidity Management

Demonetization led to a surge in bank deposits as people rushed to exchange old currency
notes. While Bose’s study acknowledges this, a more in-depth analysis is needed on:

 How banks managed the sudden influx of deposits.

 Whether increased formal savings led to greater lending and economic growth.
 The long-term impact on non-performing assets (NPAs) and credit availability.

15."Demonetisation and its Discontents" by C. Rammanohar Reddy(2017)

Need of Study:

The demonetization policy announced by the Indian government in 2016 led to the withdrawal
of ₹500 and ₹1000 notes from circulation, with the stated goals of curbing black money,
eliminating counterfeit currency, and encouraging a shift towards digital payments. This policy
had widespread economic implications, both in the short and long term.

C. Rammanohar Reddy’s book, Demonetisation and its Discontents, provides a detailed

critique of this decision, analyzing its economic justifications and real-world outcomes. The
book explores whether demonetization effectively reduced unaccounted wealth and examines
its broader implications on financial inclusion, digital payments, and overall economic
stability. Reddy also questions whether the policy achieved its intended goals or merely caused
disruptions without delivering substantial long-term benefits. His work is particularly
significant as it provides a balanced perspective on both the rationale and consequences of
demonetization.

Research Gaps:

31
While Reddy’s book provides an in-depth critique of demonetization, there are several areas
where additional research could enhance understanding:

1. Long-Term Effects on Black Money

The book primarily discusses the immediate impact of demonetization on black money
circulation. However, further research is needed to determine whether demonetization led to a
permanent reduction in black money or if individuals and businesses found alternative ways to
conceal wealth. A long-term analysis would help in assessing whether the policy had a lasting
impact on tax compliance and financial transparency.

2. Digital Transactions and Financial Inclusion

One of the key objectives of demonetization was to increase digital transactions and reduce
dependence on cash. While the book examines the initial rise in digital payments, it does not
provide a long-term assessment of whether this shift was sustained. Future research should
focus on:

 The extent to which digital payments became a permanent part of India’s financial
system.
 The barriers faced by lower-income groups and rural populations in adopting digital
financial services.
 The role of government policies and fintech innovations in sustaining digital financial
inclusion.

3. Industry-Specific Impact

Reddy provides a broad economic analysis of demonetization, but there is limited discussion
on how different industries were affected. Certain sectors, such as agriculture, small and
medium enterprises (SMEs), and retail, rely heavily on cash transactions and were
disproportionately impacted by the sudden cash shortage. Further research is needed to
examine:

 How these sectors adapted to the cash crunch.

 Whether demonetization led to business closures and job losses in informal industries.

32
  The long-term structural shifts in industries that previously depended on cash
transactions.

4. Comparative Analysis with Other Countries

The book primarily focuses on the Indian experience with demonetization. However, several
other countries, such as Zimbabwe (2015), Nigeria (1984), and Venezuela (2016), have
undertaken similar policies with varying degrees of success. A comparative study could
provide:

 Lessons from international experiences, highlighting what worked and what did not.
 Insights into the economic conditions required for demonetization to be effective.
 A better understanding of how different policy frameworks affect the success or failure
of demonetization.

5. Political Economy of Demonetization

Reddy critiques the economic rationale behind demonetization, but further research is needed
on its political motivations and electoral impact. Future studies could examine:

 Whether demonetization was primarily an economic policy or if it had political

objectives.
 The effect of demonetization on voter perception and election outcomes.

33
 Chapter 3: Research Methodology
Statement of the Problem:

Demonetisation, implemented by the Indian government on November 8, 2016, aimed to tackle

black money, curb counterfeit currency, and promote digital transactions. While it led to
increased tax compliance and digital financial adoption, it also caused economic disruptions,
especially in cash-dependent sectors. The move significantly impacted GDP growth,
employment, liquidity in banking, and financial inclusion. This study seeks to analyse the
broader economic effects of demonetisation, addressing both short-term challenges and long-
term structural shifts.

Research Methodology

1.Research Design

This study follows a mixed-method approach, utilizing both quantitative and qualitative
research techniques. It is an exploratory and descriptive study that analyses secondary data
and, where applicable, primary data through surveys and expert opinions.

2. Data Collection

A. Primary Data:

 Survey Method: Structured questionnaires were used to collect perspectives from

individuals, small businesses, and financial institutions.
 Interviews: Insights from economists, financial analysts, and policymakers will be
gathered.
 Sampling Technique: Stratified random sampling was used to ensure diverse
representation.

B. Secondary Data:

 Sources:
 Reports from RBI, Economic Survey, NITI Aayog.
 Banking sector reports and fintech data.

34
  Research papers (EPW, SSRN) and academic studies.
 News reports from sources like The Hindu and Business Standard.
 World Bank and IMF economic assessments.

6. Data Analysis

 Quantitative Analysis:
 Statistical tools like regression models and trend analysis.
 Key impact metrics: GDP trends, employment data, banking liquidity, and digital
transaction growth.
 Qualitative Analysis:
 Thematic analysis of survey responses and expert opinions.
 Case studies on small businesses, rural economy, and digital finance adoption.
7. Research Hypothesis

H1: Demonetisation had a significant short-term negative impact on economic growth.

H2: Demonetisation accelerated India’s transition toward a cashless economy.

8. Limitations of the Study

 Dependence on secondary data may affect accuracy.

 Long-term structural changes may be difficult to assess within the study period.
 Sample bias in primary data collection.

9. Ethical Considerations

 Ensuring confidentiality of survey respondents.

 Avoiding biased interpretation of data.
 Using credible sources for secondary data.

35
 Chapter 4

Data Analysis and Interpretation

1. Key Observations from the Graph

 Pre-Demonetization Level:
On November 4, 2016, the total
currency in circulation stood at
₹17.97 trillion.
 Sharp Decline Post-
Demonetization:
Following the announcement,
there was an immediate and steep
drop in currency circulation. The
lowest point was reached on
January 6, 2017, at ₹8.98
trillion, indicating a 50%
reduction in total cash
circulation.
 Gradual Recovery:
After hitting the lowest point, the currency in circulation started recovering steadily,
indicating that new currency notes were being introduced into the system.
 Currency Levels One Year Later:
By October 27, 2017, the currency in circulation had risen back to ₹16.35 trillion.
This shows that cash usage rebounded close to pre-demonetization levels within a year.

2. Analysis & Interpretation

 Short-Term Impact:
o The drastic fall in circulation suggests liquidity crunch, causing hardships for
individuals and businesses reliant on cash.

36
 o The economy likely experienced a temporary slowdown, as cash transactions
play a major role in India’s informal sector.
 Long-Term Effects:
o Although cash circulation dropped initially, its rapid recovery suggests
continued reliance on cash transactions.
o This questions the long-term effectiveness of demonetization in transitioning
towards a cashless economy.
o A possible increase in banking transactions and digital payments may have
occurred, but cash remains dominant.

1. Key Observations from the Graph

 Before Demonetization (2013–

2016):
o Digital transactions were
dominated by card
payments, with prepaid
payment instruments
playing a minor role.
o UPI transactions were
almost non-existent as the
system was only launched
in April 2016.
 Post-Demonetization Surge
(2017 Onwards):
o By November 2017, UPI
transactions became visible for the first time, marking a small but significant
entry.
o There was a steady rise in digital transactions overall, with card and prepaid
payment instruments also growing.

37
  Explosive UPI Growth (2019–2021):
o The most notable increase happened between November 2019 and August
2021, where UPI transactions overtook both cards and prepaid payments.
o By August 2021, UPI transactions alone accounted for the majority of digital
transactions, surpassing ₹6 lakh crore, while card and prepaid payments saw
only moderate growth.

3. Analysis & Interpretation

 Impact of Demonetization on Digital Payments:

o Demonetization acted as a catalyst for digital transactions, pushing people to
explore UPI, cards, and prepaid wallets due to the sudden cash crunch.
o UPI's user-friendly interface, zero transaction cost, and direct bank linkage
made it a preferred payment method.
 Why Did UPI Dominate?
o Unlike cards, UPI does not require POS machines, making it easier for small
vendors and individuals to accept payments.
o Government policies, such as incentives for digital transactions and the
Bharat Interface for Money (BHIM) app, accelerated UPI adoption.
o COVID-19 (2020–2021) further boosted UPI transactions, as contactless
digital payments became a necessity.
 Declining Role of Cards & Prepaid Instruments:
o While card transactions grew, their growth rate was slower compared to UPI.
o Prepaid payment instruments (wallets like Paytm, PhonePe, etc.) lost
momentum as UPI provided direct bank transfers without requiring wallet
top-ups.

38
1. Key Observations from the Graph

 Pre-Demonetization (August–
Early November 2016)

o The SENSEX was

trending upwards,
reaching close to 29,000
points in September.

o The 50-day moving average (short-term trend) was relatively stable, showing
minor fluctuations.

o The 200-day moving average (long-term trend) was on a steady upward

slope, indicating market stability.

 Post-Demonetization Market Reaction (November 8–November 22, 2016)

o Sharp decline: The SENSEX dropped significantly, breaking below the 50-
day moving average and nearing the 200-day moving average.

o Market panic: The decline suggests negative investor sentiment, likely due
to uncertainty about liquidity, economic slowdown fears, and potential business
disruptions.

o The 50-day moving average started declining, showing a shift in short-term

market momentum.

 Recovery Attempt (November 22–November 29, 2016)

o The market bounced back slightly toward the end of November, but it
remained below pre-demonetization levels.

o The 200-day moving average continued rising, indicating that while there was
a crash, the long-term trend was not significantly disturbed.

2. Analysis & Interpretation

 Why Did the Market Drop?

39
 o Liquidity shock: With 86% of cash removed overnight, businesses relying on
cash transactions faced immediate disruptions.

o Investor panic: Investors feared slow economic growth, a drop in consumer

spending, and lower corporate earnings.

o Foreign investor outflows: Uncertainty led to foreign institutional investors

(FIIs) selling Indian stocks, further driving the decline.

 Why Did the Market Recover?

o Market correction: After the initial shock, investors adjusted to the new
reality of demonetization.

o Long-term confidence: The 200-day moving average remaining stable

suggests that investors still had faith in India's economic fundamentals.

o Government reassurance: Policymakers assured the public that

demonetization would boost digital transactions, curb black money, and
improve long-term growth

40
 Chapter- 5: Conclusion

Demonetization in India represents a significant monetary policy intervention that aimed to

address the persistent issues of black money, counterfeit currency, and corruption within the
financial system. From a finance perspective, the move was designed not only as an anti-
corruption measure but also as an effort to drive structural reforms towards a more transparent
and formalized economy.

In the immediate aftermath, the policy led to liquidity constraints, as evidenced by the short-
term cash crunch impacting both organized and unorganized sectors. This disruption affected
transaction volumes and temporarily slowed down economic activity, particularly in sectors
heavily reliant on cash transactions. The subsequent stress on liquidity management
underscored the challenges central banks face when abruptly altering the monetary base.

Conversely, the long-term implications have been more nuanced. Demonetization accelerated
the adoption of digital payment systems and fostered a transition toward a less-cash-dependent
economy. This shift has had important ramifications for financial inclusion and transparency,
enabling more accurate tracking of economic activity and enhancing tax compliance.
Moreover, the policy indirectly supported the expansion of the formal banking sector by
channelling a significant amount of funds into bank deposits, thereby bolstering liquidity and
strengthening credit creation mechanisms. However, the effectiveness of demonetization in
curbing black money remains a contentious issue among economists. While it succeeded in
destabilizing certain unaccounted channels of wealth, a substantial volume of illicit funds was
reportedly transformed into non-cash assets, thereby circumventing the intended financial
oversight. This outcome raises important questions regarding the optimal design and execution
of such policies in the context of an interconnected financial system.

In conclusion, demonetization serves as a pivotal case study in financial policy, illustrating the
complexities and trade-offs inherent in implementing large-scale economic reforms. Its dual
impact—manifesting as both an immediate economic slowdown and a long-term push towards
digital finance and formalization—provides valuable insights for policymakers. As India
continues to refine its financial regulatory framework, the lessons learned from demonetization
will be critical in shaping future strategies that balance immediate economic stability with
sustainable growth and transparency.

41
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