Shocks And Resilience

- Shashanka Bhide

DEMONETISATION’S impact on the economy has been significant. The oft-cited graph showing a sharp decline in banknotes held by the public and the rise in the stock of cash with banks starting in November 2016, and the steady reversal of this as re-monetisation took place over nearly a year, illustrates the potential impact on transactions based on currency as well as the recovery’s complexity. Cash is now back in circulation at nearly the same level as two years ago, and the economy is moving towards digital transactions. Has demonetisation changed how the economy has operated?

The change from cash transactions to other methods is likely to have been sharp in the formal sector, even for small transactions. Many in unorganised and ‘small’ establishments would also have moved to cash and digital payments. But the return of cash to the pre-November 2016 level suggests that cash remains important for the economy.