Consumer Confidence and Lasting Effect of Demonetisation

Abstract

On 8 November 2016, the Government of India scrapped 86 per cent of the currency in circulation. Although there were reasons put by the government in support of this move, 2 years later, there is little evidence that those goals were met. More importantly, the economy lost approximately 2 per cent of GDP. While there is a widespread belief that India has absorbed the shock, in this article, we study the possible long-term effects of demonetisation. We use the consumer confidence survey (CCS) data conducted by the Reserve Bank of India (RBI) in 6 cities—Delhi, Hyderabad, Kolkata, Chennai, Bengaluru and Mumbai and for the period March 2015 to May 2018, covering 97,102 responses. We find that from a net optimistic outlook pre demonetisation, post demonetisation has led to a net pessimistic outlook. Demonetisation has also affected the relationship between the respondents’ perception of current status and future outlook, implying a higher uncertainty for the future. Finally, we find that the timing was inappropriate. Demonetisation came when the economy was recovering. JEL Classification: E65, E66