Demonetization Policy Research Articles

Does Contractionary Monetary Policy Decrease Firm’s R&D Investments? Evidence from India’s Demonetisation

On 8 November 2016, the Indian Government demonetised ₹500 and ₹1,000 notes, which made nearly 86 per cent of the cash-in-circulation illegal tender overnight, with new ₹500 and ₹2,000 notes introduced gradually over the next several months. We exploit this intervention in a propensity score-matched difference-in-differences (PSM-DiD) framework to isolate the implications of a contractionary monetary policy on firm’s research and development (R&D) investments. Our findings suggest that India’s demonetisation policy had a detrimental effect on firm innovations in the period following its implementation. Additionally, we observe a concentration of this effect among slower-growth, less-profitable and more-leveraged firms. JEL Codes: E51, E52, O30

A Holistic Review on Impact of Demonetization on Animal Husbandry Sector

The impact created in the year 2016 by demonetization policy on India's animal husbandry industry analyse different effects which are critically analysed using different studies. The goal of demonetization, which invalidated ₹500 and ₹1000 banknotes, was to suppress corruption, burden the use of counterfeit money, and encourage online transactions [1,2]. Animal husbandry holds as strongest pillar of India's rural economy, and the current study of demonetization examines the short- and long-term effects on it. The short term effects like Price volatility, lack of liquidity, and decreased market demand particularly impacted small-scale livestock, dairy, and poultry producers [3]. The studies also suitably reveal that farmers faced many significant challenges, including loss of livelihood, disrupted supply chains, and restricted access to banking facilities, increased debt, and limited farm investments [4]. The Long-term effects included a rise in the use of formal banking, a move toward digital payments, and structural modifications to cooperatives. The present agriculture and allied industries scenario, which mainly depends on cash transactions, experienced significant disruptions in labor payments, input procurement, and livestock sales etc [2]. The report also assesses government actions, such as initiatives to promote digital payments, sector-specific relief programs, and financial inclusion The policy recommends the need for more efforts to raise digital literacy in rural communities, improved rural banking infrastructure in order to improve the sector's adaptability to future economic uncertainties [5,3].

Discrepancy in efficiency scores due to sampling error in data envelopment analysis methodology: evidence from the banking sector

Background Data Envelopment Analysis (DEA) methodology is considered the most suitable approach for relative performance efficiency calculation for banks as it is believed to be superior to traditional ratio-based analysis and other conventional performance evaluations. This study provides statistical evidence on the sampling error that can creep into performance evaluation studies using the DEA methodology. Inferences are drawn based on samples, and various preventive measures must be taken to eliminate or avoid sampling errors and misleading results. This study demonstrates the possibility of sampling error in DEA with the secondary data available in financial statements and reports from a sample set of banks. Methods The samples included 15 public sectors and five leading private sector banks in India based on their market share, and the data for calculating efficiencies were retrieved from the published audited reports. The sample data was collected from 2014 to 2017 because the banking sector in India witnessed a series of mergers of public sector banks post-2017, and the data after that would be skewed and not comparable due to the demonetization policy implementation and merger process-related consolidation implemented by the Government of India. The efficiency measures thus computed are further analyzed using non-parametric statistical tests. Results We found statistically significant discrepancies in the efficiency score calculations using DEA approach when specific outlier values. Evidence is provided on statistically significant differences in the efficiencies due to the inclusion and exclusion of particular samples in the DEA. Conclusion The study offers a novel contribution along with statistical evidence on the possible sampling error that can creep into the performance evaluation of organizations while applying the DEA methodology.

Authoritarianism and majoritarian religious nationalism in contemporary India

AbstractThis first article in the 2024 World Affairs special issue examines the Narendra Modi regime in India. Often acerbic political rhetoric is attached to official policies of the regime, creating fear and hopelessness within sections of the population. In this study, five sets of political activities of the government are evaluated. First, cultural authoritarianism became apparent with complicity toward “cow vigilantism,” slapping sedition charges against those showing political dissent, banning the history books of selected progressives, and stereotyping sections of the left and liberals as antinationals. Second, the demonetization policy was implemented without adequately following the economic protocols of the state. Third, the Jammu and Kashmir Reorganization Bill indicates the thwarting of democratic and federalist ideas. Fourth, the Citizenship Amendment Act and the National Register of Citizens exercise in Assam demonstrate the communal‐fascist worldview of the regime in profiling population groups. Finally, the sloppy handling of the COVID‐19 pandemic and the new Information Technology rules show the government's callous approach toward science and privacy. By analyzing such political activities, the article points out that majoritarian religious nationalism, coupled with authoritarianism, has been the ideological expression of the Modi regime, coexisting with both state surveillance and electoral democracy.

Community influence on microfinance loan defaults under crisis conditions: Evidence from Indian demonetization

AbstractResearch SummaryThe microfinance “group lending” approach has achieved widespread success in promoting high rates of repayment, and thus the viability of financial access, in very low‐income environments. Yet group lending, which relies on social connections between borrowers to reinforce repayment, may be vulnerable under crisis conditions in which defaults are commonplace. We explore this possibility in the context of the liquidity crisis that followed India's 2016 demonetization policy. Using proprietary data on the repayment behavior of about two million microfinance borrowers, we find evidence of disproportionate localization of defaults within lending communities. Further analysis reveals evidence consistent with borrower‐to‐borrower spread of defaults not only through formal joint‐liability connections but also through informal community‐level connections, the latter effect being especially pronounced for borrowers from the same religion.Managerial SummaryMicrofinance lenders have successfully employed a “group lending” approach that holds borrowers within a small group responsible for each other's loans, thus creating strong social pressures for repayment. The findings of this study underscore potential vulnerabilities in the group lending model during economic crises. We analyze the loan repayment behavior of two million microfinance borrowers during a liquidity crisis precipitated by India's 2016 demonetization policy, finding that the resulting defaults were clustered within particular lending communities. Further analysis suggests that social processes within communities played a role in spreading defaults, not only through formal ties between borrowers who were responsible for each other's repayments, but also through informal social ties. The estimated effect of informal social ties was particularly strong for borrowers who shared the same religion.

Does going cashless make you tax-rich? Evidence from India’s demonetization experiment

This paper investigates the tax compliance effects of India’s demonetization policy, which limited cash availability for a short period of time. Using administrative data on firms’ tax returns and variation in the strength of the demonetization shock across local areas, we find that demonetization increased sales reported to the tax authorities and tax payments. Investigating mechanisms, we show that demonetization led to a large increase in the use of electronic forms of payments. We argue that this likely strengthened tax authorities’ capacity to observe tax liabilities and enforce compliance.

Demonetization and its impact on Indian economy with special reference to Indian banking sector

Demonetization refers to cancellation of legal tender status of currency in circulation. Anticipating positive effects on the economy, nations often adopt demonetization policy. Government of India adopted demonetization policy on November 8, 2016. Prime Minister Narendra Modi announced this policy while addressing the nation in his Mann Ki Baat speech on November 8, 2016. Under this policy, high denomination Indian currency notes of Rs.500 and Rs.1000 were declared to be no longer in use as legal tender which means that these notes were not be acceptable for transaction. After this, RBI announced the release of redesigned new currency notes of Rs.500 and Rs.2000 which were released on November 10, 2016 by RBI and continue to be in circulation since November 10, 2016. Demonetization in India was adopted to fight against various problems such as corruption, black or parallel economy, terror funding, fake currency, money laundering and hoarding, tax evasion etc. In this paper, we are trying to explore the impacts of demonetization on banking and economy and how far is this policy able to curb the above-mentioned problems.

An Ecological Analysis of Food Expenditure Patterns During Periods of Economic Recovery and Economic Shock in India

ObjectivesTo study the patterns of food expenditure by Indian households during periods of economic recovery (after the Great Recession in 2008–09) and economic shock (from a currency demonetization policy in 2016). I hypothesize that real consumer price index (CPI) adjusted food expenditure (in Rupees) would be lower after the economic shock with higher share of spending on processed foods ― consistent with the nutrition transition hypothesis. MethodsUsing published tables from India’s nationally representative Household Consumer Expenditure Surveys in 2011–12 and 2017–18, I estimate real (Rs.) and percentage (of total expenditure) CPI-adjusted monthly per capita expenditure (MPCE) on food. I report the share of food MPCE for dairy products, sugar, oil, fresh fruits, vegetables (including tubers), and processed foods. Analysis was carried out for 36 states and union territories stratified by urbanicity. ResultsReal and percentage MPCE on food were lower in 2017–18 (Rs. 705.1; 52.3%) relative to 2011–12 (Rs. 794.9; 52.9%) for rural India. For urban India, real MPCE on food (but not percentage) was higher in 2017–18 (Rs. 1207.4; 41.9%) relative to 2011–12 (Rs. 1168.4; 42.6%). The percentage decrease was due to higher non-food MPCE (2011–12: Rs. 1572.8; 2017–18: Rs. 1672.6). At the state-level, real (rural: 28; urban: 9) and percentage (rural: 21; urban: 20) decreases were observed in rural areas. As a share of food MPCE, spending on sugar (rural: 25; urban: 29) and edible oil (rural: 22; urban: 26) decreased in most states from 2011–12. However, share of food MPCE increased on dairy (rural: 26; urban: 23), fresh fruits (rural: 31; urban: 30), vegetables (rural: 26; urban: 19), and processed foods (rural: 20; urban: 26) for majority of states. This is despite a real decrease in spending (in Rs) on processed foods (rural: 26; urban: 9) and vegetables (rural: 21; urban: 8) for most states in rural areas. Real spending (Rs.) increased for dairy (rural: 20; urban: 26) and fresh fruits (rural: 23; urban: 29) for most states. ConclusionsRural areas showed a decrease in real food expenditures from 2011–12 to 2017–18. Food expenditures decreased in share for sugar and oil, but increased in share for fruits, vegetables and processed foods. This was also observed in urban areas where there was an increase in real food expenditures. Funding SourcesNone.

SenDemonNet: sentiment analysis for demonetization tweets using heuristic deep neural network.

Sentiment analysis is one of the efficient models for extracting opinion mining with identification and classification from unstructured text data such as product reviews or microblogs. It is used to gain feedback from political campaigns, brand reviews, marketing analysis, and customers. The sentiment analysis on Twitter data is a recent research field in the natural processing. The dataset is gathered from the “Twitter” package in R along with Twitter API. The main intent of this paper is to understand the public opinion on the recently implemented demonetization policy using the proposed SenDemonNet. Initially, the tweet preprocessing was done, which is intended for cleaning the text data. Then, the feature extraction is performed by Bag of n-grams, TF-IDF, and the word2vec algorithm. The main objective of this work is a weighted feature selection that is developed by the hybrid Forest–Whale Optimization Algorithm (F-WOA) to get the best classification outcome. With these features, the Heuristic Deep Neural Network (HDNN) is adopted for classification, where the proposed FOA and WOA tune the parameter of DNN for reaching the maximum accuracy rate. From the statistical analysis, the performance of the designed F-WOA-DNN is 1.8%, 1.9%, 1.86%, and 2% enhanced than PSO-DNN, GWO-DNN, WOA-DNN, FOA-DNN, SVM, CNN, LSTM, and DNN respectively. Extensive experimental results show that SenDemonNet outperforms its competitors, producing an impressive increase in the classification accuracy on the benchmark dataset.Graphical abstract Graphical architectural diagram of Sentiment analysis model on demonetization policy in India

Demonetisation in India and its Effect in Nepal

Demonetisation of Indian Currency of Rs 500 and Rs 1000 notes was taken as an important tool to fight against crime, tax evasion, corruption and other activities held in underground economy in India. Demonetisation in India directly affected the Nepali economy as India is the largest trading partner with common cultural relationship and open-border. The objective of the study was to examine the effect of recent demonetisation (November. 8, 2016) of India to Nepal. The study used the systematic review to find the effect of Indian demonetisation to the Nepali economy. The study found that it has paved the way for digital payments and supported the process of financial inclusion. The overall transformation in the economy translates into long-term benefit for the industry in India. But, the informal firms faced the liquidity crunch to pay their suppliers and workers without the standard access to cash in India. However, business sector and general people of Nepal are hard hit by the demonetisation because India is not making adjustments to take back demonetised IRs 500 and IRs 1000 notes estimated to be over Rs. 100 million, more than it the Indian policy departure has direct effect in Nepal. The demonetisation policy has created negative effect in Nepal to the greater extent from migrant labours to big business houses.

Assessing risk attitudes and time preferences on the rural–urban interface of Bengaluru, India

PurposeUrbanization is a main driver of the transformation from agricultural-based economies to service-based economies. At the same time, urbanization might also alter preferences and attitudes such as risk and time preferences that contribute to economic growth and foster this transition. To study the effect of urbanization, few studies have compared individual time or risk preferences in rural and urban settings, reporting mixed results. This study analyses how risk and time preferences alter along the rural–urban interface and assesses the correlation of socio-economic, socio-cultural and demographic characteristics with these preferences. Using such an approach provides insights how preferences are altered in areas of transition as the rural–urban interface mirrors different stages of urbanization.Design/methodology/approachUsing experimental approaches, risk attitudes and time preferences of 1,117 agricultural and non-agricultural households were elicited along the rural–urban interface of the fast-developing Indian megacity Bengaluru in 2016/17. The study reports joint estimations of risk and time preferences and discusses the influence of urbanization on these preferences.FindingsResults show that households are on average slightly risk-averse and highly impatient. The results also indicate a decline in discount rates towards rural areas while risk preferences do not considerably differ between those areas. This puzzling result may be explained by difference response of rural and urban areas to the Demonetization policy of the Indian government in 2016.Originality/valueThe research design compares jointly estimated risk and time preferences of agricultural and non-agricultural households of a rapidly urbanizing area in a low-medium income country.

IMPACT OF DIGITAL WALLETS ON CONSUMER BEHAVIOR IN INDIA

In todays tech-driven world, digital wallets such as Paytm, GPay, MobiKwik, and so on, are gaining immense popularity among consumers. With economies becoming digital as more and more consumers opt for computerized alternatives to the traditional leather wallet, the industry has become a profitable base for potential investors. In India, specifically, the growth of digital wallets has been propelled by the demonetization policy, which significantly reduced the volume of currency in circulation, implemented by the government in 2016. One of the major consequences of an increase in the popularity of digital wallets has been a shift in the behaviors and spending habits of consumers, particularly in India, where the transition to a cashless economy has been considerably rapid. The goal of this study is to assess the apparent impact of the transition to digital economies on consumer behavior, and the various factors associated with this shift. This assessment was made by surveying users of digital wallets, between the ages 18 and 65, to seek their responses on how shifting to digital wallets has impacted them, their spending habits, etc. The responses were closely analyzed and interpreted to come to a conclusion.

Demonetization Impact on Liquidity of Large Corporates in India

This paper ‘Demonetization Impact on Liquidity of Large Corporates in India’ focuses on the changes in the Liquidity pattern of the companies’ in-order to cope up with the Business Risk that emerged due to the unforeseen Demonetization Policy of the Government of India. The study aimed at finding the performance of various sectors on liquidity parameters during pre and post demonetization period. The study covered the companies listed in NIFTY 50 over the period of 6 years from 2014-2019. The methodology used for analysis is the longitudinal study under descriptive analysis as it involves the repeated observations of the same variables over a period of time. As the paper focuses on the top companies listed, though companies faced the uncertainty during that particular period of demonetization, they bounced back at the earlier than the MSME companies. Some sectors like FMCG, Pharmaceutical were immune to demonetization as it has an inelastic demand in the market and demonetization created giant opportunities for the software sector as the country has been shifted towards digitalization. Found short-term implications for the cash-intensive sectors but in the long run it helps in the growth of the economy, which in turn will have a positive correlation with the growth of companies.

Building resilience following a policy shock: Evidence from India’s demonetization

Greater resource endowments are assumed to help the resiliency of businesses involved in a crisis. We challenge this assumption using the context of a unique natural experiment – India’s demonetization policy shock in November 2016, when the Indian Government removed, without any warning, 86% of the country’s currency in circulation, thereby precipitating large-scale disruption amongst small businesses in India. We take a multi-method approach to examine the effects of demonetization on 294 small businesses to show that resource endowments (financial and human capital) do not ensure business resilience. Using motivated cognition as a theoretical lens, we argue and empirically demonstrate that resources facilitate business resilience when the entrepreneur identifies with the political party enacting the policy but do not appear effective in facilitating resilience when the entrepreneur does not identify with the political party enacting the policy. Our study contributes to the literatures on resilience, entrepreneurial cognition and institutions in entrepreneurship.

Did India’s demonetization policy curb stone-pelting in Indian-administered Kashmir

ABSTRACT On 9 November 2016, India’s Prime Minister Narendra Modi announced his ‘demonetization’ policy which rendered all Rs. 500 and Rs. 1000 notes null and void. His government claimed that this policy, among other things, would curb stone-pelting in India’s restive Jammu and Kashmir by rendering valueless the copious illegal currency that, according to India, Pakistan pumped into the state to pay protestors to throw stones. Subsequently, New Delhi claimed success despite countervailing evidence for this claim. Here, we assemble a novel dataset to evaluate these assertions. After controlling for other factors that may explain variation in stone-pelting, we find that demonetization corresponded to increased stone-pelting. This finding is important for at least two reasons. First, Indian efforts to depict all protests in Jammu and Kashmir as the result of Pakistani payments both delegitimize Kashmiris’ grievances by reducing them to anti-state behaviors and diminish public appetite for addressing those grievances. Second, the current populist Indian government, which caters to Hindu nationalists, selectively curates facts to justify its actions, big and small, to the detriment of democratic accountability and governance.

Impact of Indian Demonetization on Working and Non-Working Married Women: An Interpretative Phenomenological Analysis

The sudden announcement of demonetization in India caused an immediate financial crisis that cascaded throughout the whole country and consequently caused suffering in the lives of many people, one such group being married women. Therefore, the present study aimed to explore and understand how married women were impacted by the demonetization policy. A total of 20 working and non-working women were selected from New Delhi and a qualitative research design based on interpretative phenomenological analysis (IPA) was employed. The present study identified three themes (i.e., problems due to demonetization, coping with demonetization, and diverse experiences associated with hidden money) and ten subthemes in which it was evident that both working and non-working women were impacted by the demonetization policy. Participants were able to develop different coping strategies to deal with the crisis. Surprisingly, contrary to our expectations, none of the participants received any negative treatment from their husbands after knowing their hidden savings.

Political Punishment and Financial Safety Nets: Evidence from India's Demonetization

We analyze the electoral consequences of India’s 2016 ‘demonetization’: a unique policy that unexpectedly made 86% of the currency-in-circulation redundant overnight, and led to severe cash shortages in the subsequent months. We leverage a discontinuity in the number of bank branches arising from a nationwide district-level bank expansion policy, instituted by the previous government in 2005. We first document that the impacts of the branch-expansion policy around the cut-off were meaningful: areas just above the cut-off had fewer bank branches, less outstanding credit, and households were less likely to report having bank accounts. Importantly, these effects strongly persisted in 2016, when the demonetization policy was instituted. As districts with fewer banks had greater cash shortages, we identify the impacts of demonetization at the bank-expansion cut-off. Regression discontinuity estimates show that following demonetization, places with fewer banks had lower economic activity, as measured by nighttime lights, and voters reported having less favorable views on demonetization. Using electoral data and a difference-in-discontinuity design, we find that in elections following demonetization, the ruling party did relatively worse in regions with discontinuously fewer banks, receiving a 4.7 percentage point lower fraction of votes. We finally show that voters that were historically strongly aligned with the ruling party, are nearly unresponsive in voting behavior, despite having a less favorable view of the policy itself.

The Real Effects of Mobile Money: Evidence from a Large-Scale Fintech Expansion

Mobile money services have rapidly expanded across emerging and developing economies and enabled new ways through which households and firms can conduct payments, save and send remittances. We explore how mobile money use can impact economic outcomes in India using granular data on transactions from Paytm, one of the largest mobile money service provider in India with over 400 million users. We exploit the period around the demonetization policy, which prompted a surge in mobile money adoption, and analyze how mobile money affects traditional risk-sharing arrangements. Our main finding is that mobile money use increases the resilience to shocks by dampening the impact of rainfall shocks on nightlights-based economic activity and household consumption. We complement these findings by conducting a firm survey around a phased targeting intervention which incentivized firms to adopt the mobile payment technology. Our results suggest that firms adopting mobile payments improved their sales after six-months of use, compared to other firms. We also elicit firms' subjective expectations on future sales and find mobile payment adoption to be associated with lower subjective uncertainty and greater sales optimism.

Political Punishment and Financial Safety Nets: Evidence from India's Demonetization

We analyze the electoral consequences of India’s 2016 ‘demonetization’: a unique policy that unexpectedly made 86% of the currency-in-circulation redundant overnight, and led to severe cash shortages in the subsequent months. We leverage a discontinuity in the number of bank branches arising from a nationwide district-level bank expansion policy, instituted by the previous government in 2005. We first document that the impacts of the branch-expansion policy around the cut-off were meaningful: areas just above the cut-off had fewer bank branches, less outstanding credit, and households were less likely to report having bank accounts. Importantly, these effects strongly persisted in 2016, when the demonetization policy was instituted. As districts with fewer banks had greater cash shortages, we identify the impacts of demonetization at the bank-expansion cut-off. Regression discontinuity estimates show that following demonetization, places with fewer banks had lower economic activity, as measured by nighttime lights, and voters reported having less favorable views on demonetization. Using electoral data and a difference-in-discontinuity design, we find that in elections following demonetization, the ruling party did relatively worse in regions with discontinuously fewer banks, receiving a 4.7 percentage point lower fraction of votes. We finally show that voters that were historically strongly aligned with the ruling party, are nearly unresponsive in voting behavior, despite having a less favorable view of the policy itself.

Assessment of Public Discernment on Factors Influencing the Declined Gross Domestic Product of India

Gross Domestic Product of India being discouraging at present with declining trend, has paved the way to find out the economic reasons through highly established literature, observations and common sense applications should be perceived by public in line with which factor influences the most backed by rationality. There have been certain factors such as improper execution of demonetisation policy, initial stoppage of money flow through GST, decreased consumption of goods, unavailability of banking credits and loans, diminished investments, discontinuous government overheads, declined exports and lowering Industrialisation have been found imperative to influence on GDP. Having the objective to identify the knowledge and assess the perception of the public on the factors, the study went through a method mix of descriptive research, quantitative approach and cross sectional design with a standard questionnaire intended to get the responses from the different people from Srikakulam District of Andhra Pradesh. Multiple Regression Analysis was used to analyse the weightage of each independent factor on the decline of GDP. Conclusion on the level of knowledge and perception on the factors have been established.