Five years after demonetisation: How much has Indian economy changed?

It's been five years since the disruptive decision by the government to scrap high-denomination currency notes overnight was taken. The economy has seen several highs and lows during this period.

The most notable has been the return of cash. One of the objectives of demonetisation was to make India a "less-cash" economy. Though cash levels settled at a lower normal immediately after the decision,it is growing nearly at the usual rate since, and cash-to-gross domestic product (GDP) ratio has overshot the pre-demo levels (chart 1).

The older high denomination currency notes of Rs 500 and Rs 1,000 were scrapped to make way for new high denomination notes of Rs 500 and Rs 2,000. Five years after demonetisation, the share of high-denomination currency notes in the economy remains the same as it was in the pre-demonetisation period (chart 2).

Bank deposits saw a sharp jump immediately after the decision, but quickly came back to the normal level. In fact, Covid-19 seems to have pushed deposits to a higher normal (chart 3).

Real GDP growth fell sharply after demonetisation. Though a quarter or two showed higher growth rate partially due to low base effects, quarterly real GDP growth plummeted from levels of 9 per cent seen in FY17 and FY18, to 3 per cent in the last quarter of FY20 (chart 4).

So we know what happened to cash, but what happened to cash usage? ATM cash withdrawals fell sharply after demonetisation, and took more than two to three quarters to recover. Debit and credit card payments rose as people began using digital payment modes to a higher degree (chart 5). But the impact of Covid-19 on cash withdrawal was much more adverse than demonetisation.

Digital payments in newer forms rose faster. Unified Payments Interface, or UPI, clocked transactions worth Rs 7.7 trillion in October 2021. But the use of Immediate Payments Service, or IMPS, which was a popular mode of digital payments before UPI, has been lagging. Demonetisation triggered the proliferation of private players in the UPI ecosystem, which can be seen as probably its biggest positive impact (chart 6).

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