Demonetisation, 3 years on: A look at impact on key sectors of the economy

With three years of data available to back or reject the various assertions and assumptions, Business Standard looks at the Modi govt's most disruptive economic measure, the 'note ban'

Prime Minister Narendra Modi. (Photo: AP/PTI)

On November 8, 2016, Prime Minister Narendra Modi announced to the nation that Rs 500 and Rs 1,000 currency notes — 86 per cent of all currency notes in circulation in value — would cease to be legal tender. The stated objectives were unearthing black money, cracking down on counterfeit currency, and choking terror financing.
Unsurprisingly, there were strong reactions both in favour of and against the unprecedented move, which would come to be known as ‘demonetisation’ or ‘note ban’. While some hailed it as a courageous step against impropriety that was hurting the economy, others saw the move itself as disastrous for the economy.
In the months that followed, even as reports suggested that the government had not come any close to achieving its stated objectives, the government was seen patting itself on the back for the country’s move towards becoming a ‘cashless’ economy, or, as the PM said, a ‘less-cash’ economy. Many called this an act of ‘moving goal posts’ and rushed to label demonetisation as an economic nightmare.
Three years later, we have enough data to analyse and gauge the impact of the note-ban exercise on various important sectors of the economy.


According to Labour Bureau's Sixth Annual Employment-Unemployment Survey, the unemployment rate rose to a four-year high in 2016-17, when the government demonetised old currency notes. In 2017-18, the country's unemployment rate stood at a 45-year-high of 6.1 per cent, according to the National Sample Survey Office's (NSSO's) periodic labour force survey (PLFS). 

Moreover, demonetisation caused a 2-3-percentage-point reduction in jobs and national economic activity in November and December 2016, according to a research. 

Between 2016 and 2018, five million people lost their jobs and the labour force participation started declining suddenly between September and December 2016 for both urban and rural men. The rate of decline slowed down by the second half of 2017, but the general trend had continued and there had been no recovery.

Income taxpayers

As many as 8.80 million taxpayers did not file tax returns in the financial year 2016-17 - the year Modi government demonetised high-value currency notes. Records accessed by The Indian Express reveal a massive spike in the number of “stop filers” in the same year, reversing a four-year trend. In 2016-17, the number of stop filers jumped 10-fold to 8.80 million from 856,000 in 2015-16, the highest increase since 2000-2001.

During 2017-18, there was some positive impact of demonetisation on the widening of the tax base. The Income Tax department said it added 1.07 crore new taxpayers while the number of dropped filers' came down to 25.22 lakh. 

The Central Board Of Direct Taxes (CBDT) said 6.87 crore Income Tax Returns (ITRs) were filed during FY 2017-18 as compared to 5.48 crore ITRs filed during FY 2016-17, translating into a growth of 25 per cent. Also, during FY 2017-18, the number of new ITR filers increased to 1.07 crore as compared to 86.16 lakh new ITR filers added during FY 2016-17. 

Real Estate

The total number of developers in the top nine Indian cities shrunk by over 50 per cent by 2017-18. While Gurugram witnessed a decline of 76.8 per cent in the number of developers from 82 in 2011-12 to 19 in 2017-18, Noida registered a plunge of 73.2 per cent – from 41 to 11. 

Financial distress of small developers, lack of execution capability and over-supply of inventory played a key role in the downturn.

According to analysts, a large number of fly-by-night developers were forced to leave the market after demonetisation. All major cities with significant potential for real estate development – Mumbai, Pune, Thane, Kolkata, Bengaluru and Hyderabad – saw a decline in the number of developers.

Farm income and wages

Both farmers’ incomes from crop cultivation as well as wages of farm labourers contracted in 2016-17 despite the above-normal monsoon season. On the positive side in agriculture as a whole, output from fishing and livestock grew the fastest in 2016-17. The growth was nearly 10 per cent over the previous year.

In a period of low supply of cash, input suppliers demanded higher prices. Demonetisation was carried out briefly after the harvest of the kharif season entered the markets, and when the entire rabi output was yet on the fields. On the other hand, agriculture had grown (gross value added) the fastest since 2012 in the demonetisation year due to a bumper crop.

Factory investment

In the year when the demonetisation was implemented, investment in the country’s factories contracted 10.3 per cent over 2016-17, showing their worst performance since 2002-03. In the year immediately after the note ban exercise, even as factories in the organised sector witnessed job growth and wage rise consistent with previous years, their ability to channel funds in productive capital was severely dented in 2017-18.

Spending on milk and milk products

In 2017-18, the amount spent on milk and milk products (M&MP) dropped 10 per cent. Households, hotels, and halwai shops spent Rs 6 trillion on M&MP in 2016-17, consumption expenditure reduced to Rs 5.4 trillion in 2017-18, the data released by the National Statistical Office (NSO) showed.

The government pushed for a less-cash society by increasing infrastructure to allow digital payments. In most of the tier-II and tier-III towns, digital payments had doubled since demonetisation. From global tech giants such as Google, WhatsApp, to few of the country's biggest mobile wallets, including Paytm, MobiKwik all adopted the digital payments system around the time demonetisation took place.

Till December 2018, UPI managed transactions of more than Rs 1.02 trillion. National electronic funds transfer (NEFT) transactions saw an upsurge from Rs 9.88 trillion. Mobile banking payments also saw a spike since September 2015. All the digital transactions collectively registered an increase of 440 per cent since demonetisation.