Impact of India’s Demonetisation on Output, Welfare and the Shadow Economy

On 8 November 2016 it was announced that from midnight that night the two top denominations in India would no longer be legal tender. These two denominations represented 86% of the cash in circulation. A discussion paper from Monash Business School ¹ reviews findings from new modelling of that event that investigated the impact of that action on aggregate output, welfare and the size of the shadow economy in India.

The paper describes how payment choice is based on availability, usage, cost and effective taxes affecting consumption, distribution, aggregate output, welfare and the size of the shadow economy. The paper found that the welfare cost of the sudden demonetisation was a reduction of 1% in total consumption with its impact weighted to those with a higher dependency on cash who were less able to switch to non-cash payments.