Relevance: GS Paper III – Indian Economy; GS Paper II – Governance & Financial Inclusion; Source: The Indian Express, The Hindu, RBI Data, Economic Survey
Context:
On 8 November 2016, the Government of India demonetised ₹500 and ₹1,000 notes — comprising 86% of total currency in circulation (CiC) — to combat black money, counterfeit currency, terror financing, and to push India toward a digital, cash-lite economy.
Nine years later, the debate continues. While digital payments and financial inclusion have grown, India’s currency-to-GDP ratio (CiC/GDP) has risen again, indicating that cash remains central to economic transactions.
Understanding Key Terms
Term | Meaning |
| Demonetisation | Withdrawal of legal-tender status of a currency, making old notes invalid for transactions. |
| Currency in Circulation (CiC) | The total value of all cash (notes and coins) held by the public. |
| CiC-to-GDP Ratio | Indicates the level of cash use in the economy relative to GDP — higher ratio means greater cash-dependence. |
| Digital Payments | Non-cash transactions through platforms like UPI, debit/credit cards, internet banking, etc. |
| Formalisation | Bringing informal economic activities under regulatory, tax, and digital systems. |
Currency Trends: Nine Years Later
Indicator | 2016 (Pre-demonetisation) | 2025 (Post nine years) | Observation |
| Currency in Circulation (CiC) | ₹17.97 lakh crore | ₹35.7 lakh crore (as of March 2025, RBI) | CiC has doubled, surpassing pre-demonetisation levels. |
| CiC-to-GDP ratio | 11.3% | 12.3% (2025 est.) | Cash intensity remains high. |
| Digital payments volume | 9.2 billion (FY 2016-17) | 146 billion (FY 2023-24, RBI) | Exponential growth driven by UPI and mobile penetration. |
| Cash withdrawals (ATM data) | – | Rebounded to 94% of pre-2016 levels by 2019 | Indicates reversion to cash use post-COVID. |
Global Comparison: Globally, India’s CiC-to-GDP ratio (12.3%) remains much higher than advanced economies like Japan (3.1%), Eurozone (8.1%), and USA (8.3%), showing persistent dependence on cash.
Claimed Achievements vs Ground Reality
Objective | Expected Outcome (2016) | Observed Outcome (2025) |
| Curbing black money | Unaccounted cash to be extinguished. | 99.3% of notes returned to banks (RBI data, 2018) — minimal unaccounted wealth identified. |
| Checking counterfeit currency | Fake currency to be wiped out. | Short-term success; counterfeit circulation re-emerged in new denominations (RBI). |
| Promoting digital economy | Sharp and sustained rise in digital transactions. | Sustained long-term success — UPI now handles 80% of retail digital payments. |
| Formalisation of economy | Expansion of tax base, shift to formal employment. | Tax base widened modestly; EPFO data shows gradual increase in formal sector jobs. |
| Boost to fiscal transparency | Reduced cash-based political funding. | Partial progress; electoral bonds introduced (2017) but later struck down by Supreme Court (2024). |
Why Has Cash Use Risen Again?
- High cash preference in informal economy: Nearly 85% of India’s workforce remains informal, relying on cash for daily transactions.
- Consumption behaviour: Rural and semi-urban India still view cash as safer and more convenient.
- Inflation effect: Nominal GDP and money supply expansion naturally increased CiC.
- COVID-19 effect: Pandemic-era uncertainty drove people toward holding more cash as a precautionary buffer.
- Cultural and structural inertia: Cash remains a trust-based medium in small-scale trade and unorganised sectors.
Economic Implications
- Short-term disruption, long-term failure: Demonetisation temporarily formalised money flows but did not structurally alter India’s cash dependence.
- Digital revolution success: The unintended positive outcome — rapid growth of Unified Payments Interface (UPI) and FinTech innovation.
- Limited fiscal gains: No significant rise in direct tax-to-GDP ratio; black wealth mostly stored in non-cash assets like real estate and gold.
- Macroeconomic lessons: Monetary interventions must be sequenced with fiscal and institutional readiness; sudden shocks can destabilise informal sectors.
Broader Lessons for Governance
- Policy Design: Economic reforms require clear impact assessments and phased implementation.
- Inclusion & Resilience: Reforms must consider vulnerabilities of informal and rural economies.
- Behavioural Change: Sustained financial literacy and digital trust are key to reducing cash-dependence.
- Institutional Coordination: RBI, MoF, and state governments must align on liquidity management, digital infrastructure, and communication.
One-line wrap: Nine years after demonetisation, India stands more digital but not less cash-dependent — a reminder that durable reform demands inclusion, trust, and economic balance.
UPSC Mains Question: “Evaluate the economic, social, and institutional impacts of India’s 2016 demonetisation policy. Has it achieved its stated goals of formalisation and transparency?”
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