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On the occasion of the fifth anniversary of demonetization, cash in circulation 57% more

Incidentally, the money in circulation before November 8, 2016 was 18 lakh crore, and five years later it is 28.3 lakh crore, a jump of 57.5%, a growth of about 10%. per year, higher than real GDP growth. In these times of high inflation, public money is extraordinarily high.

This despite a sharp increase in electronic payments and the widespread use of the Unified Payment Interface (UPI). The latter records more than 4 billion transactions each month, and will record 25 billion transactions annually against 15 billion in China.

But it can be argued that India’s digital journey did not need a demonetization “jhatka”. It would have happened anyway, as the current pace of adoption shows. More importantly, the share of payments (in value) that are instant UPI-type payments is 15.6% according to a study by a US company called ACI Worldwide. Even the Reserve Bank of India’s annual report shows that retail non-cash instant payment systems still have a long way to go. There’s no question that the pace of digital payment adoption is blazing fast, but that shouldn’t be credited with demonetization.

The goals of demonetization were never clearly stated, and the narrative kept changing over the next year. It was first an attack on black money, counterfeit money, the financing of terrorism. Then it wiped off the extra income tax and pulled more people into the tax net. Then it was about moving India quickly to cashless transactions. And then again, it was about enabling the ecosystem of fintech companies and innovation in the financial system.

None of this has been confirmed. However, one can use the fallacy “post hoc, ergo propter hoc” to justify that the objectives of demonetization (whatever they are) have been achieved. Not only does “correlation not mean causation”, but also, just because X follows Y, it does not mean that Y causes X. All of this may sound too nuanced, and it will take the Nobel laureates in economics of this years establish the causality between demonetization and subsequent effects.

Undeniably, the following propositions still hold.

First, people suffered. Second, the informal sector economy has been hit hard. Third, the popularity of the prime minister, who made the decision his own, has not waned. (This could be attributed to his power to project a “reality-warping field” to which legendary entrepreneur and innovator Steve Jobs often refers). It is the strength of his charisma.

Fourth, instant cash is back in circulation, despite a surge in digital payments. Fifth, until the pandemic year, GDP growth steadily declined and the investment-to-GDP ratio stagnated. Finally, the share of the informal economy in the total economy has contracted, although the factors are numerous. The analysis of the contraction of the informal economy is left in another column.

(Dr Ajit Ranade is an economist and principal investigator, Takshashila) Institution. Opinions are personal) (Syndicate: The Billion Press)