This is a summary of a paper by Preethi Rao, Suraj Nair and Shruti Korada; published by Leveraging Evidence for Access and Development (LEAD), a unit of the Institute for Financial Management and Research (IFMR); April 2018, 46 pages, available at:
http://ifmrlead.org/wp-content/uploads/2018/08/IFMR-LEAD-Demonetization-Study-Final-Report.pdf
This study reviews the short- and long-term impacts on low-income households resulting from the demonetization of Indian currency in 2016. The authors collected data
on households in four states – Maharashtra, Meghalaya, Tamil Nadu and Uttar Pradesh – between April 2017 and February 2018. The head of these households all: (1) had a bank account that had been opened before August 2016; (2) had executed at least two bank transactions since the announcement of demonetization; and (3) had an annual household income between INR 50,000 (USD 704) and INR 150,000 (USD 2,100).
The authors hypothesized that demonetization would require people to “tweak” their financial habits. In looking for changes in “bank account usage, credit and savings patterns, expenditure patterns and adoption and use of digital financial services,” they found “no change in the use of digital payment methods and savings behaviour after more than one year after implementation of the demonetization policy.” However, shortly after demonetization, transaction times at automated teller machines (ATMs) increased to a peak of 141 minutes in Uttar Pradesh. Across the study area, the number of bank transfers declined, as did the sizes of deposits and withdrawals. The decline in withdrawals is attributed to restrictions imposed while banks switched over to the new currency.
Participants in three of the four states reported that the main reason they did not save more is a lack of surplus income. The second strongest reason cited was a lack of access to ATMs. In addition, willingness to use digital financial services was limited by a combination of lack of knowledge of the products and a perception that using cash is less time consuming and otherwise easier.
The authors conclude that there was little to no long-term change in consumers’ saving habits or other financial behavior due to the change in monetary policy. However, the “results suggest that in the short-term, demonetization might have forced people to tweak their financial behavior depending on the availability of cash, causing substantial discomfort in terms of making necessary expenditures and investments.”
By Michelle Fleming, Research Associate
Sources and Additional Resources
IFMR LEAD publication
http://ifmrlead.org/wp-content/uploads/2018/08/IFMR-LEAD-Demonetization-Study-Final-Report.pdf
IFMR LEAD homepage
http://ifmrlead.org/
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