Few measures have been more controversial during Prime Minister Narendra Modi’s time in office than his decision to demonetise India’s high value notes in November, 2016. Even though it isn’t clear whether demonetisation had any significant effect on curbing corruption, its drag on economic growth was obvious. Fifteen months after the decision was implemented, the Reserve Bank of India is yet to even count the demonetised notes returned to the banking system.

For a move so wide ranging, did the Union government do its research? The original proposal to demonetise large denomination notes was prepared by a small Pune think-tank called Arthakranti (literally, “economic revolution”). Nine months before demonetisation was actually carried out, two state governments – Haryana and Madhya Pradesh – both led by the Bharatiya Janata Party, asked the National Institute of Public Finance and Policy, an independent research institute funded by the Union finance ministry, to evaluate Arthakranti’s proposal.


Released in June 2017, after demonetisation has already been implemented, the report argued that the ground conditions to require demonetisation simply did not exist.

The institute report listed out two questions to be asked before which demonetisation should even have been considered: “One, is there too much cash in India and second, is the value of the highest denomination note too high?”

Too much cash?

Arthrakranti attempted to address the the first question by listing a cross-country comparison of currency in circulation to gross domestic product. The NIPFP report, however, ruled that out as too simplistic. The report argued that this single metric does not take into account factors such as imports/exports, inflation, interests rates and industrialisation. “In situations of high inflation and high interest rate,” said the institue report, considering one scenario, “it is argued that people would prefer not to hold currency and hence the need for currency would be lower.”


Taking these factors into account, the economists at the institute concluded that “given the structure of the Indian economy, the level of currency in circulation is not sharply higher than that dictated by its needs”.

Too many big notes?

The second question to determine is demonetisation was needed if India’s currency spread was top heavy. Did India have too many Rs 1,000 and Rs 500 notes – the two notes that were banned by the Modi government? The NIPFP report examines this by asking if India’s highest denomination note is too big when buying basic commodities and services as compared to other countries.

To do this, the report took milk, bread, eggs, water and local transport and compared them across 15 countries – developed and developing – in order to determine if India’s currency stack was too top heavy.


The conclusion: “The comparison with other countries, the notion that India is an outlier, i.e., that it circulates a denomination that is too high in value, in relation to prices of specific commodities, may be incorrect.”

The report also compared the proportion of large currency notes to total currency circulation with other countries. Benchmarking with 25 other economies, the report actually concluded, “The share of the largest note in circulation in total value of currency in India is below the proportion observed for a number of other countries.” In India, as it so happens, the largest number of notes in circulation was the humble tenner.

The NIPFP report then carried out the same exercise with respect to value. Before demonetisation, India had 86% of its currency by value in Rs 500 and Rs 1,000 notes. However, the distribution is similar for the US and for the United Kingdom. “Even within this comparison, India does not seem to be a complete outlier,” says the report.


No rationale

The report said that it “cannot be conclusively inferred that India has too high a value for high denomination currency notes”. It proposed another logical impediment: “It may be mentioned that even if we remove the high denomination notes, there would still exist another ‘highest denomination note’ and its share in total value of currency in circulation would continue to remain high.”

As per its analysis, argued the NIFPF report, “the rationale for eliminating high denomination notes is not clear”.

As it so happened, the Modi government did not wait for the NIFPF to complete its study. It announced demonetisation in November 2016. If any economic experts were consulted, it isn’t clear who they were.