Demonetization, Liquidity shock, Tax Evasion


The November 2016 Dn of the rupee is a phenomenal event in India’s monetary history with spillovers into every nook and corner of Indian economy, and yet it has hardly received the attention it warrants from economists and other professionals. To better understand the socioeconomic consequences this paper compiles and evaluates the positives and negatives of Dn in spite of challenges in quantifying them. There was uproar at the outset because of the market turmoil notebandi caused, but some twenty months later Indian economy is doing well on the Dn stress test. This is evident in a) the broadening of the tax base, b) the relatively higher degree of compliance with filing income tax returns and reduction in black money, c) the new business regulations related to Goods and Services Tax (GST) leaving little scope for corrupt ways, d) increasingly higher rates of growth in GDP and notably, e) the swift transformational change in economic behavior triggering better tax compliance as well as the exodus to digital payment modalities, and the concurrent reduction in habitual need for cash. The five structural changes above normally have a long gestation. However, the successful ongoing makeover in India in so short a time by itself calls for an intensive study tempting one to suspect if nation-state pride is one of the drivers of reform.