Demonetisation in India: A Critical Analysis

In an important move, the Government of India declared on 8^th of November 2016, that the five hundred and one thousand rupee notes will no longer be legal tender from midnight, 8th November 2016. The RBI will issue Two thousand rupee notes and new notes of Five hundred rupees which will be placed in circulation from 10th November 2016. Notes of one hundred, fifty, twenty, ten, five, two and one rupee will remain legal tender and will remain unaffected by this decision. This measure has been taken by the Prime Minister in an attempt to address the resolve against corruption, black money and counterfeit notes. This move is expected to cleanse the formal economic system and discard black money from the same. The argument posited in favour of demonetisation is that the cash that would be extinguished would be “black money” and hence, should be rightfully extinguished to set right the perverse incentive structure in the economy. Therefore, it is imperative to evaluate the short run and medium-term impacts that such a shock is expected to have on the economy.. This paper elucidates the impact of demonetisation on Indian economy.