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Behavioural Economics Perspective of ‘Demonetisation’
How does one understand demonetisation from a behavioural economics perspective? Would a better understanding of cash holding behaviour and tax evasion have helped policymakers? What does behavioural economics offer for large-scale public policy decisions?
Decisions of public policy would have a greater chance of success if they were to consider principles of behavioural economics, that is, the incorporation of insights from psychology into economics. Behavioural economics contributes to public policy in at least three ways: it offers new policy tools that can be used to influence behaviour, it can yield better predictions about the effects of existing policies, and it can generate new welfare implications (Chetty 2015). Britain’s Nudge Unit set up by David Cameron in 2010 (Rutter 2015), and other such nudge teams being established in Australia, Singapore, Germany and the United States testify to the critical significance of understanding human behaviour for public policy.
On 8 November 2016, the Indian government announced its decision to withdraw high-value currency notes of denomination of ₹1,000 and ₹500 from circulation. Such notes, valued at ₹15.4 trillion, constituted 86.9% of the value of total currency in circulation in India. The stated objective of this measure was to purge the economy of black money and reduce corruption, as also reduce the amount of counterfeit notes in circulation used to fund terrorist activities (RBI 2017a).
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