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Repercussions of Protracted Currency Shortage across Two Models of Financial Inclusion in India

Following the announcement of demonetisation on 8 November 2016, India saw the withdrawal of nearly 86% of the cash in circulation. This caused prolonged currency shortages and impacted employment, sales, income, loan payback capacity, savings and by extension, financial inclusion. A survey conducted among two distinct groups in Mumbai and Pune, three months after demonetisation, in April–May 2017, reveals the adverse impact of currency shortages on the incomes and livelihoods of those employed in tiny, informal enterprises. With a decline in the sales in their businesses, their income and savings fell, and so did the demand for credit.

It has been four years since the extraordinary event of 8 Novem­ber 2016. Much has been written and, indeed, more needs to be said about the medium- and long-term effects of the decision to demonetise about 86% of the currency in circulation. The scale of this policy decision and the extended period over which currency shortages persisted has no parallel in India’s economic history, and perhaps of the world in recent time. More than two years later, a report by the Centre for Monitoring Indian Economy (CMIE) indicates that the phenomenon of declining labour force participation rates shows a yearly declining trend in the post-November 2016 period. The head of the CMIE said,

In every month of 2018 and in the months of 2019 so far, the ratio has always been lower than it was in the corresponding month of the previous year. This was also the case in 2017. But, that could be attributed to demonetisation. The continued y-o-y fall in the labour participation rate even in 2018 and 2019 indicates a deeper or a more sustained problem ailing India’s labour markets. (Business Today 2019)

What is more, the CMIE data shows that:

... the unemployment rate rose to 7.2% in February 2019, the worst in 28 months. Meanwhile, the labour force is down 25.7 million since September 2016 and the number of employed persons has declined by 18.3 million in the same period. (Business Today 2019)

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Updated On : 4th Nov, 2020

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