1.77 The Economic Survey 2016-17, Volume
I had discussed the potential consequences of demonetization, mostly in theoretical terms because data available at the time was limited. Six months on, there is more data to add to
the discussion. The discussion is organized around a few indicators that were highlighted in Volume I.

1. Cash and Digitalization

1.78 Reducing the use of cash and increasing the use of digital modes of payment were major aims of demonetization. What has been the progress so far?

1.79 As shown in the Economic Survey
2016-17, Volume-I, India relied to a greater extent on cash than comparator countries, reflected in a high cash-GDP ratio of about 12 percent and a rising cash-GDP ratio over time (Figures 2 and 3 in Chapter 3 of Economic Survey 2016-17, Volume I). It has been nine months since demonetization Went into effect. Assuming—and this is a critical assumption—that remonetization has
happened fully and that the supply of cash is now fully reflective of demand, then today’s level of cash can be compared with predemonetization levels.

1.80 Figure 15 plots the level of cash since 2014 and also shows a trend line, pointing to where cash might have been in the absence of demonetization (it is not accurate to compare levels today with levels prevailing on Demonetization day). In levels, and as a share of GDP and money, there seems to have been a sharp and equilibrium decline in the use of cash: as of July, the holding of cash
is about Rs. 3.5 lakh crore (20 percent) less than what might have been the case had predemonetization trends prevailed, consistent with the calculations presented in Volume

I. This reduced cash holding is illustrated in Figure 16 which plots cash as a share of GDP and money (M1). The former has declined by about 1.6 percentage points down from 11.3percent of GDP to 9.7 percent, and the latter by 5 percentage points.

1.81 Of course, a definitive judgment can
only be passed if current levels of cash relative to GDP persist over time but so far, reliance on cash appears to have declined sharply. This decline suggests that a considerable portion of cash holdings was used for savings, which
has now been transferred to the banking
system. In addition, post-demonetization
a new enforcement and compliance regime and increased digitalization have reduced the use of cash for transactions.

1.82 What about digitalization? Digitalization can broadly impact three sections of society: the poor, who are largely outside the digital economy; the less affluent sections, who are becoming part of the digital economy, having acquired Jan Dhan accounts and
RuPay cards; and the affluent, who are fully digitally integrated via debit and credit cards. Different indicators capture the impact on each of these categories: Aadhaar enabled payments (AEPS) for the ‘digitally excluded’; Currency in Circulation to GDP and M1 (per cent)

Rupay cards for the intermediate category; and credit and debit cards for the digitally connected. These Figures are presented in Figures 17-20.

1.83 It is clear that there has been a
substantial increase in digitalization
across all categories. And even though the Immediate post-demonetization surge has moderated in some cases, the level and pace of digitalization are still substantially greater than before demonetization. This is also true for a category of large customers whose
transactions are captured.

1.84 Demonetization was expected to reduce black market transactions in real estate which would be manifested in reduced real estate prices Even prior to demonetization, there was a deceleration in house price inflation, and there was a further reduction in prices postdemonetization. The decline has since been reversed, and prices appear to be rising again.It remains to be seen whether the impact of demonetization on the housing market will be permanent.

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