Almost a year ago, the Indian government rolled out an unprecedented policy move. Arguably, it was a time when the country was poised for economic success. With $9.49 trillion in purchasing power parity, it was the third-largest (in PPP terms) and the fastest-growing large economy in the world. On November 8, with no advance warning, India’s two highest-denomination banknotes, the 500-rupee and 1,000-rupee bills, were demonetized, rendering 86% of the country’s currency invalid overnight. The ostensible objective was a popular one: to root out corruption and illegitimate activity involving untraceable cash transactions. As the implications unfolded, I wrote two pieces (“India’s Botched War on Cash” and “Early Lessons from India’s Demonetization Experiment”) evaluating the policy and its impact. My assessment of the action was that the policy was poorly thought out and executed and that its net impact would be negative and particularly bad for the poor.
Indeed, India subsequently suffered a dramatic drop in its GDP growth rate, which fell to 6.1% annualized during January–March 2017 after three quarters with the annualized growth rate staying in the range of 7.9% to 7%. It most recent GDP growth figure has fallen to 5.7%, and part of that, too, can be attributed to the policy move from last November.
As we are closing in on the one-year anniversary, it is natural to reflect on the lessons of this policy move. The Indian experience holds powerful lessons for policy makers planning economic interventions around the world.
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