Nine Years After Demonetisation

Nine Years After Demonetisation: Currency in Circulation vs Digital Aspirations

₹34.48 lakh crore. That is the staggering amount of currency in circulation (CIC) in India as of September 2025, almost double what it was in November 2016, when the government announced the demonetisation of ₹500 and ₹1,000 notes constituting 86% of CIC at the time. This number raises a critical question: did demonetisation achieve its stated goals of curbing black money, reducing dependency on cash, and formalising the economy?

Institutional Architecture: The RBI and Money Supply Management

India's monetary architecture, governed centrally by the Reserve Bank of India (RBI), categorises currency management and monetary policy under its purview. Demonetisation aimed to influence the deepest levels of money supply, categorised into M1, M2, M3, and M4 aggregates since 1977. Among these, M3 (Broad Money), which includes currency with the public and bank deposits, serves as the key indicator used by the RBI for monetary targeting as per the Chakravarty Committee recommendations (1985).

CIC, a subset of M1, is particularly sensitive to shifts in economy-scale behaviours like digital adoption. Despite demonetisation and subsequent policy measures, CIC now stands at 11.11% of GDP, a decline from 12.1% in 2016 but higher than comparative economies such as the United States (7.96%) and Eurozone (8-10%). The gap underscores the challenge posed by India's informal sector, which remains substantially cash-dependent.

Policy Realities: Did Demonetisation Achieve its Goals?

The narrative surrounding the success or failure of demonetisation is deeply contested. While the demonetisation drive reduced the CIC-to-GDP ratio, public currency steadily rose in absolute numbers—arguably a reflection of India's expanding economy. Between 2016 and 2025, India's economy grew annually at an average of over 6%, with occasional peaks such as the 7.8% GDP growth in Q1 FY2026. A larger GDP requires proportionately more currency in circulation, tempering outright criticisms of CIC growth.

However, did this translate into less reliance on cash? On one hand, Unified Payments Interface (UPI) transactions surged by over ₹20 lakh crore per month by 2025, reflecting increased digital adoption in Tier-2 and Tier-3 cities. On the other, India’s informal economy still constitutes the bulk of cash transactions. The shift to digital appears unevenly distributed, with urban areas benefiting disproportionately, leaving rural zones tied to cash and limited card usage.

Beyond digitisation, black money reclamation—the foremost stated intent of demonetisation—remains a mixed success. Counterfeit detection rose briefly post-demonetisation, but large-scale black money operators adapted through undisclosed cash channels or alternative financial instruments. Without meaningful data transparency or further tax reforms, it remains unclear whether demonetisation excised entrenched economic informality.

Structural Tensions: Informal Economy and Centre-State Frictions

The limitations of demonetisation are amplified by India's enduring reliance on informal cash transactions, particularly in sectors like agriculture, retail, and small manufacturing. This structural dependency is a fiscal and governance challenge, creating friction between digitisation goals and ground realities.

Further complicating monetary transitions is the political economy of state-level implementation. Digitisation programs often face limited uptake across states with weaker IT infrastructures. Uttar Pradesh and Bihar, for instance, lag significantly behind Karnataka and Tamil Nadu in per capita UPI use—a divide mirrored in state GDP levels.

Between 2016 and 2025, the distribution justifies skepticism over the uniformity of a "cash-less" vision. Policies targeting digital inclusion, such as BharatNet and PMGDISHA, have not sufficiently bridged these state-level disparities, raising doubts about the sustainability of a centralised push for digital payments.

The International Lens: Comparing India with Japan

Japan offers a fascinating contrast. Despite its advanced economy, Japan's CIC-to-GDP ratio is comparably high at 9–11%, attributed to cultural factors such as trust in cash. India's elevated ratio of 11.11%, however, differs fundamentally—it stems from both economic informality and digital lag, not cultural preference.

Japan's case demonstrates that CIC levels alone cannot define "modernisation." What sets Japan apart is its success in integrating cash dependency within a highly formalised economy, allowing smoother monetary policy transmission. India's informal structure, by contrast, creates fragility rather than continuity, exposing risks of uneven economic formalisation.

What Success Looks Like: Metrics for Assessment

True success for demonetisation lies in more than reducing CIC; it demands integration of cash-intensive sectors into formal financial systems. Metrics to track could include:

• State-wide consistency in digital payment adoption rates.
• Reduction in cash dependency in informal sectors like small retail and agriculture.
• Improvements in tax-to-GDP ratio, signaling reduced black money inflow.

It remains unresolved whether India can entirely shift to a "less-cash society," considering its structural reliance on cash and uneven regional digital engagement.

UPSC Integration

Two Prelims questions for practice:

• Q1: Which among the following aggregates forms the principal measure used by the RBI for monetary targeting?
  Options:
  1. M1
  2. M2
  3. M3
  4. M4
  Answer: 3. M3
• Q2: What does "Currency in Circulation" (CIC) represent?
  Options:
  1. Currency held by commercial banks only
  2. Currency notes and coins available for transactions
  3. Total demand deposits with RBI
  4. Time deposits with cooperative banks
  Answer: 2. Currency notes and coins available for transactions

Mains Question: Critically evaluate whether demonetisation has achieved its objectives of economic formalisation and reduced reliance on cash, considering the structural constraints in India's informal economy.

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