The Indian federal government demonetized all 500- and 1,000-rupee notes on Nov. 8, 2016. Prime Minister Narendra Modi declared that the notes would cease to be effective on Nov. 9, leading to a short-term drop in sales and the Indian economy that could have global impacts.  

The decision has impacted over one billion people that live in the country. The banknotes accounted for approximately 85 percent of the Indian currency in circulation. 500 rupees is around $7.50, while 1000 rupees is around $15.

“Short-term, people are losing an immediate purchase power, because the government has [limited people to drawing] 2,000 rupees in cash from ATMs. That means, in a week, a person can only spend 2,000 rupees in cash,” said Dinakara Rao Pasupuleti, former chief general manager of the State Bank of Hyderabad in India. “Most of the middle-class people in the Indian economy depend on cash for the purchase of small goods. Therefore, in a month, they cannot spend more than 12,000 rupees, so, in the short term, purchase sales will decline.”

By doing so, the government attempted to reduce the use of the black market system. 500- and 1,000-rupee notes have played a major role in financing terrorism and drug exchanges. Illegal activities including gambling and illicit liquor brewing also depend on black money and have been suppressed due to the demonetization.

The government also intended to digitize more transactions in India and motivate residents to set up bank accounts by reducing the availability of cash.

“I do think people who possess fewer financial resources will find that devalued currency might make it harder for them to borrow and be as successful in lower-level economic activities and opportunities,” economics and Modern International Affairs teacher Damon Halback said. “It’s going to make the currency stronger, so I think there’s going to be a short-term pain, but that pain’s going to be felt asymmetrically.”

The country’s cash-dependent economy suffered a severe decline after the decision was made. Over 90 percent of transactions that take place in India are made through cash, and most vendors can only accept payment through cash. Transactions through the app Uber occur through cash in India.

The price of real estate is expected to drop as a result of the demonetization. Prior to the demonetization, certain parts of the country paid for property with both official and unofficial money.

Demonetizing currency has not yet achieved all of the goals Modi wanted it to.

“I don’t think it will eliminate [black market exchanges and terrorism], but is it a way to mitigate the impact of those issues? I do think so,” Halback said. “By making it harder to make illegal exchanges, it mitigates the problem, but it doesn’t solve the problem whatsoever; it’s a short-term mitigation.”

Sales in India have severely declined because citizens can no longer make small transactions, since many purchases occur through cash and small vendors do not have the means to accept digital transactions.

According to The New York Times, India’s economic growth slowed to a rate of 7.1 percent, lower than its growth of 7.6 percent as of March in 2016, because of the demonetization. The projected the growth rate is expected to drop even more within the beginning of 2017 to around 6.3 or 6.4 percent.

This piece was originally published in the pages of The Winged Post on January 24, 2017.