IMPACT OF DEMONETIZATION ON BANKING SECTOR

Introduction

On 8th November 2016, India witnessed a major policy announcement of demonetization

of ₹500 and ₹1000 currency notes. Such measures, while quite attractive from the political-
economic perspective, raise an important question regarding their efficacy as far as the real
economic activity is concerned. Many quick estimates and analysis were made available at
that time discussing the impact of demonetization on various sectors and sections of the
society. These currency denominations comprised of 86 percent of all the cash in circulation
(a significant component of narrow money M1) in the economy. Withdrawal of such high
amount of cash obviously led to shortage of cash in hand, but not the supply of broad
money. Those who can exchange the old notes without much of the monetary and non-
monetary cost due to access of wider banking facility and shift to cash-less transaction
without much of a hassle would have to bear less cost of demonetization than the one who
could not.

According to the Reserve Bank of India (RBI) data, about 38 percent of bank branches
were located in rural areas in August 2016. This is certainly a matter of greater concern
in the context of demonetization, since more than two-thirds of the population lives or
earns livelihood from the rural sector. Moreover, people of India also have high
preference for cash transaction. Data suggest that cash transactions account for 98 per
cent of the total volume and 68 per cent of the total value of consumer payments in India
(PWC, 2015). The rural population predominantly engaged in agriculture and informal
sector would have even higher preference of cash transaction. These critical points
might have made the rural people more vulnerable to the policy announcement of
demonetization.

It is in this context, after around a year of the decision, when the initial euphoria got
over, we felt the need to examine how this rural population would have been affected
due to demonetization. The following questions emerge: Did banking infrastructure
provide enough facility to rural people at the time of demonetization? Did people of
rural India avail the benefits of this infrastructure for their monetary transactions? What
was the monetary and non- monetary impact on the lives of these people? Was there any
significant difference in the impact across the group of people who had benefited and not
benefited from the process of financial inclusion?

The paper is divided in four sections. Section I discusses the theoretical framework in
the context of India’s demonetization, section II provides details on the methodology,
section III discusses the status of financial inclusion in Kachchh district, section IV
provides the analysis of impact of demonetization in context of financial inclusion and
section V gives policy recommendations and conclusion.

Theoretical framework

Studying the impact of demonetization on the rural economy is particularly of interest

because of the issue of financial inclusion of this large population that lives and works in
the rural areas. The Pradhan Mantri Jan Dhan Yojana (PMJDY), initiated in 2014,
achieved the target of opening of around 15.75 crores new bank account by November
2016 in the rural and semi- urban regions to provide financial services at an affordable
cost to the large section of the poor and low income groups (Govt of India, Ministry
of Finance, PMJDY, 2016). This was accompanied with strong supply side measures
by the RBI to promote banking facilities in the rural area as a part of its ‘Rationalization
of Branch Authorization Policy 2016’. These two strategic policy measures should have
provided an easy access to cash-less transactions to the rural population at the time of
demonetization. However, the other side of the coin is that about 91 per cent of the
banking outlets in villages were covered through banking correspondents and only 8.5
percent of the villages had real brick-and-mortar bank branches. (RBI, 2017). As per the
report of the Committee on Medium-term Path on Financial Inclusion 2015, the number
of branches per 100,000 of population in the rural and semi-urban areas is still less than
half of that in urban and metropolitan areas.

The 2016 demonetization attempt was not for the first time in India. Similar decisions
were taken on two occasions earlier – in 1946 and 1978. The 1978 demonetization
involved withdrawal of currency notes of ₹ 1000, 5000 and 10,000. The total value of
such currency only accounted for ten per cent of the total currency in circulation, against
 ₹ 500 and ₹ 1000 which consisted of 86 percent in 2016. According to the RBI, back in
1978, there were ₹ 8,800 crore worth of notes in circulation and this figure stood at ₹
16.4 lakh crore few month before the demonetization of 2016 (Nair Smita, 2016). This is
an indicator of how complex and intense can be the impact of demonetization
particularly when not much alternative mode of payments are prevalent in rural
economy. Not much literature is available on the impact of demonetization of 1978, may
be due to the fact that the possibility of common man holding such high denomination
currency notes was almost nil unlike the case of 2016. On the other hand, the
demonetization of 2016 became highly debated issue due to two reasons (i) it came as a
sudden shock and (ii) citizens were not given sufficient time to exchange the old notes.
Many researchers and policy makers immediately reacted with their thoughts on the
possible impact of demonetization in the forms of blogs, articles, commentaries etc.
Many national and international agencies, including the IMF and the RBI studied the
economic impact of demonetization, estimated the GDP growth rate in the short run and
long run after demonetization. However, these studies were largely carried out at the
macro level.

There are few studies that provide the theoretical framework for analyzing the impact of
demonetization on a specific segment of the society or on specific economic variables.
These studies revolve around basic argument of change in the specific component of M 1,
i.e.cash, in circulation and its impact on economic transactions. According to Ajay Shah
(2016), “Money is the lubricant of the market economy. It is how payments are made.
When money is disrupted, the working of the market economy is disrupted.” He argues
that people focusing more on the
real economic variables usually underrate the role of money and finance. Further, he also
argues that the group of people who can adopt cash-less transaction would not be affected
much but the section of the society that relies mainly on the cash for their transactions
would suffer from lack of cash and would not be able to carry out transactions smoothly.
Firms suffer from lack of demand and lack of credit facility and thus the production
would suffer. Based on this argument he concludes that “money is a veil, but when the
veil flutters, real output sputters”. Arun Kumar (2017) discusses the possible
consequences of demonetization in the context of economic structure of organized versus
unorganized sectors and black money versus white money. He rewrites the classical
economists’ quantity theory of money equation segregating the variables as organized and
unorganized sectors: Mu.Vu + Mo.Vo = Pu.Tu + Po.To. (u stands for the unorganized
sectors and o for the organized sectors). According to him, the implication of a decline in
both M and V is that P and T also has to fall. In case of demonetization, since P has not
fallen (wholesale and retail prices were still rising during that time), it is T that has
contracted. T translates into incomes so there is a corresponding fall in production and
incomes. Assuming that organized sector would have access to formal banking facilities
can make cashless transactions feasible. However, the unorganized sector, the one that
could not shift from a cash to alternative modes of payment, i.e. cheque or debit/credit
card or a digital money, would have suffered higher reduction in T. A similar argument is
made by Waknis (2017) using the macroeconomic theory of essentiality of money and the
segmented markets model. The paper explains how the policy decision of demonetization
affects the organized and unorganized sectors of the Indian economy. It is a theoretical
perspective and provides derivations for the possible impact of demonetization on two
different sets of market, one with excess to formal financial market facilities; and the
other not connected with the formal financial markets, but managing the financial
transactions through cash. The paper concludes that the segment of the economy which is
well connected with banking sector is not affected much, but the segment without the
access to financial institutions had a greater impact on consumption, expenditure, income
and employment.

A major lacuna among all the articles published immediately post demonization was that
they could not incorporate empirical analysis due to the insufficient evidence in this
direction. The current research work attempts to fill this gap, with the help of empirical
data collected after one year of the event. The aim is to measure the impact of
demonetization in the rural areas, in the backdrop of financial inclusion in terms of both
demand and supply side.

On 8th November 2016, Tuesday at 8.15 P.M (IST), Indian Prime Minister Narendra
Modi delivered a prime-time address to the nation and made an epic announcement
of “demonetisation". He announced that five hundred and thousand rupee currencies
in circulation, valued at 15.41 Lakh Crore rupees (approximately 87% of total
currencies in circulation) would not be legal tender (Tharoor, 2017). This
unexpected decision of demonetisation was shocking news to the Indian economy.
At that time, most of the economy had not even heard the term ‘demonetisation’
before. At the national and the state level, the sudden currency ban created several
economic disruptions and chaos. The prime objectives of the demonetisation
decision were to fight against corruption and black money and to stop the circulation
of counterfeit currency that was used or diverted to fund terrorist activities. The
other two supplementary objectives of demonetisation are fighting against tax
evasion and developing a cashless economy.

After the announcement of demonetisation, long queues were snaked in, out and
around the ATMs, banks and anywhere where people might exchange the banned
notes. Some people ran to deposit their banned notes into bank accounts and rushed
to jewellery shops to purchase gold in exchange for banned notes. Some others tried
to repay their loans to creditors. While considering the entire economy, the middle
and lower-income groups especially those who work daily basis suffered substantial
financial difficulties during demonetisation; some of them lost their job and plunged
into poverty. Similarly, agriculturists and fishers faced lower demand for their
perishables in the market; small scale traders found immense financial difficulty due
to the unavailability of legal currency to be given to customers for exchange for
goods. Likewise, street traders, cheap jacks, hawkers and those who had no
sufficient financial backup were felt immense financial distress during the initial
days of demonetisation. While coming to the small-medium industries, they could
not even purchase raw materials and faced colossal difficulty in paying their
employees daily due to cash shortage. Likewise, senior citizens, technically
illiterate and rural people were faced immense difficulty during demonetisation.
This unexpected revolutionary decision created several economic disruptions and
chaos throughout the country, especially the rural areas where limited number of
banks and Automated Teller Mechine (ATM) counters. Even so, after the
demonetisation, people started to use different varieties of digital payment avenues,
which was one of the incredible achievements of demonetisation. Furthermore,
several corrupted officials and black money hoarders have been caught red-handed.
Demonetisation also created massive uncertainty in the real-estate sector and there
visible fall in real estate prices. Altogether, demonetisation has influenced all the
sectors of the nation; some have not been much affected, and some have been badly
affected.
Banks in India, especially the public and private sector banks played an admirable
role during the demonetisation. After the masterstroke demonetisation decision,
entire India stood still. But banks and their workforce did their job efficiently like
victorious warriors and they protected the nation from sudden financial distress
within a shorter period.

Statement of the Problem

The word ‘Demonetisation’ was not a new term to the Indian economy; it has
happened twice before 2016. However, the term demonetisation was not familiar for
the majority of the Indian economy, especially the younger generation. Since, at that
time, a sufficient number of literature, especially Indian literature regarding the
'demonetisation', was not much available.

Demonetisation was an unexpected economic phenomenon that created a riot like

situation throughout the country. After the sudden announcement of demonetisation,
the entire economy ran towards ATM counters and banks to exchange their banned
notes. Almost all the bank branches in India were overcrowded with customers, and
no one had ever seen such long queues around the banks before. In fact, during
demonetisation, most banks didn’t have sufficient money in their coffers or ATMs to
meet the immediate demands of customers. Similarly, the bank employees were
overstressed due to managing the long queue of customers (Kavitha & Megala,
2019). After this strategic move, people distrusted the government and lost their
confidence in the banking system, and they started to blame the bank
employees because of the hectic cash crunch (“Five bankers from Kerala”, 2021).
Nevertheless, banks and their employees have put their maximum efforts to serve
the customers. During demonetisation, the bank employees were overstressed due to
the sudden heavy workload. Most bank employees had to sit late and were
compelled to work even during holidays. Several deaths and suicides were reported
during demonetisation due to work pressure and stress (Anand, 2018). Many of the
bank employees in Kerala opined that the demonetisation experience was far more
terrific than the Covid-19 pandemic situation (“Five bankers from Kerala”, 2021).
Even so, bank employees did not get much appreciation from anywhere and no one
tried to understand their work challenges during demonetisation and their perception
or opinion regarding the demonetisation and its impact.

When compared to any other sector, the banking sector is

confronted with several positive and negative effects of demonetisation.
From the beginning days of demonetisation, a massive inflow of cash was
visible into the banking system. Within the first week of demonetisation,
the overall volume of the banking business was increased (Goyal, 2019).
Similarly, demonetisation created greater demand for digital banking
services (Adil & Hatekar, 2020). Despite all these advantages, the sky-
rocket growth of Non-Performing Assets (NPAs), one of the evertime
problems of the Indian banking sector, was again worsened during
demonetisation. Banks faced enormous difficulty recovering the loan from
the customers (“Demonetisation impact: Bank NPAs”, 2017).

Altogether, sudden demonetisation created significant variations in

the day to day operations of the banks. These changes directly reflect in the
performance of all the commercial banks, especially the public and private
sector banks. A minor change in the banking operations like changes in the
advance and deposit rate make drastic changes in the total financial stability
of the economy. Because banks are the core part of the Indian economy and
all the sectors of the economy are heavily dependent on these banks for all
kinds of their financial transactions. Banks are playing a crucial role in
India's economic development and contribute a considerable portion of
their earnings to the nation’s Gross Domestic Product (GDP). There is a
direct relationship between the overall financial wellness of the nation and
the strength and weakness of a banking system. Hence, it is certain that the
demonetisation and its financial distress have created radical changes in the
various operations of the banks. Far from being a masterstroke, all the
adverse conditions due to the demonetisation seem to be changed. But still,
while celebrating the fifth anniversary of demonetisation, no one has
initiated to measure and compare the magnitude of these operational
changes during the pre and post-demonetisation period and how all these
changes have affected the banking sector and the nation too. From the very
next second after the demonetisation declaration, several positive and
negative speeches, news channels' debates, talk shows, political
discussions, protests, litigations, and strikes against demonetisation have
taken place. The whole Indian economy has experienced the impact of
demonetisation in one way or another. Reserve Bank of India (RBI) annual
report 2018 stated that 15.31 lakh crore rupees (99.3% demonetised
currencies) were returned to the banking system; that means only a
minuscule amount (10720 crores) was left out of the system. Still, the result
of demonetisation seems questionable, and no one knows the actual result
with certainty. Till now, no other formal announcement regarding the real
effect of demonetisation has been found from the side of the concerned
authority.

At this juncture, the primary intention of the present study is to

realise how demonetisation affects the public and private sector banks in
Kerala. To achieve this, the present study evaluates the impact of
demonetisation in two facets:

In the first facet, the study evaluates ten years (pre and post-
demonetisation period) average growth rate of various performance
indicators such as the amount of deposits, amount of advances, amount of
NPAs, number of NPAs and Credit-Deposit ratio (CD ratio) of private and
public sector banks in Kerala, This helps to analyse and compare the
demonetisation impact on the performance of public and private sector
banks in Kerala.

In the second facet, the study evaluates and compares the

perspectives of public sector and private sector bank employees in
Kerala towards demonetisation and its impact. Here, the present study
considers how the banks handled the demonetisation situation, what they
experienced what kind of challenges and effects of challenges faced by
them during the demonetisation period, their level of satisfaction towards
various work-life factors during demonetisation. In addition to this, the
study also enquired the bank employees’ general opinion regarding
demonetisation and how they perceive it now (while celebrating the fifth
 anniversary of demonetisation).

Research Questions

In the present study entitled “Demonetisation and its impact on

Public sector and Private sector Banks in Kerala: A comparative study”, the
researcher tries to respond to the following major questions.

RQ1: What is demonetisation? How does it affect the banking sector?

RQ2: Is there any significant difference in the average growth rate of

performance indicators of public and private sector banks during the
pre and post- demonetisation period?

RQ3: What are the major challenges faced by the bank employees during
demonetisation?

RQ4: What are the major effects of challenges faced by the bank employees during
demonetisation?

RQ5: Is there any significant difference in the level of satisfaction of

public sector and private sector bank employees towards work-life
factors during the demonetisation?

RQ6: Is there any significant difference in the opinion of the public sector
and private sector bank employees towards the demonetisation and
its impact?

Significance of the Study

Banks are the fundamental financial intermediaries of the nation;

they channelise the legal tender money to all needs of society. The banking
sector's strength can easily judge the entire financial stability of a country.
Slight changes in government policies make wide variations in the
operations of the banking sector, that also directly reflected in the overall
growth and economic advancement of the nation. Compared to any other
industry, the banking sector’s contribution to the nation's GDP is immense.

The present study discusses the Government of India's 8th

November 2016 demonetisation decision and its impact on Kerala's public
and private sector banks. The study evaluates the impact of demonetisation
from the perspective of bank employees and through the analysis of various
performance indicators of banks during the pre and post-demonetisation
period. Amount of bank deposits, amount of advances, amount of NPAs,
number of NPA accounts, and CD ratio are the crucial performance
indicators that determine the liquidity, profitability and total business of
banks.

In addition to the evaluation of performance indicators, the present

study directly approached the private and public sector bank employees in
Kerala through the well-structured questionnaire and tried to identify the
major challenges and effects of challenges faced by the bank employees
during the demonetisation, their level of satisfaction and their opinion
regarding demonetisation. In the present study, the researcher emphasises
the bank employees’ views and opinions on demonetisation. When
compared to anyone, the bank employees' have an extraordinary experience
of demonetisation. They have a clear picture of the real consequences of
demonetisation, how it affected the banking sector and how long it has
persisted in the banking sector. Moreover, this study constitutes the bank
employees' recommendations and suggestions to overcome the barriers or
negative effects of demonetisation in future. Because, during the hectic
days of demonetisation, bank employees suffered a lot due to lack of
precautions, improper planning, and ever-changing policies from the
government authority's side and the heavy workload and work pressure
from the bank authorities.

It is hoped that this study will benefit (Al-Saud & Hamde, 2018)
 the Human Resource Department of banks to get a clear idea about the
stress and suffocation of the bank employees during the demonetisation
period. This will help them become more vigilant when allotting or
scheduling the work tasks to the employees. The study hoped that the
banking authorities will consider employees' opinions while framing the
new employee management policies and taking stress reduction strategies

Because the employees are the organisation's real assets, the success and
failure of the business always depend upon their performance.

It is hoped that this study will benefit (Al-Saud & Hamde, 2018)
the Government and banking authorities for planning or framing sudden
policies and taking preventive measures beforehand to avoid confusion and
reduce uncertainties in the future. It is hoped that this study definitely will
be a good reference for those who want to know more about the 2016
demonetisation and its impact, especially on the public and private sector
banks in Kerala.

1.1 Scope of the Study

The study is primarily concentrated to evaluate ‘the impact of

demonetisation on the public and private sector banks in Kerala’ mainly
from the perspective of bank employees’ and the ten years (pre as well as
post-period of demonetisation) average growth rate of five crucial
performance indicators such as the amount of bank deposits, amount of
advances, amount of NPAs, number of NPA accounts and C-D ratio of
State Bank of India, Union Bank of India, Canara Bank, Federal Bank,
Catholic Syrian Bank and South Indian Bank in Kerala.

The data were collected from the officers and clerical staff of
sample banks operating in Thiruvananthapuram, Kottayam, Ernakulam,
Thrissur, Malappuram and Kozhikode districts of Kerala.
1.2 Objectives of the Study

The main intention of the present study is to realise the impact of

demonetisation on public and private sector banks in Kerala. To achieve
this, the following objectives have been set forth.

1. To analyse the average growth rate of performance indicators such

as the amount of bank deposits, amount of advances, number of
NPA accounts, amount of NPAs and C-D ratio of public and private
sector banks during the pre and post-demonetisation period.

2. To identify the major challenges faced by the bank employees

during demonetisation.

3. To examine the major effects of challenges faced by the bank

employees during demonetisation.

4. To assess the level of satisfaction of public sector and private

sector bank employees towards work-life factors during the
demonetisation.

5. To evaluate bank employees’ general opinion regarding the demonetisation.

1.3 Operational definition of Key terms used in the study

 Demonetisation:

The Government of India’s decision to ban the ‘legal tender’ status

of highly circulated high denominated banknotes of Rs. 1000 and Rs. 500
as a move to curb black money, corruption and terror funding.
  Impact:

The effects of demonetisation from the bank employees’ perspective

and ten years (pre and post-demonetisation period) average growth rate of
the amount of Bank deposits, amount of advances, number of NPA
accounts, amount of NPAs and CD ratio of selected public sector and
private sector banks in Kerala.

 Public sector banks (PSBs):

Banks are owned and controlled by the Government of India.

(“Commercial Banks: Present Structure”, n.d.) (more than 50% of
shares are held by Government). The selected public sector banks in this
study are State Bank of India (SBI), Canara Bank, and Union Bank of India
(UBI) in Kerala.

 Private Sector Banks:

Banks are owned and controlled by private promoters. (most shares

are held by individual shareholders rather than Government). In this study,
the Federal Bank, South Indian Bank (SIB) and Catholic Syrian Bank
(CSB) in Kerala are the selected private sector banks.

 Pre-Demonetisation period:

The period before the demonetisation. For the analytical purpose of the
study, the pre-demonetisation period is considered from 2012 to 2016.

 Demonetisation period:

The peak period in which demonetisation hardly hit the Indian economy.
(8th November 2016 to December 2016).
  Post-Demonetisation period:

The period after the demonetisation. For the analytical purpose of the
study, here, the post-demonetisation period is considered from 2017 to
2021.

 Comparative study:

The present study considers and compares public and private sector
bank employees' perspectives regarding demonetisation. Moreover, the
study examines and compare ten years (pre and post-demonetisation
period) average growth rate of Performance Indicators such as the amount
of Bank deposits, amount of advances, amount of NPAs, number of NPAs
account and CD Ratio of the Public and Private sector banks in Kerala
during the pre and post-demonetisation period.

 Challenges:

The ‘Challenges’ simply means the new and unexpected work

situations experienced by the bank employees during the demonetisation.
These work situations are either favourable or unfavourable.

 Effect of Challenges:

Effect of Challenges simply means the impact/ positive or negative

aftermath/ result of the challenges experienced by the bank employees
during demonetisation.

1.4 Research Methodology

The study entitled "Demonetisation and its impact on public and

private sector banks in Kerala: A comparative study " is descriptive and
analytical in nature. The prime intention of the study is to evaluate the
impact of demonetisation on public and private sector banks in Kerala. The
present study evaluates the impact of demonetisation mainly from the
perspective of bank employees and the ten-year average growth rate in the
performance indicators of the sample banks operating in six districts of
Kerala. To assess bank employees' perceptiveness, the study surveyed the
issue through a structured questionnaire and gathered information regarding
the challenges and effects of these challenges faced by the bank employees
during demonetisation and their level of satisfaction towards various work-
life factors during the demonetisation period, general opinion on
demonetisation and its impact. In addition to the employees' perspective on
demonetisation, the study evaluates the real impact of demonetisation
through the light of ten years (from March 2012 to March 2021) annual
financial reports of public and private sector banks in Kerala.
 Chapter II, Review of Literature
Ramdurg and Basavaraj (2016) conducted a descriptive study entitled
"Demonetisation: Redefining Indian economy”. In this study, the authors revealed
that demonetisation was not a new term to India or the outside world; it happened
several times in and out of the nation. Moreover, the study threw light on the
experiences of various nations where demonetisation took place. Further, the study
discussed the pros and cons of demonetisation and measures needed to sustain
demonetisation benefits. The authors concluded that common people suffered many
short term inconveniences due to sudden demonetisation, but in future, the long term
benefits of demonetisation would override the short term challenge.

Sangeetha (2016) has developed a descriptive study entitled "Benefits of

Demonetisation : Rich and Poor". In this study, she described the long term as well as
short term benefits of demonetisation. The study revealed the positive side of
demonetisation and hoped that demonetisation would create good days ahead. The
author suggested that the government take necessary steps beforehand to avoid the
immediate chaos and other financial crunches due to the demonetisation.
Simultaneously, the author has delivered her appreciation towards the government
and the entire hidden brains behind the demonetisation decision.

Rajakumar and Shetty (2016) published an article entitled "Demonetisation: 1978,

the present and the aftermath". In this study authors nicely delineate the real history of
demonetisation in India. Further, they tried to compare the 8th November 2016
demonetisation with the 1978 demonetisation of India, and they disseminated the fact
that, during 1978 demonetisation, Rs.1,000, Rs. 5,000 and Rs.10,000 currency notes
were demonetised to eliminate the funding of illegal transactions. Similarly, the study
concerned that, compared to previous demonetisations, the recent demonetisation has
received huge public attention and it created a massive impact on the public's daily
life. At last, the study noticed that the recent demonetisation (2016) process was a pro-
poor measure.

Gupta and Sood (2016) carried out a study entitled "Literature analysis of
demonetisation: Blessing or bane to the Indian economy". In this study, the
researchers tried to determine the real effect of demonetisation on the Indian
economy. For this, they investigated the demonetisation impact on India's formal and
informal sectors and checked whether it was a bane or blessing for the economy. In
this study, authors covered almost all the economic segments such as Indian monetary
markets, banking sector, automobiles, real estate and FMCG sector. Moreover, in this
study authors explained the positive and the negative effects of demonetisation.

Sinha and Rai (2016) published an article on "Aftermath of demonetisation on rural

population". In this study, the authors discussed the impact of demonetisation on rural
India and informal sectors. The authors attempted to diagnose the various problems of
the rural population due to demonetisation, particularly the challenges faced by
agriculturists. In addition to this, the authors illustrated the experience of some
countries that were implemented demonetisation earlier. The study found that the
microeconomic effects of demonetisation, such as the increased amount of
uncollected revenue and restrained political move on terror financing were the
significant advantages of demonetisation and also beneficial for the economy,
whereas the macroeconomic problems due to demonetisation severely hit the common
people and the informal sector, especially those who opted for minimum cashless
transactions.

Balamurugan and Hemalatha (2016), in their study "Impacts on demonetisation:

Organised and unorganised sector", highlighted the short term and long term impact
of demonetisation on the various organised and unorganised sectors. Authors opined
that demonetisation hardly hit the tiny scale establishments than medium & large
scale businesses. The study concluded that demonetisation affected the general public,
but at the same time majority of the people considered the demonetisation was an
inevitable decision from the side of the government of India. Even they faced several
difficulties due to the sudden demonetisation; the people gave heartfelt support for the
demonetisation drive. The authors added that demonetisation did not fully curb black
money but played a big role in clampdown black money. After analysing the study's
findings, it is clear that the authors have a neutral opinion towards the demonetisation
move and its implication.

Singh and Singh (2016) studied the "Impact of demonetisation on the Indian
economy". In this study, the authors mainly tried to highlight demonetisation's
positive and negative consequences on various economic variables, and the short-term
and longer-term implications of demonetisation. In order to find the immediate impact
of demonetisation on the Indian stock market, authors have done a comparative
analysis between the Indian stock market and the Asian stock market. Findings of the
study stated that demonetisation adversely affected real estate, agriculture, luxury
goods, consumer durable and non-durable goods in the short run. Whereas e-
commerce, fin-tech, mobile wallets, online -retail, net and payment banks, plastic
cards and e-market have been positively impacted due to demonetisation. Moreover,
this study also assured exhaustive knowledge and more clarity on the demonetisation
experience of various countries such as Russia, Zaire, Nigeria, Ghana, Zimbabwe,
North Korea and Myanmar.

Sherline (2016), in her article "Demonetisation as a prelude to complete financial

inclusion", described the importance of demonetisation as a measure of financial
inclusion. The author noted that financial inclusion is the policy that ensures equal
access to banking services and other financial services to the low-income segments of
society at an affordable cost. The study found that the poorer sections of the society
could not access financial services from the organised financial system. The author
opined that there would be a good credit and financial services delivery mechanism
and the demonetisation drive is considered the latest solution for complete financial
inclusion.

Nandhini and Kalaimani (2016) have enacted a study on "Demonetisation: Impact

on the Economy". In this study, the authors observed the immediate effect and long
term benefit of demonetisation. The study opined that the sudden move of
demonetisation hardly hit the whole economy, especially the unorganised sector.
However, the demonetisation opened up a big arena for the growth of various digital
payments and it also created a digital culture among the people. Authors argued that
India is becoming a superpower among the world nations through these digital
transformations. After analysing the study's findings, it is clear that the authors have
positive hope towards the demonetisation move.

Mali (2016), in his article "Demonetisation: A step towards modified India",

expounded the demonetisation effects on selected sectors in India. This article is
based on secondary data, and the author primarily focused on the demonetisation impact
on the micro-businesses, E-Wallet businesses and online retail stores. The study
highlighted that during the initial period of demonetisation, online retail stores such as
Flipkart, amazon, snapdeal and other online retailers had temporarily stopped their
cash on delivery services. Likewise, small and micro businesses felt an acute digital
divide. Moreover, the study found that E-wallet firms are the biggest beneficiaries of
the demonetisation. According to the author's point of view, demonetisation created
some positive and negative impacts on different sectors in the short run. However, in
the long run, demonetisation would positively impact suppressing black and fake
money.

Dasgupta (2016) carried out a study on "Theoretical analysis of demonetisation".

This study was purely theoretical and akin to an economics lecture note embedded
with several equations and simple graphs. Here, the author tried to analyse the
implications of demonetisation from an ‘economics’ perspective. Moreover, the study
discussed how the monetary framework of the economy was affected by
demonetisation. The author adopted the "money market Equilibrium" and "IS-LM
Equilibrium" concepts for this economic investigation. This study also put some light
on the impact of demonetisation on price and inflation.

Nag (2016) has conducted a study on "Lost due to demonetisation". Like every other
author, he also started with the demonetisation history of India and questioned the
legality of the latest demonetisation exercise. This study gave more concentration on
the adverse effects of demonetisation. For all his arguments, the author gives correct
explanations with the help of authentic data and great examples. Moreover, in this
study the author has beautifully showcased his concerns about the difficulties faced by
the general public due to demonetisation. According to the author's point of view,
demonetisation was a very effective anti-corruption move. However, its effectiveness
stood only for a short term, and it would not stop the onward journey of the chariot of
corruption.

Kerala State Planning Board Report (2017) stated ‘how the impact of
demonetisation affected the state economy of Kerala'. As per the planning report, the
cash-dependent economy was the most affected victim of demonetisation and it was
followed by informal or unorganised sectors of Kerala such as fisheries, coir,
handlooms, cashew processing, crop and plantation agriculture. The report stated that
compared to others, these categories faced the huge difficulty of demonetisation. In
addition to these two categories, sudden demonetisation adversely affected the other
three segments namely Primary Agricultural Credit Societies (PACS), manufacturers,
service organisations like banks, especially the cooperative banking sector and
tourism sector of Kerala; And these three segments come third, fourth and fifth
positions respectively in the order of most affected category. In addition to the above,
the report stated that demonetisation caused several economic disruptions in the flow
of ‘remittances’.

Reserve Bank of India (2017) has conducted a study entitled ‘Macroeconomic

impact on demonetisation: A Preliminary Assessment’ during the initial periods of
demonetisation. The study reported that the overall impact of demonetisation on the
real economy has been last only for a short period. The adverse effect of
demonetisation was felt mainly in November and December 2016; in the mid of 2016
February, the adverse effects disappeared. Report stated that, demonetisation has a
modest impact on the growth of Gross Value Added and a temporary impact on the
forex market. While considering the banking sector, there found a surge in the
deposit, especially a surge in the number of PMJDY accounts that led to an increase
in the liquidity position of banks. Moreover, sudden demonetisation has resulted in an
increase in the import of gold, whereas it hardly hit the export of garments, gems and
jewellery. Likewise, demonetisation also caused a sharp decline in the real estate
sector and a sharp increase in the usage of digital payments.
Kumar and Chaubey (2017) have conducted exploratory research on the topic
“Demonetization and its impact on the adoption of digital payment: Opportunities,
issues and challenges". The study's main objective was to assess the people's trust and
confidence in the digital payment system during post- demonetisation. The authors
selected 300 sample respondents for the study and collected data through a well-
structured questionnaire. Descriptive statistical techniques like mean and standard
deviation applied for analytical purposes. Findings of the study stated that 33.9% of
people had used debit cards as the most likely payment method; 20.5 % of them used
cash, 16.2% preferred credit cards and only 13.4% of people preferred cheques as the
most likely payment method. The study concluded that the Indian economy had faced
a heavy cash crunch due to demonetisation. During the pre-demonetisation period,
most people were reluctant to use cashless transactions. However, after the sudden
demonetisation, 83% of the people shifted from cash to digital transactions.

Nadar and James (2017) have framed a study entitled "Impact of demonetisation:
An analytical study". Here, the authors elucidated the positive and negative impact of
demonetisation on various dimensions such as black money, counterfeit currency and
other similar things. In this research work, the authors nicely depicted the various
phases of demonetisation in India and its level of impact. As per the result of this
study, the authors revealed that 93% of people were positively accepted the decision
of demonetisation, and the remaining 7% were disclosed their negative opinion about
the move of note ban.

Guerin et al. (2017) have published a study entitled "Insights on demonetisation from
rural Tamil Nadu: Understanding social networks and social protection". The study
talks about the unanticipated impact of demonetisation on different classes of the rural
population in Tamil Nadu. For this, authors have collected pre-and post-
demonetisation villagers' experiences through surveys and direct interviews. This
study considered both quantitative as well as qualitative data. The survey’s sample
size was 2,692 individuals, from 492 households of ten villages in rural Tamil Nadu.
After carrying out the detailed analysis, the study found that most villagers lost their
jobs due to demonetisation; some got fewer wages, and others got delayed payments.
Authors noticed that pay cuts were mainly raised for Dalits and middle castes.
Compared to Dalits and middle castes, demonetisation's worst effect on employment
affected the upper caste people.

Abhani (2017) developed a research paper entitled "A study on the impact of
demonetisation over the banking sector with reference to Veraval city". This study
investigated the impact of demonetisation on the banking sector. The author has
chosen 100 bank employees of 13 selected banks in Veraval city and used structured
questionnaires for data collection. After the analyses of data collected, the author
found that 55% of bank employees were agreed that demonetisation has a positive
impact on the economy. Likewise, the study found that saving and current accounts
were highly affected, and 51% of employees admitted that customers were moving
towards online banking. In addition to the above, the author noted that when he
compared the recent demonetisation with the earliest two demonetisations of India, he
found that the latest (8th November 2016) demonetisation was more successful than
the other two. As per the study's findings, the author stated that it could not vanish
entire black money within one or two months. However, the immediate
demonetisation created huge fear in the minds of black money holders and parallel
economies. At last, the author opined that the government should take more
compulsory measures like demonetisation to crack down on corruption, terrorism,
black money, and other parallel things from society.

Gupta and Kumar (2017) have drafted an article entitled "An analytical study of
demonetisation and its impact on the Indian economy". Here, authors explained the
study in two dimensions; in the first part, authors have given a detailed description of
major reasons behind the demonetisation, problems after demonetisation in India and
the impact of demonetisation on the education sector, real estate sector, corruption,
service sector, business process, economic growth and cost of the commodity.
Likewise, in the second segment, they have discussed the role of demonetisation in
the growth of cashless transactions in India. Authors opined that demonetisation
policy increased the use of various e-payments services such as Unified Payment
Interface (UPI), Prepaid Payment Instruments (PPIs), Aadhaar Enabled Payment
System (AEPS), Point of Sale, Paytm. The authors also argued that these e-payment
services reduced the threat of theft and loss of money on the one side and facilitated
risk-free transactions. After analysing various segments of the economy, the authors
concluded the study that the strategic decision of demonetisation was considered the
foundation of drastic economic reform. This move led to a positive trend in the
growth of cashless transactions in India.

Prabhu et al. (2017), in their study "Demonetisation and its effect on the banking
sector", attempted to discover the positive and negative impact of demonetisation on
various bank operations. According to the authors' view, the banking sector was the
biggest beneficiary of demonetisation than any other sector in India. This study
disclosed that the immediate demonetisation has resulted in a great hike in the number
of deposits, customer base, the demand for Government bonds and the improved
digital interface in banks. In addition to this, the study showcased several negative
effects faced by the banks due to demonetisation, such as merchant discount rate,
huge stress in employees, downward sales in SME business and increased number of
NPAs in banks. The authors also added that, during the initial days of demonetisation,
banks were fully focused on exchanging currency notes and could not sell any loan
products.

Adhikary and Bora (2017) carried out an exploratory study entitled

"Demonetisation : A case in Indian perspective". In this study, authors have elucidated
the short term and long term positive and negative impacts of demonetisation on the
Indian economy. After analysing all the positive and negative sides of demonetisation,
the study concluded that the sudden move of demonetisation affected the common
man to some extent. However, the demonetisation was inevitable for the larger
interest of the country. The authors added that the demonetisation move would
support the Indian economy in the future.

Patel (2017) conducted an imperative study on "Demonetisation - A way to the

cashless payment system in India". In this study, he listed out the various situations
where people preferred cash transactions and the risk embedded in the cash
transactions. Likewise, the author also explained about advantages and disadvantages
of a cashless system and various cashless payment options such as plastic cards, e-
wallets, UPI, point of sale. Author emphasised that demonetisation had a positive and
negative effects on the Indian economy. Although after the demonetisation, people
have gained more awareness of the use of various digital payment modes. At last, the
author appreciated the RBI and the Government of India for their significant role in
promoting the cashless system. The author also added that demonetisation was the
right decision of India's government, which would help the Indian economy achieve
complete digitalisation.

Sarma (2017), in his research work "Demonetisation 2.0: Aims and Achievements",
expressed his strong annoyance about the demonetisation 2.0 (8th November 2016
demonetisation) decision of the government. The author emphasised that the
enactment of the demonetisation was an unsystematic and anarchic procedure that led
to the scarcity of cash in every nook and corner of India. Compared to any other
sector, the informal sector of India were the greatest sufferers. In this study author
beautifully narrated his suspiciousness on the soundness of the Indian demonetisation
policy. In addition to this, the study briefly discussed the motivational factors behind
the demonetisation, economic impacts and legality of demonetisation, India's earlier
demonetisation exercises and digital India. The author concluded the study with the
certitude that demonetisation was just could be a skinny scratch on the surface of the
enormous menace of black money and corruption that had negatively affected our
society.

Banerjee and Sayyed (2017) conducted a research work entitled “A study on the
impact of demonetisation on e-commerce industry". The study's main objective was to
analyse the consumers' preference towards various electronic payments and their
frequency of online purchase during the pre and post-demonetisation period. The
study's findings stated that, during the pre-demonetisation period, the frequency of
shopping through the retail shops was 48%. Consumers used to buy fewer products
through online shopping. In contrast, online shopping frequency increased drastically
from 27% to 53% in the post-demonetisation period. The use of the debit card was
increased from 14% to 43%; due to the heavy cash crunch, consumers purchased
more products online than a retail shop. The authors concluded that demonetisation
opened up mammoth opportunities for the e-commerce industry and would be a huge
boon for the digital payment market.

Kumar (2017) constructed a study entitled "Demonetization and cashless banking

transactions in India". In this study, the author investigated the role of demonetisation
in cashless banking transactions. The study analysed that, in India 98 % of the
economic transactions by volume were done through cash. Furthermore, the study
also identifies a list of nations that ranked as the most cashless nations in the world.
Singapore placed in the first position in this list whereas India bagged 16 th position.
After carrying out a detailed analysis, the author clarified that the Indian economy
moved from cash to cashless after the strategic move of demonetisation. There was
also enormous growth in credit/debit cards, net banking, and other online payment
mechanisms. The study also explained the merits and demerits of cashless
transactions and the various cashless payment options available in India.

Ganiger and Ranganatha (2017) researched "Demonetization and its impact on

social development”. This study stated that demonetisation adversely affected the
real-estate business, self-employed professionals, economically richer sections,
private education schools, professional colleges, and those with an unaccounted
source of money. According to the author’s point of view, demonetisation badly
hit the illiterate Indian farmers. However, it also helped the farmers to sell their
products directly to the customers without the intervention of intermediaries; therefore,
farmers got an actual price from the customers. In addition to this, the study
mentioned the positive side of demonetisation. Authors remarked that
demonetisation boosts the bank deposit and savings, transforms the cash economy into the
digital economy, supports government finances, and ensures efficient bond market
and mutual fund. And all these positive factors uplift the growth of Gross
Domestic Product.

Prajapati and Singh (2017), in their research work entitled "A study on the impact of
demonetisation on online transactions", discussed the positive influence of
demonetisation in the growth of digital transactions in India. In this study, the authors
have given louder applause to the Government of India for the brave decision of
demonetisation and opined that demonetisation transforms the country towards a
cashless economy. In addition to this, the paper discussed the major factors that
discourage the usage of cashless transactions, problems and prospects of the cashless
system, and also put some light on the short term and the long-term impact of
demonetisation on e-commerce in India. After conducting a detailed study, the
authors summarised that, during demonetisation there was a flood in demand for
digital payments; and the brave decision of note ban caused an increase in the use of
mobile wallets.

Balaji and Balaji (2017), in their research work "A study on demonetisation and its
impact on cashless transactions", discussed how demonetisation influenced cashless
transactions. The authors add several crucial examples of demonetisation across the
world. Author opined that adopting the Euro by the European Union countries is the
best and most well-known example of demonetisation. In addition to this, the authors
spelt out the advantages of cashless transactions and the best five cashless payment
options used in India. Finally, they concluded that a cashless system was a
requirement and a need for society, but at the same time, there also presents a huge
risk of cyber-crimes in cashless transactions.

Ganesan and Gajendranayagam (2017) conducted an analytical study, "Impact of

demonetisation on the Indian economy". In this article, the authors tried to analyse the
implications of demonetisation on various sectors. Their study was diagnostic and
analytical in nature, and completely based on secondary data. For the analytical
purpose, they were used a paired-sample t-test and regression to understand the
immediate effect and its impact on the Indian economy. The study's findings
summarised that the agriculture sector showed an upward trend compared to previous
years, but financial and real estate showed a negative impact.

Muthulakshmi and Kalaimani (2017), in their research work entitled "Impact of

demonetisation on the Indian economy," focused on various strategies used for
tackling the black money and the parallel economy. Moreover, the study highlighted
the demonetisation experience of various countries, such as Russia, North Korea,
Zaire and Myanmar. According to the authors' point of view, demonetisation was one
of the major steps toward eradicating black money in India. Meanwhile, the authors
noted that the government could not curb black money fully, but at the same time, the
demonetisation moves clamp down the black money to a large extent.

Shah (2017), in his study "Impact of demonetisation on rural India", explained about
impact of demonetisation on rural India, particularly common people, the agricultural
sector and farmers. The author argued that demonetisation created chaos among the
general public. During demonetisation, farmers could not purchase seeds from the
market due to a heavy cash crunch. There was also a huge fall in demand for agro
products in wholesale markets. The author also added that the preparation for the
demonetisation was lop-sided, and it adversely affected the common people and the
agricultural sector.

Uke (207), in his research work "Demonetization and its effects in India", focused on
the positive as well as a negative effect of demonetisation on the various segments of
the Indian economy, such as the Indian financial market, real estate, automobiles,
assets backed loan and Fast Moving Consumable Goods industry. The study found
that demonetisation has a short term negative impact on Indian financial markets.
Moreover, in this study author try to embedded several experts' and economists'
opinions about the consequences of demonetisation. According to the author's point of
view, demonetisation was a bold decision of the government, and it could be a big
success to some extent. Its real positive impact will be visible shortly.

Dash (2017), in his research paper "A study on the socio-economic effect of
demonetisation in India", has delineated the social and economic impact of
demonetisation. This research revealed that the negative impact of demonetisation
was more felt in the social sector, particularly the cash-dependent section, poor and
common people. The author also noted that demonetisation would positively impact
the social sector in the long run through the restraint meant of black money and digital
transformation.

Nataraj (2017) has chartered a research paper entitled "Demonetization and its
impacts". In this paper, he illustrated the positive and negative effects of
demonetisation on various sectors of the economy, such as the Indian financial sector,
banking sector, rural and informal economy, formal economy and digital economy,
and the macroeconomy. Findings of the study stated that initial hiccups of
demonetisation and heavy cash crunch deeply affected the economy, especially the
informal sector found more adverse effects. He added that Union Government
accounts were mounded with a good portion of wealth as tax revenue. According to
the author's presumption, demonetisation would be positive for large organised
players in the retail sector and banking sector. Finally, the study exposed that the real
 effects of demonetisation on the economy are neutral, which means the positive
effects far outweigh the negative outcomes.

Shirley (2017) conducted research work, "Impact of demonetisation in India". In

this study, the researcher explained how demonetisation influenced the domestic
sector, farming- fishing industry, business, jewellery, real estate, black money
hoarders, counterfeit currency, hawala, bank deposits, and the IT sector.
Moreover, the author mentioned the demonetisation experience of different
nations across the globe. Finally, the study opined that the idea of
demonetisation was good, but its design was fundamentally flawed. Due to its
improper planning, almost all the sectors of the economy were faced too much
inconvenience during demonetisation.

Yohavarshini et al. (2017), in their article "A study on demonetisation in

India and its effectuations", expounded the implementation of demonetisation
under three segments; the first segment comprehends the measures taken by the
government of India before demonetisation. In this section, the authors stated
several positive government initiatives such as Jan Dhan accounts, Aadhaar card
and digital India schemes. Likewise, the authors exposited the second segment,
'India: during demonetisation' and 'India: future of demonetisation'. Furthermore,
the study listed out the features of new currencies in a tabular form and
beautifully portrays the merits and demerits of demonetisation, positive and
negative experiences and opinions of different personalities towards
demonetisation. In addition to this, the study showcased the long term and short
term effectuations of demonetisation, and finally, they suggested some tips for
cop-up with demonetisation.

Methodology

The study selected the largest district of India, Kachchh, for surveying the household. It
is located in Gujarat state and covers 23.27 percent of total geographical area of the state
and has
65.18 percent of total district population living in rural areas. (Census 2011). There are

28
total 10 taluks/block and 949 villages in the district. The density of population is
significantly low at 46 persons per sq.km. as against the state average of 308 persons per
sq.km.

For the current study, two taluks namely, Rapar and Mundra were selected considering
the diversity among them in terms of their economic activities, geographical location and
banking penetration. From the supply side of financial inclusion, as per 2011 census,
12.7 per cent and
6.27 per cent of the villages had banking facilities in Mundra and Rapar respectively.
Only five villages in Mundra and Rapar taluka (with one village – Chitrod, having only
bank counter in Rapar taluka) had bank branch at the time of demonetization 2. Five
banked villages and five unbanked villages were selected for the sample survey
(unbanked villages were selected based on the size of the population more than 3000
population as per census 2011). The analysis is based on a sample of 449 households, as
well as the information regarding impact of demonetization, status of financial inclusion,
and availability of financial services in the villages gathered from the office of village
panchayat, the head of APMC market, village dairy co-operative societies, etc.

Financial inclusion is a process of ensuring access to financial services, including timely

and adequate credit where needed by the vulnerable groups such as weaker sections and
low income groups at an affordable cost. (C Rangarajan, 2008) In addition to ensuring
availability and accessibility of financial services experts have also emphasized on
effective use of such services, referring to the demand side of financial inclusion. The
Rangarajan Committee notes that financial exclusion is also caused by demand side
issues. Unless some initiatives are taken on the demand side, or in the “real sectors”,
mere supply side solutions from the financial sector cannot work. Financial Inclusion is
also about greater financial literacy and consumer protection so that those who are
offered the products can make appropriate choices” (Raghuram Rajan, 2016) 3. Merely
giving access to financial services does not always result in the use of such services
(Beck et. al. 2007). It is equally important to emphasize the effective use of banking
facilities along with providing access to such facilities. Thus, both demand and supply
side of financial inclusion is considered important.

For our study the two segments of the sample have been created: one, which is inclusive,
and the other, which is exclusive of formal banking facility. The impact of

29
demonetization has been examined for both these segments. (Chart 1) For creating these
segments, both supply side and demand side approaches have been adopted. Supply side
refers to the presence or the absence of bank branches – brick and mortar – in the village,
while demand side refers to the active or the passive use of banking facility.

Chart 1 Classification of rural population based on status of financial inclusion

Active user of
banking facilities
Demand
side
Passive user of
banking facility
Financial Inclusion
in Rural areas No bank branch in
the village at the
time of
demonetization
Supply side
Having bank
branch in the
village at the time
of demonetization

The active and passive users are classified based on the number of banking facilities
used by the household from the list provided4. The households who frequently use at
least three services from the list are classified as active users, otherwise as passive users.
The logic followed here is that merely using one or two facilities out of those listed
would not have provided enough ease of managing cashless transactions particularly in
the hustle and bustle of cash shortage at the time of demonetization.

Measuring the impact of demonetization

The impact of demonetization is measured in terms of both monetary and non-monetary

(mainly time). The monetary impact is captured by two obvious economic variables of
economic transaction - consumption and income. The non-monetary costs mainly
include the time value. The details of the variables studied for monetary and non-
monetary impact are provided below.

30
Chart 2 Monetary and Non-monetary Variables

Loss of income
at the time of
exchange of
Income currency
(wage rates, price
and sale of crops, Postponement
Sales and Profit) of
income/payme
Monetary nts
Impact
Cost on currency
Expenditure exchange and
cash withdrwal
(HH consumption,
purchase of raw
materials Reduction/postpon
ement of exp.
Shift to
credit/borrowing

Time spent for cash

withdrawal

Non Monetary
Impact
Time taken for normalising
the economic transaction

The diversity and complexities of economic activities in rural areas make it difficult to
measure the impact of demonetization directly for all monetary variables through an
empirical study. Hence, the three point rating scale is used to capture the responses
ranging from no impact at all, moderate impact and extremely high impact for some
relevant information.

Hypothesis: The impact of demonetization on the group of people who had access to

31
formal banking system is lower as compared to the one who did not have access to
banking facility.

Section III Status of financial inclusion in Kachchh district

Mundra is a relatively more industrialized area and has witnessed growth in terms of
investment, infrastructure development and port related activities. It has 77.4 percent
literacy

rate which was higher than the district average of 70.6 percent while Rapar is a
backward taluka with the lowest literacy rate of 54.8 percent. There are total 97 villages
in Rapar and 62 villages in Mundra. As per the 2011 census, in Kachchh, 61.51 percent
of rural households were availing banking facilities. While in Rapar taluka, 27.46
percent and in Mundra taluk 61.51 percent of the rural households were availing banking
facility. The credit to deposit ratio of Kachchh district remained below 40 percent (150 th
SLBC, Gujarat, June 2016).

As per our survey, 55.7 percent households reported having bank branch in the village
while

44.3 percent households did not have. Although the branch penetration of the banks is
poor, around 91 percent of the households reported at least one family member holding a
bank account. Out of this, 86.5 percent households opened bank account before
demonetization while only 13.5 percent opened bank account after demonetization. So
exchanging the old currency notes and shifting from cash to cash-less transaction
particularly at the time of demonetization should not be extremely painful at least for
these 86.5 percent households. However it is also important to note that 42 percent of
these bank account holders reside in unbanked villages and the average distance from
home to the bank branch for these households is 23 km. Such a long distance is certainly
a matter of concern for those who did not have bank branch in their own village as they
have to travel and spend a lot of time as well as money for the exchange of notes and
managing cash-less transactions. As per the RBI efforts towards financial inclusion, the
unbanked villages have been provided with banking correspondents (Bank Mitra) to
carry out banking transactions. However, during our study it was found that only 20
percent of the households were aware of the banking correspondent in the village and

32
merely 8.5 percentage have ever availed banking correspondent services in any form.

It is being increasingly recognized that addressing financial inclusion requires a holistic

approach addressing both supply and demand side aspects (Dev, Mahendra S 2006). So
far we only looked at the profile of the rural household from the supply side of banking
facilities. But having banking facility and holding bank account do not ensure active and
frequent use of banking facilities. This is also evident from the fact that there is an
increase in the number of bank accounts while there is a slow increase in bank deposits
(Nair, 2014). Our survey revealed that many of the respondents were unaware of the
names of their bank and the branch despite of having a bank account. Someone who
holds the bank account but not using it regularly might also suffer more than the one
who is actively using banking faculties. Based on the responses of the surveyed
households, it was found that although 91 percentage of the households had bank
accounts, only 43 percent used it for saving and depositing money. 65 percentage of
these respondents were either employees or businessmen and entrepreneurs. Most of the
households were not aware of facilities like demand draft, mobile banking or online
banking. Although, 66 percent households possessed a smart phone, very few
households were comfortable using mobile banking.

Table 1: Responses for Banking facilities Usage (%)

Banking Facility and Instrument Frequency

Respondents* (%)
Avail benefits of govt. schemes 17
Receiving and making payment 36
Saving and depositing money 43.2
Borrowing 20
Cheque 35.1
ATM 32.7
Demand Draft 3.9
Debit card 15.7
Credit card 7.6
Mobile Banking 8.1
Online Banking 6.9
Source: Calculation based on the survey data (September-October 2017)
Note: *The responses are considered out of the number of household

33
 having bank account

As discussed in the methodology the respondents have been classified as active and
passive users of banking facilities. Only 30 percent of the respondents have been using
minimum three of the above listed (in table 1) services whereas 70 percent of the
respondents are using only two or even less than that. Out of these 70 percent, 11
percent do not have bank account whereas other 89 percent have bank account but not
using it effectively. Out of total respondents, almost 32 percent are such that they do
hold bank account but have not availed even single banking facilities before
demonetization.

Table 2: Test of Independence

Income and Type of Banking Facility
User
Type of user Percentage Average
of household monthly
(%) income (in ₹)
Active 30 30290*
Passive 70 17559*
* Significant at 1 %

A significant difference in the average monthly income across active and passive
banking facilities users was also observed, which indicated existence of a strong
association between income levels and the use of banking facilities (T statistics 4.062,
SE 31231.150). The literature has been suggesting that one of the prime reasons for
demand side of financial exclusion is low income level. The results support this
argument that low financial literacy, low income level and inadequate awareness have
significant association with usage of financial facilities (Chithra and Selvam 2013,
Christabell and Vimal Raj, 2012, NSS 59 th Round, All India Debt and Investment
Survey). We also found a strong association between the availability of bank branch and
the type of user of banking facilities. This is examined through the Chi-square test

34
between the two variables (table 3)
Table 3: Test of Association
Banking Facility – Availability and
Usage

Active Users Passive Users

No Banking 17 % 83 %
Facility
Banking Facility 26 % 74 %
Chi-square = 4.7 P value = .03
Source: Calculation based on the survey data

In each taluka, only five villages had banking facility at the time of demonetization and
only 30 percent of the households were actively using various banking facilities. In this
environment it is imperative to observe whether there is any significant difference in the
impact of demonetization among the people who had banking facility in the village and
the people who did not have.

Impact of demonetization Cost of

exchange
In this section we examine the monetary and non-monetary impact of demonetization. It
was observed from the collected data that almost 62 percent of the respondents
exchanged and 16.5 percent deposited old currency notes in banks with the average
value being approximately ₹ 30000 and ₹ 61000 respectively. Those who did not
exchange/deposit reported not possessing Rs. 500 and Rs. 1000 currency notes as a
prime reason (60 percent) for not exchanging the old notes. Interestingly, there are
around 4 percent of the respondents who did not have a bank account and still managed
to exchange or deposit old currency notes in the bank. Around 29 per cent of those who
deposited old currency reported the amount ₹100,000 and above, whereas merely seven
per cent of those who exchanged the notes reported the amount ₹100,000 or more. 50
per cent of those who participated in exchanging/depositing the currency notes reported

35
the amount below ₹15,000. Although the underreporting of the actual amount
exchanged/deposited may certainly not be denied.

A skewed distribution in case of income loss while standing in the queue at the time of
demonization was also observed. More than half of the households who stood in the
queue for exchange or depositing the currency reported that they suffered loss of income.
The average income loss is estimated around ₹ 9669, but only 15 households reported
the loss of income more than ₹ 20,000 which is equivalent to the monthly income of the
household from primary occupation.

Table 4: Demonetization Experience: Exchange of Old Notes

Particular Responses
(%)
Percentage of household exchanged notes 62
Percentage of household deposited old notes 16.5
Average amount exchanged during demonetization ₹ 34680
An average days spent in the queue for exchange of notes 7.2
An average hours spent per day while standing in the queue 4.9
Percentage of household reported loss of income while 37
exchanging notes (52 % of those who exchanged/deposited
old
notes)
Amount of income lost while standing in the queue ₹ 9669
Source: Based on the survey data (September-October 2017)

As suggested by the past literature, the access to formal banking system would possibly
have the lower impact of demonetization on the group of people compared to the one
who would not have access to banking facility. Availability of a bank branch in the
village and actively using the banking facilities are the two important indicators that
were included in the survey to identify financial inclusivity of the population. The test of
independence is run for four variables, (i) the number of days’ employment lost for
exchange of notes, (ii) number of hours lost per day and (iii) income loss and (iv)
number of months taken to normalize the economic activities. This is viewed against the
amount of money exchanged or deposited. The results provided in table 4 indicate that

36
 the amount of currency notes exchanged is higher for the financially included group as
compared to the excluded group, although it is statistically
different only in case of demand side classification i.e. active and passive users of
banking facilities. The income lost on account of waiting in the queue for currency
exchange is also higher for the group that is financially inclusive as compared to the
group that is not financially inclusive. Both these variables would obviously be strongly
linked with the income of these groups, however, that is not the issue this study is trying
to address. What is important to observe here is that although the amount of money
exchanged and the income lost is less for the excluded group, there is no difference in the
number of days lost while standing in the queue and more importantly the number of
hours spent in the queue is higher for the financially non-inclusive group for both demand
and supply side. Also it is observed that the proportion of respondents reported the loss of
income, is significantly higher for the households without banking facility than the
household with banking facilities although the amount is lower. Out of those who did not
have banking facilities almost 62 percent of the respondents reported loss of income vis-a-
vis 44 percent who reported loss with banking facility in the village. This association is
also found statistically significant through the Chi-squired test (χ2 (1) = 3.24, P
< 0.10).

Table 5: Test of Independence

Cost of Demonetization and Financial Inclusion (supply & demand)

Mean Values
Particular
Financial Inclusion Financial Inclusion
Supply Side Demand Side
Banked Unbanked Active Passive
Village Village User User
Amount of currency exchanged
₹ 37,012 ₹ 31,732 ₹ 44,569** ₹ 31,774**
No. of days lost while standing in
7 7.23 7.27 7
queue
Hours spent per day 4.18* 5.9* 3.95* 5.2*
Amount of income lost while
₹ 11,000 ₹ 8321 ₹ 13712 ₹ 8581

37
 standing in queue

No. of months taken for

3.3** 3.7** 3.82 3.43
normalizing the economic
activities
Source: Calculation based on the survey data
* Significant at 5 %, ** Significant at 10 %

Graph 1 provides the responses that measure the extent to which demonetization had an
impact on the household consumption. The mean value is estimated by the three point
rating scales, mentioned above. The graph clearly indicates that the impact of
demonetization was felt in three areas (i) getting the change of ₹ 2000 notes (ii) the
households had to shift to credit for making their purchase and (iii) the households
experienced shortage of cash for the routine transactions. Social set up and relationship
based trust is very strong in rural area and hence although people faced severe shortage
of cash, they managed their household purchases through credit system. 65 percent
shifted to credit purchases due to which the postponement of consumption was minimal,
around 46 percent of the respondents reported that they did not experience reduction in
consumption and around 51 percent of the respondents said they did not face any issue
of postponement of consumption. While asking for the details of the nature of
postponement / decrease in consumption, the list consisted of mostly daily household
commodities such as milk, ghee, oil, sugar, and other two prominent items include
clothes and mobile recharge. Postponement of consumption also happened in case of
commodities like, vehicle, television, and mobile handsets.

38
 Graph 1 Impact of Demonetization on Consumption (Mean Value)

2.5
2.15
Mean Value

2.02 2
2 1.74 1.73
1.63
1.5

0.5

0
Problem of ₹ 2000 Purchased on credit Cash Crunch Borrowing for HH Reduction in Postponement in
change expenditure consumption consumption
Impact on Household and Occupation Activities

Source: Calculation based on the Survey data

39
Table 6 provides results of the t-test for examining whether the supply side and demand
side of financial exclusion has resulted in higher impact on the household consumption
as reported by the respondents in the rural area. Shortage of cash on hand, availing
borrowing for managing household expenses and reduction in consumption are the
variables that indicate statistically significant difference across the group of people with
and without the banking facilities in the village. Whereas considering the demand side
factor, the impact in terms of managing household expenses by shifting on credit,
postponement of consumption, reduction in consumption and also borrowing money for
managing household expenses are significantly higher for passive banking facilities
users.

Table 6: Test of independence

Impact of Demonetization on Consumption & Financial Inclusion (supply &

demand)

Mean Rating
Financial Inclusion Financial Inclusion
Particular
Supply Side Demand Side
Banked Unbanked
Active Passive
Village Village
Problem of ₹ 2000 change 2.13 2.17 2.18 2.14
Make purchases on credit 1.98 2.06 1.9** 2.05**

Cash Crunch 1.91* 2.12* 1.95 2.01

Borrowing for household
1.66* 1.84* 1.48* 1.81*
expenditure
Postponement in
1.64 1.62 1.51* 1.66*
consumption
Reduction in
1.67* 1.79* 1.56* 1.77*
consumption

40
Source: Calculation based on the Survey data
* Significant at 5 %, ** significant at 10 %

41
 Graph 2: Impact of Demonetization on Occupational Activities
Percentage Responses
No impact
7%
3% Reduction in income/business by less than
50
3%
%
30%
6% Reduction in income/business by more
than 50 %
Experienced cash crunch
11%
Not having work/business for few days

Delay in payment
Made purchases on credits
12%
Business got shut
3% 25% down
Other impact

Source: Calculation based on the survey data (September-October 2017)

Table 7: Impact on Occupational Activities – Test of Association

Percentage Responses

Financial Inclusion Financial Inclusion

Supply Side Demand Side
Impact
Banked Unbanked
Active Passive
Village Village
No impact on economic
62.2 37.8 25 74.8
activities
Reduction in the
56.7 43.3 23 77
income/business by less than
50
%
Reduction in income/business
38.5 61.5 30 70
by more than 50 %
Experienced cash crunch 56 44 18 82
Not having work/business for
34.8 65.2 13 87

42
few days
Delay in payments 61.5 38.5 31 69
Made purchases on credits 50 50 28.6 71.4
Business got shut down 23 77 15.4 84.6

χ2 = 15.503, (df 8) χ2 = 7.385, (df 8)

P = 0.05 P = 0.496
Source: Calculation based on the survey data (September-October 2017)

43
It is found that 30 percent of the respondents have realized no impact of demonetization
on their occupation and income. 35 percent of these respondents are employees. In fact
66 percent of the total employees reported no impact of demonetization at all. Around 11
percent reported of not getting the work for few days, 50 percent of whom were the
agriculture labourers. This set of people actually earned through an activity of standing
in the queue for exchange of notes for others but they were shying away from reporting
the same. When asked about was there any support available from various organizations
with which they were associated, 93 percent responded that the institutions such as
banks, APMC, fertilizers trading company, employer organizations, etc. did not provide
any kind of support at the time of demonization. Whereas when asked to the APMC
officials or bank officials and village Sarpanch they all narrated of how various support
system such as bank queues arrangements, help for filling up bank forms, service of
online transaction for APMC members, etc. were set up to deal with the problems of
exchange of notes or facing cash crunch. Probably these services would have selection
bias.

The occupation wise impact of demonetization are provided in the tables 8 below. Each
of the segments had different set of experiences and impacts of demonetization due to
the nature of their financial transactions. 90 percent of the daily wage earners reported
delay in the payment, while 70 percent reported loss of work. However, wage rate
reduction was reported only by 27 percent. This may be because of a shift of labour
supply from agriculture or construction to standing in the queue to exchange old notes
for others. This became an alternative source of income for the daily wage earners. 66
percent of the daily wage earners reported that they were engaged in standing in the
queue and earned through that. The rate of exchange was ₹ 100 for exchange of ₹ 500 to
earning ₹ 300 for standing in the queue for the entire day. While conducting the test of
independence, loss of work and delay in the payment show significant relationship with
the banking facility in the village. The test of independence for Demand side could not
be conducted as only 3 percent of the daily wage earners are active users.

44
 Table 8: Impact of Demonetization on Daily Wager Earners

Impact Responses Test of Independence

Percentage Mean Banked Unbanked
Responses Values Village Village
Loss of work 70 46 days 28* 61*
Delay in payment 90 33 days
25** 44**
Reduction in wage rates 27 ₹ 100 105 100
Had to look for the work 22 76 46 99
elsewhere
Advancement of payment 6.8 45 60 38.5
Earned through exchange of 66 Not
notes reported
Source: Calculation based on survey data
* Significant at 5 % ** Significant at 10 %

Table 9: Impact of Demonetization on Farmers

Mean Value

Impact Financial Inclusion Financial Inclusion

Percentage
Supply Side Demand Side
Responses Banked Unbanked Active Passive
Village Village User User
Crop perished as it could not
51 1.69 1.65 1.72 1.65
be sold
Reduction in the crop prices 60 1.93 1.88 1.69** 1.96**
Had to reduce purchase of
64 1.98 2.1 1.79** 2.1**
seeds and fertilizers
Source: Calculation based on survey data.
* Significant at 5 % ** Significant at 10 %

45
 Table 10: Impact of Demonetization on Self Employed

Mean Value
Financial Inclusion Financial Inclusion
Percentage
Impact
Supply Side Demand Side
Responses
Banked Unbanked Active Passive
Village Village User User
Reduction in the sales
86 2.26 2.3 2.21 2.30
turnover
Reduction in the prices of
22 1.25 1.38 1.24 1.32
your goods/services
Loss of products 10 1.17 1.11 1.12 1.16
Problems of procurement 3.4 1.06 1.03 1.0 1.07
Source: Calculation based on survey data
* Significant at 5 % ** Significant at 10 %

At the time of demonetization, farmers were engaged in sowing of rabi crop and selling
of the kharif crop. In Kachchh, rabi crops mainly include jiru (cumin), chickpea, castor
and groundnut, while major Kharif crops include cotton, oilseeds, pulses and millet. A
difference in farmers’ responses was observed when it came to reporting procurement
prices and the reduction therein. The price reduction was dependent upon the market in
which the farmers sold their produce. Farmers selling the produce in Rapar APMC did
not suffer price reduction as the APMC provided RTGS facility to farmers and also
helped them to open a bank account if they did not have one. Farmers cultivating cotton
mostly sold it directly to the ginning mill near Rapar, which offered ₹ 500 less (while
the price was around ₹ 1500 for 40 kg) to those farmers who could not accept the
payment though cheque. Farmers who were actively using bank account managed to get
the full payment. Oil seeds and guvar gum are other products where farmers experienced
reduction in the prices. Around 35 percent of the farmers sold their crops in the local
market or outside APMC. They suffered more than the ones who sold their crops in the
APMC. The major problem that farmers faced was in purchase of seeds and fertilizers.
Almost 77 percent of the farmers bought seeds and fertilizers from private shops rather
than the agro-samiti. Very few shops provided the seeds and fertilizers on credit. It is

46
observed that, reduction in the prices of crops and reduction in the purchase of the seeds
and fertilizers for rabi crops was significantly dependent upon the demand side of
financial inclusion.

47
While 60 percent of the farmers reported the price reduction, only 22 percent of the self-
employed reported price reduction. Where 64 percent of the farmers reported reduction
in the purchase of seeds and fertilizers, only 3.4 percent self-employed reported the
problem of procurement. The impact on self-employed and business man is observed to
be less severe than that of farmers and daily wage earners. Farmers who could use RTGS
and cheque payments were the only one who could buy fertilizers and seeds. Others had
to almost wait for two months for the cash crunch to get over. Although 86 percent of the
business had an impact in terms of reduction in the sales turnover but the sales got
postponed rather than selling the products at a lower price. Most of the shop owners and
small businessmen shifted to selling goods and services on credits. Few
businessmen/shop owners made use of urban banking facilities while making a business
trip to cities like Rajkot, Ahmedabad and Mehsana, instead of exchanging old notes in
Rapar itself. Surprisingly there is no significant difference in the impact of
demonetization on the business activities across the two segment of financially included
and excluded groups.

Section IV Conclusion

The adverse impact of demonetization was not on an extreme. Probably this is so

because in rural areas people have lower income levels and mostly have a hand-to-mouth
life. Also, they are a more close-knit community as compared to the urban areas. So
when it came to maintaining standard of living, they could shift to credit and borrowing
to satisfy their daily absolute needs, and the postponable demand was pushed back to the
times when the cash crunch was reduced.

It appears that longer-term economic activity, such as agriculture, suffered greater

negative impact as compared to shorter-term and organized sector economic activities,
such as dairy and businesses – either because such people are entirely outside the
banking network or they have cash-less modes of transactions available to them.

Availability of physical infrastructure to support monetary transactions is the single most

crucial factor that can lead to success or failure of such policy measures as
demonetization and a shift to cash-less economy. Once this is ensured, it is equally
important that people start using these facilities actively for all types of transactions.
This requires a conscious effort on part of the authorities to reduce cost of using such

48
facilities – both in monetary terms as well as the time involved in carrying out cash-less
transactions.

49
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