More than two years after the Indian government announced demonetization of high-value currency notes on November 8, 2016, a US-based study has said the decision shaved economic growth by at least 2 percentage points for the October-December quarter of 2016.

The research paper titled “Cash and the Economy: Evidence from India’s Demonetization” and co-authored by India-born Harvard professor Gita Gopinath, who will be taking over as chief economist at the International Monetary Fund next month, said districts experiencing more severe demonetization had relative reductions in economic activity, faster adoption of alternative payment technologies, and lower bank credit growth, Press Trust of India reports.

The research paper, whose lead author was Professor Gabriel Chodorow-Reich of Harvard University and was published by the US National Bureau of Economic Research, stated that six quarters before demonetization, year-on-year growth averaged 8% and in the seven quarters after the cash ban it averaged about 6.8%.

Relying on night-lights data, a scientific model for estimating total economic activities both formal and informal, the report stated that employment generation dropped 3% or more in November and December of 2016.

The paper also noted that cash continues to serve an essential role in facilitating economic activities in modern India.

The other co-authors include economist Prachi Mishra, who formerly headed the strategic research unit at the Reserve Bank of India and is currently chief economist at Goldman Sachs, and Abhinav Narayanan, manager of research at the RBI.

It pointed out that there might be longer-term advantages from demonetization that arise from improvements in tax collection and in a shift to savings in financial instruments and non-cash payment mechanisms. However, it noted that evaluation of such long-term consequences requires waiting for more data and an empirical strategy suited to the study of longer-term effects.

Indian Prime Minister Narendra Modi in a televised address on November 8, 2016, announced a ban on 500- and 1,000-rupee banknotes. The professed goals kept changing; initially the government said it wanted to curb black money, fake currency and terror funding. Later it began stressing a shift to a cashless economy, and on the second anniversary of demonetization, Finance Minister Arun Jaitley stated that it was done to formalize the economy.

However, the government’s much-vaunted premise that those hoarding ill-gotten wealth would not dare exchange the banned notes in banks fell flat. In August this year, after the RBI finally finished processing the returned demonetized currency, it declared that 99.3% of the banned notes came back to the banks.

Currency printing costs doubled

Meanwhile in a related development the government informed Parliament on Tuesday that the cost of printing banknotes escalated to 79.65 billion rupees in the 2016-17 fiscal year, the period of demonetization, from 34.21 billion rupees during 2015-16.

Also, the printing cost came down to 49.12 billion rupees (US$70 million) in 2017-18 when the currency shortage caused by demonetization was neutralized.