Early Lessons from India’s Demonetization Experiment

India’s government took drastic demonetization action in November 2016 to expose the so-called “black” market, fueled by money that is illegally gained and undeclared for tax purposes. Reactions to the move to demonetize 500- and 1,000-note rupee notes have been mixed, but Prime Minister Narendra Modi’s government was recently rewarded with victory in midterm state-level elections, seen as a referendum on its unprecedented action. There are some updated takeaways to consider from this risky political and monetary move: First, public policy for rooting out corruption calls for a systemic approach, with carrots and sticks to motivate cultural, institutional, and behavioral change in the long term. Silver bullets, such as drastic demonetization, don’t work. Second, innovation and creativity emerged around the digital payments ecosystem in the wake of the sudden voiding of some currencies. Next, data quality and context still matter. In India’s case, relying on official GDP growth figures may not be the best measure of monetary policy success. And finally, having a “big narrative” about a controversial policy move may still matter more to public opinion than having a data story to prove whether something is worthwhile.