On the night of 8 November 2016, the Indian Prime Minister made a surprise announcement on television: currency notes of ₹500 and ₹1,000 denominations were to be withdrawn from the market with immediate effect (RBI 2016b; Bhatt 2016). The scheme, popularly called notebandi, was championed by Prime Minister Narendra Modi as a way to end the menace of black money, counterfeit currency, and corruption. The government stated that honest citizens had nothing to fear. People holding the two withdrawn denominations could either deposit them in banks, or exchange them at the bank for new currency notes.

 

Following the announcement, there was a rush at banks and ATMs to exchange old notes and withdraw new currency (Roy 2016; PTI 2016a). The two withdrawn denominations represented 86% of the currency in circulation (RBI 2016a). As the queues at banks grew, reports appeared in the press about the suffering experienced by people, especially among the poor, who had no access to credit cards or mobile wallets (Biswas 2016; TNN 2016). As more days went by, the press reported that in both urban and rural India, the country’s large informal economy (Kalyani 2016) had been disrupted, and that notebandi would have a negative impact on gross domestic product (GDP) (Kohli 2016; Mishra 2016; PTI 2016b)

 

S P Jain Institute of Management and Research–Abhyudaya (SPJIMR–Abhyudaya), an educational non-profit working in slums in the K-West ward of Mumbai, decided to assess the impact of notebandi on the families they were working with. The objective was to get a first-hand picture of how these families were coping with notebandi.

 

About the Study

 

SPJIMR runs a non-profit initiative called Abhyudaya, where business students at SPJIMR mentor children from the slums in the K-West ward of Mumbai. The children are called “Sitaras.”

 

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Each business student is paired with one Sitara. The students visit the Sitara’s home in the slum and provide one-to-one mentoring through the year.

 

 

To study the effects of notebandi on the families of the Sitaras, the SPJIMR-Abhyudaya team designed a questionnaire in the last week of November.

 

It was decided that each business student would interview the family of the Sitara whom they were mentoring, and obtain responses to the questions. The responses would be collected using Google Forms, on smartphones.

 

On 3 December the questionnaire was uploaded on Google Forms, and the students were given a link to the questionnaire, to be filled online on the phone.

For slum locations without data access, the students were instructed to fill out the form on paper and then upload it on Google Forms when they returned to the campus.

 

From 3 December to 9 December, the students visited their Sitara’s family, and obtained the answers to the questionnaire. The data collected via the questionnaire was then merged with the existing socio-economic data about each family, already held with Abhyudaya.

 

The survey consisted of 37 questions, which address the families’ initial response to the demonetisation announcement, the economic consequences for their income, expenditure, and savings, changes in payment choices following demonetisation as well as a subjective assessment of the policy.

 

 

Surveyed families

 

The sample of surveyed families includes 214 families living in 28 slum or lower-income neighbourhoods of Mumbai. Of the 28 neighbourhoods, 27 are located in Mumbai’s K-West Ward, while two families reside in the neighbouring K-East Ward. Appendix Table A1 lists all neighbourhoods included in the study as well as the number of families per neighbourhood.

 

The families interviewed for the purposes of this study have not been randomly selected (as their children were previously selected to participate in the SPJIMR-Abhyudaya initiative) and are not necessarily representative of slum communities in Mumbai.  However, the following socio-economic characteristics of the interviewed families show that the vast majority belong to India’s lower-middle class. For example, Figure 1 reveals that 41% of fathers have at most seven years of schooling, while 30% of mothers are either illiterate or have only completed elementary school. The occupational profiles of fathers and mothers included in the sample, (see Figures 2A and B), show that some receive regular salaries as they work in “service jobs” as domestic helpers, cooks, and drivers, while many face substantial uncertainty as their wage income or customer volume will fluctuate day-to-day. Finally, Table 1 and Figure 3 provide information about monthly incomes in 2016 before demonetisation and the distribution of income across the families in the sample. The mean (median) monthly total family income is ₹12,777 (12,000) or approximately $190 ($179) at an exchange rate of ₹/$ 67. For two thirds of the families, the monthly total income is between ₹8,000 and ₹18,000. Based on the recently completed ICE 360° Survey,[i] 2016, the average monthly household income is ₹16,840 across all Indian households and ₹29,690 across families living in metro areas such as Mumbai.

 

Figure 1: Education Profile of Respondents (Fathers and Mothers of Sitaras)

 

 

Figure 2: Occupation of Respondents

 

Panel A: Father’s Occupation

 

 

 

Panel B: Mother’s Occupation

 

 

Figure 3: Histogram of Monthly Total Family Income before Demonetisation (₹)

 

 

(Frequency expressed as absolute number of families, N=214)

 

 

 

 

 

Table 1: Monthly Total Family Income before Demonetisation (₹)

 

 

 

 

Results

 

Initial reactions: The news of the unscheduled announcement to withdraw the legal tender of high denomination notes by the Prime Minister quickly spread and dominated media coverage. Not surprisingly, therefore, 77% of families in our sample heard about the policy the evening of the announcement, and 97% had heard about it by the end of the following day. Following the announcement, between 9 November and 18 November, 82% of respondents visited a bank branch or an ATM, 52% exchanged old notes for new ones, 49% to deposit old notes, and/or 22% withdrew new notes from the ATM. The majority (63%) experienced average wait times of one to three hours during these visits (Table 2). About 11% of families report that they exchanged old for new notes outside the banking sector, while about 25% continued to use old notes.

 

Table 2: Average Wait Time when Visiting Bank or ATM between 9 November and 18 November.

 

 

 

Losing income

 

 About 31% of families report that they lost at least some income by the end of November. Table 3 Panel A and Figure 4 show that the fraction of those reporting lost income following demonetisation varies significantly as a function of the father’s occupation. Families with fathers that are self-employed were hit the hardest: 59% of these lost some income in November. Similarly, 47% of autorickshaw and taxi drivers who typically accept only cash payments report some income loss. The frequency of lost income is much lower (15%) for those with service jobs, such as domestic help, employed drivers, or cooks, who receive a regular salary.

 

To assess the magnitude of the income losses, we ask those that report lost income for November to provide an estimate of the lost income. After scaling this estimate by the family’s monthly total income before demonetisation, we tabulate the median relative amount of income that was lost in Table 2 Panel B. Across all families that reported some income loss for November, the median loss relative to their total income is about 21%.[ii] Families with self-employed fathers experience the biggest relative drop in income (44%), while the median loss for families with fathers working as autorickshaw and taxi drivers report, labourers, tradesmen or in service jobs ranges between 14 and 24%.[iii]

 

Across all families, independently of whether they reported any lost income, the equally-weighted average relative income loss is 12%, while the income-weighted average is about 9%. While it is too early to establish the full income effect of demonetisation on the families in our sample, the initial evidence presented here suggests that for the month of November 2016 their family income was on average about 10% lower than in other months in 2016.

 

Table 3: Lost Income in November

 

Panel A: Fraction of Those That Lost Some Income

 

 

 

Panel B: Median Relative Amount of Income Lost

 

 

Figure 4: Fraction of Families Reporting Some Lost Income

 

 

Changing expenditure

 

 We next examine the impact of demonetisation on household’s expenditures between 8 November and 30 November. Expenditures might be lower either because income dropped, because transactions could not be completed due to lack of new currency notes, or because of increased precautionary savings. Table 4 shows that across all families 54% report that they purchased less groceries between 8 November and 30 November than usually, while 43% report no change. Whether a family lost income is significantly associated with whether a family reduced grocery purchases in November, with 70% of those reporting lost income also reporting lower grocery purchases.

In Table 5, we investigate households’ postponing purchase decisions in November. Panel A reports the fraction of those households that report that they postponed at least one purchase decision in November. Across all households, 39% delayed a purchase decision. The fraction is higher for those that experienced income losses (46%), even though the association between postponed purchases and lost income is not statistically significant. Panel B shows that for 46% of those that did postpone a purchase in November, the postponed amount was at most ₹2,000, for 34% the amount was between ₹2,001 and ₹5,000, and only for 20% the amount was larger than ₹5,000.

 

Table 4: Grocery Purchases in November

 

 

 

Table 5: Postponed Purchases

 

Panel A: Fraction of Households Reporting Postponing Purchase Decision in November

 

 

 

Panel B: Amount postponed

 

 

 

Savings

 

 Having investigated the impact of demonetisation on household income and expenditure, we analyse the policy’s impact of households’ savings in November as well as on the way households expect to save money in the future.

According to Table 6, only 10% of all households experienced a decline in their savings. The fraction is much higher (25%) for those households that experienced a loss in income. About 30% of households report that their savings increased in November, possibly due to precautionary motives or due to “forced” savings as new currency notes were not available.

Table 7 Panel A reports how families in our sample used to save before demonetisation and how they plan to save in the future. Before demonetisation, 80% of households held some of their savings in bank accounts, while 51% of households also used to store some of their savings in cash, only very small fractions used to save by lending money to others or by investing in gold or real estate. In the future, 92% of households expect to save at least some money in a bank account, while only 17% expect to store their savings in cash. The substantial changes for bank accounts (+12 percentage points or pp) and cash (-34 pp) are economically as well as statistically significant. In Panels B and C, we examine how the adoption of a bank account as a way to store the family’s savings varies across different subsamples. Panel B reveals that those that were negatively affected by demonetisation in terms of lost income are more likely to report using a bank account for their savings in the future relative to those that did not experience a drop in their income. Similarly, in Panel C, we observe that the planned adoption of a bank account is particularly pronounced among families whose father is a labourer, self-employed, or an autorickshaw or taxi driver.

 

Table 6: Savings in November

 

 

 

Table 7: Changes in Ways to Save—Past and Future

 

Panel A: Asset Classes Used to Store Savings before and after Demonetisation

 

 

 

Panel B: Bank Account Adoption by Income Lost

 

 

 

Panel C: Bank Account Adoption by Father’s Occupation

 

 

 

 

Payment tools

 

The Families also answered several questions related to cashless forms of payments they use or that they are aware about. Of the total, 8% report a difference in the mode of payments they have used in November. Out of those 8%, 54% have used debit cards, 29% have relied on credit (or udhar), and 12% have used cheques.

 

Several families (12%) also report that at least one vendor in their neighbourhood has adopted a cashless payment method. In 28% of those cases, the adopted method was PayTM.

 

Finally, 80% of families report that they are aware of at least one cashless payment method, with debit cards being mentioned most frequently (50%), followed by PayTM which was mentioned by 21% of respondents.

 

Policy assessment

 

 A large majority of families (73%) confirm that as of the first week of December there was a significant shortage of cash in their neighbourhood. About one third (36%) of respondents expect the shortage to last until the end of December, 22% until the end of January, 7% until the end of February, and 9% beyond three months. The remaining 25% of families do not know how long the shortage will last.

 

When asked how respondents feel about demonetisation, 56% provide a positive assessment of the policy, while about 24% provide a negative assessment (Figure 5).

 

In Table 8, we show that the policy assessment varies by families’ experiences (Panel A) as well as their level of education (Panel B). Families that lost some income in November are more likely to view the policy negatively than families that did not experience a loss in income (31% vs 16%), even though a majority in both subsamples (51% and 62%) view the policy positively. Families in which both parents have less than 8 years of schooling are more likely uncertain, undecided, or neutral about their assessment of the policy than families with at least one parent with 8 years or more of education (34% vs 13%). Among families with at least 8 years of education, 63% view the policy as positive, while 25% of them view the policy negatively.

 

Figure 5: Subjective Policy Assessment (%)

(N = 194)

 

 

 

Table 8: Policy Assessment

 

Panel A: Assessment by Income Lost

 

 

 

Panel B: Assessment by Education Level

 

 

 

Conclusions

 

Responses to our survey, conducted among selected families in several slum neighbourhoods of Mumbai, provide an insight into how demonetisation has affected some of the underserved communities in India. It is important to keep in mind that surveyed population is not representative of India’s population as a whole nor of necessarily of those of low socio-economic status in India. Nevertheless, the results provide some initial understanding of the immediate and possibly longer-term effects of the demonetisation policy onto the urban poor.

First, the policy led to a drop in income. Across all families in our sample, the average drop in income during the month of November was about 10% of their typical monthly income. However, the effect on income varies significantly across different groups, in particular between those receiving a regular salary and those not. The drop in income is associated with a drop in consumption as well as changes in families’ savings in November. To assess the full impact of the policy on the economic conditions of the surveyed families, additional data will be needed in the future.

Based on respondents’ expectations, how lower-income families store their savings in the future might differ significantly from the past. In particular, bank accounts are expected to increase in importance, while cash is expected to drop substantially as a storage choice. Whether or not such changes actually occur remains to be seen.

Similarly, while there are signs of changes of how payments can be made and are made by vendors and customers in slum communities, it is too early to tell how significant these changes might be.

The majority of respondents view the policy overall as positive, including the majority of those that experienced some loss of income in November.

 

NOTES

 

 

REFERENCES

Bhatt, A (2016): “Watch PM Narendra Modi's Entire Speech on Discontinuing 500, 1000 Rupee Notes,” NDTV, 9 November, http://www.ndtv.com/india-news/pm-modi-speaks-to-nation-tonight-at-8-pm-1622948.

Biswas, Soutik (2016): “How India's Currency Ban is Hurting the Poor,” BBC, 12 November, http://www.bbc.com/news/world-asia-india-37947029.

Kalyani, Muna (2016): “Indian Informal Sector: An Analysis,” International Journal of Managerial Studies and Research (IJMSR), Vol 4, No 1, January, https://www.arcjournals.org/pdfs/ijmsr/v4-i1/9.pdf.

Kohli, Renu (2016): “Demonetisation: The Impact on Agriculture,” Live Mint, 22 November, http://www.livemint.com/Opinion/B1vFTOgwqHjdM5nkmg2CxJ/Demonetization-The-impact-on-agriculture.html.   

Mishra, Ashit Ranjan (2016). “Will Demonetization Adversely Impact GDP Growth?” Live Mint, 10 November, http://www.livemint.com/Politics/IcNFg1Gdxh3QACZz9fcFbM/Will-demonetization-adversely-impact-GDP-growth.html.

PTI (2016a): “Demonetisation: Finance Ministry Asks Banks to Hire Retired Staff to Deal with Cash Rush,” Economic Times,  15 November, http://economictimes.indiatimes.com/news/economy/policy/demonetisation-finance-ministry-asks-banks-to-hire-retired-staff-to-deal-with-cash-rush/articleshow/55439928.cms.  

PTI (2016b): “Demonetisation to Pull Down GDP Growth: Montek Singh Ahluwalia,” Economic Times, 22 November, http://economictimes.indiatimes.com/news/economy/policy/demonetisation-to-pull-down-gdp-growth-montek-singh-ahluwalia/articleshow/55568179.cms.

RBI (2016a): “Annual Report, Table VIII 1 Banknotes in Circulation,” 29 August, https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=38520.  

RBI (2016b): “Withdrawal of Legal Tender Status for ₹ 500 and ₹ 1000 Notes,” Reserve Bank of India (RBI) Notice, https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=38520.  

Roy, Debayan (2016): “Demonetisation Rush at Banks Has Cashiers 'Weeping', Say Bank Unions,” News18.com, 22 November, http://www.news18.com/news/business/demonetisation-rush-at-banks-has-cashiers-weeping-complain-bank-trade-unions-1314593.html.  

TNN (2016): “Poor Lose Earnings and Time by Being in the Queue,” Times of India, 30 November, http://timesofindia.indiatimes.com/city/noida/Poor-lose-earnings-and-time-by-being-in-the-queue/articleshow/55695083.cms.

 

 

Appendix Table A1: Surveyed Families by Neighbourhood and Ward