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On 8 November, Prime Minister Narendra Modi announced the government’s decision to demonetise Rs 500 and Rs 1,000 currency notes, which made up for 86% of the currency in circulation. 

Although initially Modi and his government sold this move as a ‘surgical strike’ on black money, or untaxed wealth, the narrative has since shifted to transforming India into a cashless economy. 

Logically, with most of the cash sucked out of the system, cashless transactions should have risen, especially in the period between 9-30 November. Instead, the opposite seems to have happened.

The latest data released by the Reserve Bank of India (RBI) show that in November, electronic transactions under RTGS, IMPS and NEFT systems fell both in value and volume as compared with October.

So, what explains this drop? We don’t know for sure, but it may be attributed to a sudden fall in economic activity following demonetisation, coupled with the fact that the festive season ended in October. It is, therefore, possible that the cash crunch that followed demonetisation impacted cashless transactions as an overwhelming majority of the transactions in India are in cash.

In fact, several ratings firms and financial institutions have already cut their growth outlook for India following demonetisation. Fitch Ratings revised its real GDP growth estimate for India in 2016-17 from 7.4% to 6.9%, while brokerage Ambit Capital scaled its growth outlook for the current fiscal year from 6.8% to 3.5%.

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