Demonetisation and the Health Costs of Cash Shortages

The Lift Line

“Liquidity, these writers’ findings suggest, is an economic determinant of health.” (Anindya S. Chakrabarti, Chirantan Chatterjee and Samarth Gupta, “Demonetisation and the health costs of cash shortages”, The Hindu, 7 November 2026)

Why This Editorial Matters for Your Exam

In the news: in an op-ed in The Hindu on 7 November 2026, ahead of the tenth anniversary of demonetisation, which falls on 8 November 2026, three economists report their own study of medicine sales during the cash shortage. In their account, households put off medicines for sudden illness more than those for long-term conditions.

The authors, in the column’s own words: “Anindya S. Chakrabarti is Associate Professor of Economics at the Indian Institute of Management Ahmedabad. Chirantan Chatterjee is Professor of Economics at U-Sussex and a 2025 Founding Fellow of the Royal Economic Society. Samarth Gupta is Assistant Professor of Economics at the Indian Institute of Management Calcutta.”

Everything about the study below is the authors’ claim. They say it is forthcoming in the Journal of Economics and Management Strategy; the paper could not be found online as of 7 November 2026. For the currency side of the story, see this site’s September 2026 editorial on cash in a digital economy.

UPSC relevance:

• GS Paper 3: money and banking, the RBI, digital payments; inclusive growth.
• GS Paper 2: health, out-of-pocket spending and the public health system.
• Prelims: section 26 of the RBI Act; the 2017 Act; the 2023 Supreme Court case; National Health Accounts.

The Crux in 60 Words

Broad financial indicators stayed stable in 2016, the authors say, but households faced choices. Their forthcoming study reports that medicines for sudden illness, bought unplanned and with less chance to compare prices, lost ground to chronic-illness medicines, more so where public health care was weak. Their lesson: cash is a health variable, and currency operations need a health protocol.

Background and Context

The 2016 exercise and its numbers

The share withdrawn was, in the RBI’s words, “nearly 86 per cent of value of notes in circulation”. The column adds that this came at “just four hours’ notice”; that timing is its own statement.

Rs 15.31 lakh crore (Rs 15,310.73 billion) came back, against Rs 15.42 lakh crore (Rs 15,417.93 billion) in circulation on 8 November 2016, the second figure as reported by Scroll from the RBI. The ratio is 99.3 per cent, the share the column gives. The difference is Rs 10,720 crore.

The stated aims, the column lists, included curbing counterfeit currency and black money and accelerating digital payments.

The research it stands on

The Analysis

The column builds its case in five steps.

1. The question. The authors say demonetisation is no longer an India-only case, citing Kenya (2019) and Nigeria (2022-23) in the column’s account. So they ask “a practical question for future policymaking: what happens to essential consumption, such as medicines, when cash liquidity tightens sharply?”

2. The theory: search costs. A medicine for a long-term condition is bought every month, so the buyer has reason and time to find the cheaper option. A medicine for a sudden infection, pain or stomach illness is bought in a hurry, for a short spell, with “less opportunity to search”. The authors’ prediction follows: “When a household faces a sudden cash constraint, which purchase is more likely to be deferred? The expensive, unplanned, unsearched item.”

3. The data and design, as the authors describe them. The All India Organisation of Chemists and Druggists (AIOCD) database gives monthly sales of every stock keeping unit (SKU) across 805 pharmaceutical firms, 31 regions and 18 illness categories. They use difference-in-differences, a method that compares how two groups changed across the same event, here acute drugs against chronic ones.

4. The result. The authors report that “sales volume for acute drugs fell by nearly 3.6% and value by 3.1% relative to chronic drugs”. Read “relative to” with care: this is a gap between two groups, not a 3.6 per cent fall in acute sales. They report no change in the number of unique products or in the inter-quartile range of prices, so products did not vanish and prices did not jump. Their term is “a pure intensive margin contraction”, meaning people bought less of what was still on the shelf. Two rival explanations are set aside: IQVIA prescription data and outbreak data from the Integrated Disease Surveillance Programme (IDSP) “showed no break”.

Why might this happen in India when, as they note, studies in insured, developed economies find small or zero effects? Their answer is out-of-pocket spending. The official figure supports the premise, though for a later year: households paid 43.41 per cent of Total Health Expenditure in 2022-23.

5. Three lessons.

• Count the cost upfront. “The implication is not about intent - which was to address legitimate policy concerns - but about distributional impact.” The judgement on intent is the authors’ own.
• A public health buffer helps. Using HMIS public health centre data, they report larger declines where public health infrastructure was weaker, and conclude that public health centre density cushioned the shock. They list Jan Aushadhi Kendras, AB-PMJAY and UPI-based payment at pharmacies as post-2016 sources of resilience, and propose “a health-sector protocol”, for instance credit lines or digital payment facilitation at pharmacies, during any large currency operation.
• Measure welfare better. They concede that their work “captures drug sales, but not household-level health outcomes due to data limitations”, and ask for linked consumption-health datasets and “a pre-registered evaluation protocol”.

Data and Institutions Vault

Prelims-grade facts:

The 2016 exercise:

• Notification: S.O. 3407(E), dated 8 November 2016, under section 26(2) of the RBI Act, 1934.
• Legal effect: Rs 500 and Rs 1,000 notes ceased to be legal tender from 9 November 2016 (RBI Annual Report 2016-17).
• Share: nearly 86 per cent of the value of notes in circulation on 8 November 2016.
• Returned: Rs 15.31 lakh crore; in circulation: Rs 15.42 lakh crore; ratio 99.3 per cent.

The law:

• RBI Act, 1934: section 26(1) legal tender and Central Government guarantee; section 26(2) cessation by notification on the Central Board’s recommendation.
• Specified Bank Notes (Cessation of Liabilities) Act, 2017: Act No. 2 of 2017; deemed in force from 31 December 2016.

The Court:

• Vivek Narayan Sharma v Union of India: decided 2 January 2023 by a five-judge Constitution Bench, 4:1, upholding the scheme.
• Majority: Justice B.R. Gavai for himself and Justices Abdul Nazeer, A.S. Bopanna and V. Ramasubramanian; “any series” in section 26(2) includes “all series”.
• Dissent: Justice B.V. Nagarathna: it “ought to have been done through a legislation or an ordinance”.

Health spending (National Health Accounts, 2022-23):

• Total Health Expenditure: Rs 8,81,359 crore.
• OOPE: Rs 3,82,629 crore, 43.41 per cent of the total and 1.47 per cent of GDP.

Data sources the column names: AIOCD (sales); IQVIA (prescriptions); IDSP (outbreaks); HMIS (public health centres).

⚠️ Watch the trap: 15.31 is what returned and 15.42 what was in circulation; 99.3 per cent is the ratio of the two. “Nearly 86 per cent” is the 8 November share; 86.4 per cent is the share of notes of Rs 500 and above at end-March 2016. Notification on 8 November, effect from 9 November. Acute drugs fell 3.6 per cent relative to chronic drugs, not outright, and on the authors’ own numbers, from a study the column calls forthcoming. The Supreme Court upheld the scheme.

The Debate

The case for the authors. Aggregate data can look calm while a household is choosing what to do without. Two obvious rival stories (doctors changed their prescribing, or disease fell) are said to be ruled out. The search-cost idea rests on published work, and the direction fits a country where households pay directly for so much of their care.

The other side. The paper cannot be read yet, so neither the numbers nor the checks can be tested. A sale is not a health outcome: the study, by its own account, cannot say anyone fell sicker. The column gives no duration, and a deferred purchase may have been made later. The effect is a gap of a few per cent between two groups. The Chodorow-Reich abstract also describes effects that “dissipate over the next few months”, which makes timing the question that matters. And the authors themselves accept that “observational data cannot rule out all mechanisms”.

The balanced verdict. Treat the finding as a strong hypothesis from named researchers, not a settled result. The policy lesson survives even a smaller number: know in advance how essential purchases will be paid for when cash disappears. The 2023 judgment settled legality, not cost.

How to Think About This

Keep three questions apart for any big policy shock:

1. Was it lawful? Ask the Court. (Upheld, 4:1, with one dissent on the route.)
2. Did it meet its aims? Ask for evidence on each stated aim, one at a time. (The column’s claims on digital adoption and on counterfeit stock are its own.)
3. Who paid? Look below the aggregate, at who deferred what, and where.

Then test any study with four checks: Relative to what? (Chronic drugs.) What was measured? (Sales, not health.) Published? (Forthcoming, by the authors’ account.) For how long? (Not stated in the column.)

Diagram-in-Words

Cash vanishes → households must choose what to defer → chronic drugs: planned, searched against acute drugs: sudden, unsearched → acute sales fall relative to chronic (the authors’ figures) → larger declines where public health care is weak → the lesson: a health protocol for any currency operation

Read it left to right: theory first, then the reported result, then the authors’ policy case.

Takeaway Box

• Core idea: the authors argue that a liquidity shock is also a health shock, and that aggregate recovery can hide it. Their numbers await publication.
• Prelims hooks: RBI Act sections 26(1) and 26(2); S.O. 3407(E); Act No. 2 of 2017; Vivek Narayan Sharma (4:1, 2 January 2023); OOPE 43.41 per cent.
• Ethics and Interview angle: a good intention does not cancel a distributional cost. What does a planner owe those who cannot absorb a shock?
• Probable question: “What is out-of-pocket expenditure on health? Discuss how it makes poor households vulnerable to economic shocks.” (GS2, 150 words)

Sources:

• Anindya S. Chakrabarti, Chirantan Chatterjee and Samarth Gupta, “Demonetisation and the health costs of cash shortages”, The Hindu, 7 November 2026
• RBI Annual Report 2016-17, chapter VIII, and 2017-18, chapter VIII
• Scroll, 29 August 2018, and Business Today, 2018, on the RBI’s figures
• Specified Bank Notes (Cessation of Liabilities) Act, 2017, Gazette of India; Reserve Bank of India Act, 1934
• Supreme Court Observer, summary of Vivek Narayan Sharma v Union of India
• National Health Accounts 2022-23, NHSRC, Ministry of Health and Family Welfare
• Journal records: Quarterly Journal of Economics 135(1); Journal of Political Economy 108(4) and 131(11); Journal of Public Economics 224; NBER Working Paper 25370

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