Demonetisation and the Health Costs of Cash Shortages

Context

• India’s demonetisation of November 8, 2016, withdrew ₹500 and ₹1,000 notes, representing approximately 86% of currency in circulation by value, with only four hours’ notice.
• The objectives included curbing black money, counterfeit currency and promoting digital payments.
• However, the exercise created a massive liquidity shock in a cash-dependent economy.
• Although nearly 99.3% of demonetised currency returned to the banking system, the temporary cash shortage disrupted economic activities and essential consumption.

Demonetisation Effect on Medicine Consumption

• Understanding Differences in Medicine Consumption
  • Research published in the Journal of Economics and Management Strategy examines pharmaceutical consumption during demonetisation using the All India Organisation of Chemists and Druggists (AIOCD) database.
  • It covers monthly sales across 805 pharmaceutical firms, 31 regions and 18 illness categories.
  • The study distinguishes between:
    • Chronic medicines, which are purchased regularly for long-term illnesses, allowing consumers to compare prices and identify affordable alternatives.
    • Acute medicines, which are required for sudden illnesses such as infections, pain and gastrointestinal problems, leaving little opportunity to postpone purchases or search for alternatives.
  • This difference is explained through search costs, the time and resources required to identify suitable products and compare prices.
  • Consumers purchasing chronic medicines can plan their expenditure, whereas acute medicine purchases are generally urgent and unanticipated.
• Evidence of Reduced Medicine Consumption
  • Using a difference-in-differences research design, the study found that acute medicine sales volume declined by approximately 3.6%, while sales value fell by 3.1% relative to chronic medicines.
  • The decline was not caused by products disappearing from the market or increasing prices.
  • The number of unique products and the interquartile range of prices remained unchanged.
  • This indicates an intensive-margin contraction, meaning consumers purchased smaller quantities of available medicines.
  • Prescription data from IQVIA and disease-outbreak information from the Integrated Disease Surveillance Programme (IDSP) also revealed no significant changes in prescription trends or acute disease outbreaks.
  • Thus, the decline was associated with cash constraints rather than reduced medical requirements.
• Healthcare Vulnerability in a Cash-Dependent Economy
  • India's substantial out-of-pocket healthcare expenditure makes households particularly vulnerable to sudden financial disruptions.
  • Unlike insured populations in developed economies, many Indian families directly finance medicines and treatment.
  • Consequently, medicines may remain available and prices stable, yet patients may be unable to purchase them because of inadequate cash.
  • Therefore, market availability does not guarantee actual healthcare access.

Lessons for the Future

• Assessing the Distributional Consequences of Monetary Policy
  • Currency replacement exercises may pursue legitimate objectives, including reducing counterfeit currency, improving tax compliance and encouraging digital transactions.
  • However, policymakers must evaluate their wider social consequences.
  • Research by Das and other economists indicates that demonetisation generated only modest tax gains.
  • Moreover, the return of almost all withdrawn currency raises questions about the extent of its effectiveness in achieving its stated objectives.
  • The pharmaceutical findings demonstrate that economic disruptions affect different categories of consumers unequally.
  • Therefore, distributional consequences must be assessed alongside monetary and administrative objectives.
• Strengthening Public Health Infrastructure
  • The study identifies public health infrastructure as an important buffer against liquidity shocks.
  • Regions with weaker public healthcare facilities experienced larger declines in acute medicine consumption.
  • Several initiatives can strengthen healthcare resilience:
    • PM Bhartiya Janaushadhi Kendras improve access to affordable generic medicines.
    • AB-PMJAY provides financial protection against eligible hospitalisation expenses.
    • UPI-based digital payments facilitate cashless transactions at pharmacies.
    • However, digital payments cannot completely replace cash because of inadequate connectivity, limited digital literacy and unequal banking access.
    • Future currency operations should incorporate health-sector safeguards, including emergency credit facilities for pharmacies, uninterrupted medicine supplies and accessible digital payment systems.

The Way Forward: Building Evidence-Based Public Policy

• Although pharmaceutical sales data reveal changes in medicine consumption, they do not establish the direct consequences for household health outcomes.
• Reduced medicine purchases may lead to delayed treatment, worsening illnesses and additional medical complications.
• India therefore needs integrated consumption-health databases linking household expenditure, prescriptions, medicine purchases and health outcomes.
• Additionally, pre-registered evaluation protocols should accompany large-scale economic interventions.
• These would establish measurable indicators, identify vulnerable populations and facilitate independent assessments of policy consequences.
• Improved data systems would help governments anticipate unintended effects and introduce appropriate safeguards before implementing disruptive economic measures.

Conclusion

• A decade after demonetisation, its experience offers important lessons for monetary policy and public health.
• Although digital payment adoption accelerated and counterfeit currency was withdrawn, sudden cash shortages also disrupted essential consumption.
• For households dependent on out-of-pocket healthcare expenditure, financial disruptions can result in delayed treatment and reduced access to essential medicines.
• Future economic interventions must balance financial objectives with social protection.
• Ultimately, economic reforms must protect essential consumption, ensuring that financial disruptions do not compromise access to medicines and basic healthcare, particularly among vulnerable populations.