The demonetisation step of the Modi government, for the most part, appears to be hugely problematic. Several expert commentators – including Ajay Shah, Prabhat Patnaik, Swaminathan Aiyer, Manmohan Singh and several others – have pointed out that given the high dependence on cash transactions in the Indian economy, the resulting liquidity crunch, the diminished purchasing power and the reduced ability to transact is likely to badly hurt the macro economy and the damage to the informal sector – especially to small firms and retailers – is likely to be severe and permanent.
Also, being saddled with cash and unable to invest due to a lack of economic activity, the banking sector may face a crisis. Ultimately, the poor and the underprivileged will likely be the worst hit – as they usually are.
Given that 86% of the currency was wiped out overnight, it seems unlikely that the RBI can systematically pump money into the economy soon enough to mitigate the problem. We will have to wait and see how the events will unfold and how soon the economy can recover, but it will be naive to assume that the demonetisation step will eradicate the deep rooted corruption and the black money problem forever.