Daily Editorial Analysis 9 November 2026

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 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:
    • Pradhan Mantri 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.

Demonetisation and the Health Costs of Cash Shortages FAQs

Q1. What was the primary objective of demonetisation in 2016?

Ans. It aimed to curb black money, counterfeit currency and promote digital payments.

Q2. How much demonetised currency returned to the banking system?

Ans. Approximately 99.3% of the demonetised currency returned to the banking system.

Q3. Why were acute medicines more affected than chronic medicines?

Ans. Acute medicines require urgent purchases, leaving consumers little time to search for affordable alternatives.

Q4. What was the impact of demonetisation on acute medicine sales?

Ans. Acute medicine sales volume declined by approximately 3.6% relative to chronic medicines.

Q5. What is the major policy lesson from the study?

Ans. Economic interventions must protect essential healthcare consumption by strengthening public health infrastructure and ensuring uninterrupted access to medicines.

Source: The Hindu

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