Demonetisation and the Health Costs of Cash Shortages

07 Nov 2026

Tags: Economy   Budgeting   Fiscal policy

Source: The Hindu

Context: On 8 November 2016, the government demonetised ₹500 and ₹1,000 currency notes, withdrawing approximately 86% of currency in circulation by value, with only four hours' notice.

• The stated objectives were to curb black money, counterfeit currency and promote digital payments.
• According to the RBI, 99.3% of the demonetised currency returned to the banking system, while research indicates that the exercise caused a temporary contraction in money supply.
• Similar cash shortages followed currency withdrawals in Kenya (2019) and Nigeria (2022–23), raising concerns about the impact of sudden liquidity shortages on access to essential goods, particularly medicines.

Impact of Demonetisation on Medicine Consumption

• A forthcoming study in the Journal of Economics and Management Strategy examined the impact of demonetisation on pharmaceutical sales using the All India Organisation of Chemists and Druggists (AIOCD) database, covering monthly sales of every Stock Keeping Unit (SKU) across 805 pharmaceutical firms, 31 regions and 18 illness categories.
• Acute medicines: Used for short-term conditions such as infections, pain and gastrointestinal illnesses; their purchase is often unplanned, leaving consumers with limited time to compare prices or search for cheaper alternatives.
• Chronic medicines: Used for long-term conditions and purchased regularly, allowing consumers to search for cheaper alternatives and plan their expenditure.
• The study found that, relative to chronic medicines, sales volume of acute medicines declined by nearly 3.6% and sales value by 3.1% following demonetisation.
• This decline was attributed to a contraction in the quantity of medicines purchased (intensive margin contraction), rather than products exiting the market or price increases, as the number of unique SKUs and inter-quartile price ranges remained unchanged.
• Search-cost explanation: Based on economic theory and Alan Sorensen's 2000 study in the Journal of Political Economy, the researchers argued that consumers facing sudden cash constraints were more likely to defer expensive, unplanned purchases for which they had little opportunity to search for alternatives.
• Alternative explanations were ruled out using IQVIA prescription data and the Government's Integrated Disease Surveillance Programme (IDSP) data, which showed no significant break in prescription trends or acute disease outbreaks around demonetisation.
• The findings suggest that unlike insured populations in developed economies, where healthcare consumption may be relatively insensitive to wealth shocks, India's high out-of-pocket expenditure (OOPE) makes cash availability a critical determinant of access to medicines.

Regional Differences and Role of Public Health Infrastructure

• Areas with weaker public health infrastructure experienced larger declines in acute medicine consumption, according to the study's analysis of AIOCD data alongside Health Management Information System (HMIS) data.
• Primary Health Centre (PHC) density helped mitigate the impact of cash shortages by providing an alternative source of healthcare access.
• Poorer and underserved regions were particularly vulnerable, even though physician behaviour and disease incidence did not change significantly.

Lessons for Monetary and Public Health Policy

• Distributional impact: Even when currency replacement pursues legitimate policy objectives, its costs are unevenly distributed, disproportionately affecting financially vulnerable populations.
• Cash dependence: Expansion of digital public infrastructure does not eliminate dependence on cash for essential purchases, particularly in regions with limited financial and healthcare access.
• Healthcare safeguards: Large-scale currency operations should incorporate health-sector protocols, including credit facilities for pharmacies and digital payment infrastructure to ensure uninterrupted medicine availability.
• Strengthening public health infrastructure: Expansion of Primary Health Centres and accessible medicine distribution networks can improve resilience against economic shocks.
• India has expanded initiatives such as Pradhan Mantri Bhartiya Janaushadhi Pariyojana (PMBJP), Ayushman Bharat–Pradhan Mantri Jan Arogya Yojana (AB-PMJAY) and UPI-based payments at pharmacies, which can improve access and resilience.

Need for Better Data and Evaluation

• The study captures pharmaceutical sales but could not directly measure household-level health outcomes due to data limitations.
• India needs linked consumption-health datasets to assess how economic disruptions affect medicine consumption and actual health outcomes.
• Any future large-scale currency intervention should ideally have a pre-registered evaluation protocol to enable systematic assessment of its economic and welfare consequences.
• The study complements existing research on price elasticity and price transparency by highlighting the role of search costs and liquidity constraints in essential consumption.

Important Economic Concepts

• Liquidity constraint: A situation in which individuals cannot make purchases despite having a need for them because they lack immediately available cash or accessible funds.
• Out-of-pocket expenditure (OOPE): Direct payments made by households for healthcare services and medicines, excluding reimbursement or insurance coverage.
• Intensive margin: Change in the quantity of an existing product purchased, rather than a change in the number or variety of products available.
• Search costs: Time, effort and resources spent by consumers to identify and compare products, prices and alternatives.
• Price elasticity of demand: The responsiveness of quantity demanded to a change in the price of a good or service.

Conclusion

• Demonetisation demonstrated that liquidity is an important economic determinant of health, particularly in economies with high out-of-pocket healthcare expenditure.
• Monetary policy interventions must therefore account for their distributional consequences and incorporate safeguards to protect access to essential medicines and healthcare.