Impact of Suddenly Complete Demonetization in India: A Microeconomic Analysis

Abstract

Majority of the impact studies of demonetisation in India have considered macroeconomic framework. This paper has tried to explain the impact of suddenly complete demonetisation in India considering the microeconomic framework. Explaining the choice problems of the representative agents of three categories of consumers this paper reveals that demonetisation reduces the welfare of the middle class and informal labour class people. However, utility of rich class people may remain unchanged. The analysis explains how demonetisation can trigger off the unemployment problem. Demonetisation results into an adverse selection problem where although the ‘rich’ are targeted but leads to a negative impact on the poor, thereby expanding the rich-poor inequality forcing the poor more downwards in terms of income and utility.