5 ideas
Illicit wealth is mostly stored as real estate, gold, foreign holdings and business assets, with cash being only a small fraction at any moment. A cash-voiding measure therefore hits the stock of currency rather than the stock of undeclared wealth. Most of the demonetised notes were later returned to banks, which is consistent with this argument.
In an informal economy, currency works like circulating capital that keeps production running: wages, seeds, inputs and trade credit all move through cash. Withdrawing it does more than inconvenience holders. It halts the transactions that generate output and employment, so a monetary shock turns directly into a real-economy shock.
The burden of demonetisation was carried mainly by daily-wage workers, small traders and farmers who operate in cash and have weak access to banks. The wealthy, who hold diversified assets, were largely insulated. A measure framed as an attack on the corrupt therefore worked in practice as a regressive tax on the poor.
Demonetisation came in November, just as farmers needed cash to buy seeds and fertiliser and to pay labour for the winter crop. It also coincided with the sale of the kharif harvest in mandis, which run on cash. Crop prices collapsed while input purchases stalled, showing how a policy's timing can multiply its damage in an agrarian economy.
When a policy's stated aims fail, its official rationale moves on: here it went from rooting out black money and counterfeit notes to promoting a cashless digital economy. A rationale that keeps changing after the fact is evidence that the policy lacked a coherent design. It also makes the policy hard to hold accountable.