Demonetisation and the health costs of cash shortages

Why in the News

Ten years after demonetisation, new research shows that the sudden cash shortage of November 2016 cut purchases of medicines for acute illnesses such as infections. The study, forthcoming in the Journal of Economics and Management Strategy, finds the fall was larger where public health infrastructure was thinner. Its lessons apply to any country planning a large currency withdrawal.

What was demonetisation, and how did it squeeze cash?

1. What it is: Demonetisation ends the legal tender status of existing notes, so they stop being money. In 2016, notes worth 86% of India’s currency were withdrawn at four hours’ notice.
2. Stated aims and outcome: It sought to curb black money and counterfeit currency and promote digital payments. Nearly all withdrawn notes returned to banks, according to the Reserve Bank of India (RBI).
3. Cash crunch: The withdrawal briefly shrank the money supply, so households suddenly lacked cash for everyday purchases.
4. Global parallel: Kenya in 2019 and Nigeria in 2022 to 2023 faced similar cash shortages after currency withdrawals.
5. The takeaway: A currency operation can also decide whether a household can buy medicine that week.

How did the study measure the effect on medicines?

1. Data: The All India Organisation of Chemists and Druggists (AIOCD) database records monthly sales of every stock keeping unit (SKU), or product pack, in each region. It is the first such dataset used to study demonetisation.
2. Search-cost theory: Chronic drugs are bought monthly after comparing prices. Acute drugs, for infections, pain or gastric illness, are bought suddenly, so a cash-strapped household defers them.
3. Method: A difference-in-differences design compares acute with chronic drug sales over time, so shocks common to both cancel out.

What did the study find?

1. Acute drug sales fell: Sales volume of acute drugs fell nearly 3.6%, and value 3.1%, relative to chronic drugs.
2. Same drugs, smaller purchases: No products left the market and prices did not rise. People bought less of the same products, a pure intensive margin contraction.
3. Alternatives ruled out: Prescription data from IQVIA and outbreak data from the Integrated Disease Surveillance Programme (IDSP) showed no break in prescriptions or acute disease outbreaks.
4. Cash binds in India: In insured, developed economies, health care barely responds to wealth shocks. Indian households pay much of their health costs out of pocket, so cash decides essential purchases.
5. Public health buffer: Matching sales with Health Management Information System (HMIS) data shows that a denser network of primary health centres (PHCs) cushioned the shock.

What are the study’s lessons?

1. Upfront cost check: Whatever a currency replacement aims at, households depend on cash in the same way. Who bears its costs must be weighed upfront.
2. Real but limited gains: Digital adoption did accelerate and counterfeit stock fell. Other research found only modest tax gains from going cashless.
3. Stronger buffers since 2016: India has expanded Jan Aushadhi Kendras, the Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (AB-PMJAY) and Unified Payments Interface (UPI) payments at pharmacies, so households cope better with cash shocks.

Challenges

1. Outpatient costs uncovered: AB-PMJAY pays for hospital care, so pharmacy medicines are still largely paid in cash.
2. Data gaps: The study captures drug sales, not health outcomes, since no dataset links household consumption to health.
3. Digital exclusion: Households without smartphones or bank access cannot switch to UPI when cash runs short.

Way Forward

1. Health-sector protocol: Build credit lines or digital payment support at pharmacies into any large currency operation.
2. Pre-registered evaluation: Require an evaluation plan fixed in advance before such extreme instruments are used.
3. Linked datasets: Build linked consumption-health datasets to measure welfare effects precisely.
4. Denser primary care: Raise PHC density in under-served districts as a standing buffer.

Conclusion

Liquidity is an economic determinant of health, so a monetary shock is also a health shock for households that pay for medicine in cash. Watch whether future currency or payment reforms carry a health-sector safeguard.

Key numbers

1. Notes returned: Nearly 99.3% of the withdrawn notes returned to the banking system (RBI).
2. AIOCD coverage: 805 pharmaceutical firms, 31 regions and 18 illness categories.

Back2Basics: Pradhan Mantri Bhartiya Janaushadhi Pariyojana

1. What it is: A scheme of the Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers, that sells quality generic medicines through outlets called Jan Aushadhi Kendras.
2. Implementing agency: The Pharmaceuticals and Medical Devices Bureau of India (PMBI).
3. Aim: To cut household spending on medicines by offering generics at prices well below branded equivalents.

Matching Previous Year Question

“No direct PYQ traced in the provided files. Thematic PYQ: [2024, GS2, 15 marks] In a crucial domain like the public healthcare system, the Indian State should play a vital role to contain the adverse impact of marketisation of the system. Suggest some measures through which the State can enhance the reach of public healthcare at the grassroots level.”