Political Punishment and Financial Safety Nets: Evidence from India's Demonetization

44 Pages Posted: 5 Feb 2020

See all articles by Gaurav Khanna

Gaurav Khanna

University of California, San Diego (UCSD)

Priya Mukherjee

College of William and Mary - Department of Economics

Date Written: January 1, 2020

Abstract

We analyze the electoral consequences of India’s 2016 ‘demonetization’: a unique policy that unexpectedly made 86% of the currency-in-circulation redundant overnight, and led to severe cash shortages in the subsequent months. We leverage a discontinuity in the number of bank branches arising from a nationwide district-level bank expansion policy, instituted by the previous government in 2005. We first document that the impacts of the branch-expansion policy around the cut-off were meaningful: areas just above the cut-off had fewer bank branches, less outstanding credit, and households were less likely to report having bank accounts. Importantly, these effects strongly persisted in 2016, when the demonetization policy was instituted. As districts with fewer banks had greater cash shortages, we identify the impacts of demonetization at the bank-expansion cut-off. Regression discontinuity estimates show that following demonetization, places with fewer banks had lower economic activity, as measured by nighttime lights, and voters reported having less favorable views on demonetization. Using electoral data and a difference-in-discontinuity design, we find that in elections following demonetization, the ruling party did relatively worse in regions with discontinuously fewer banks, receiving a 4.7 percentage point lower fraction of votes. We finally show that voters that were historically strongly aligned with the ruling party, are nearly unresponsive in voting behavior, despite having a less favorable view of the policy itself.

Keywords: elections, voter behavior, money supply, demonetization

JEL Classification: O16, D72, E51

Suggested Citation

Khanna, Gaurav and Mukherjee, Priya, Political Punishment and Financial Safety Nets: Evidence from India's Demonetization (January 1, 2020). Available at SSRN: https://ssrn.com/abstract=3518143 or http://dx.doi.org/10.2139/ssrn.3518143

Gaurav Khanna

University of California, San Diego (UCSD) ( email )

9500 Gilman Drive
Mail Code 0502
La Jolla, CA 92093-0112
United States

HOME PAGE: http://www.econgaurav.com

Priya Mukherjee (Contact Author)

College of William and Mary - Department of Economics ( email )

Williamsburg, VA 23187-8795
United States

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