The Indian central bank’s final tally of Prime Minister Narendra Modi’s 2016 demonetization drive, intended to take money derived from tax evasion out of circulation, showed that 99.3 percent of outlawed high-value bank notes had been returned. That’s a severe loss of face for officials, who had argued that holders of the cash would rather destroy it than return it to banks, providing a windfall for the government.

The authorities managed to produce several other defenses of the initiative, however. One in particular was appealing to financial markets: The notion that, in Finance Minister Arun Jaitley’s words, “Demonetization appears to have led to an acceleration in the financialization of savings.” Households that traditionally kept their savings in cash would now prefer to put the money into other instruments, perhaps even the stock market.

This would increase the amount of capital available for companies to deploy and banks to lend out, spurring economic growth.

There certainly were some indicators to support the idea. For one, Life Insurance Corp. of India saw a 142 percent increase in premium collection in the month demonetization was carried out. And Indian stocks have been on a record-breaking run, even though foreign investors were net sellers so far this year.

Unfortunately, the Reserve Bank of India punched a hole in that hypothesis, too. Its annual report, as well as tallying the result of demonetization, provided a breakdown of savings by households, a category that includes small and unregistered enterprises. It turns out that net financial savings for the fiscal year that ended March 31 were 7.1 percent of overall disposable income — less than the average for the five years prior to demonetization.

Worse yet, perhaps, households are keeping far more of their net savings in cash, not less. And their net savings going to banks are almost 50 percent lower than the five-year average before demonetization. In other words, the idea that the crackdown would leave banks flush with household savings that they could lend to productive parts of the economy has been comprehensively debunked.

What’s going on? Some have argued that lower interest rates are the problem. That’s not an easy sell: Over the past year, India was one of the few countries with strongly positive real rates — and savings in bank deposits were a higher fraction of disposable income back in 2012-2014, when Indians were dealing with negative real interest rates.

Perhaps, instead, a change in behavior is responsible. For most Indians, the defining experience of demonetization was losing access to their bank accounts: We had to stand in long lines at ATMs, and our withdrawals were strictly rationed. In contrast, those who had piles of old bank notes appeared to be able to change them (at a black market-determined discount) with ease.

What would you learn from this? Would you trust a banking system that can be closed down on a prime minister’s whim? For many Indians, demonetization provided their first experience of banks or digital payments. I just hope the insanity of the process didn’t put them off formal finance forever.

Still, you might say, at least the markets are doing well. That reflects households’ greater willingness to put their savings in stocks, right? And yes, the RBI data do indeed suggest that.

But look a little closer and things aren’t so bright. One of the reasons domestic institutional investors — who pumped $10 billion into Indian markets so far this year, while foreigners took $280 billion out — are bullish is because they believe a structural change is under way in how Indians save.

They think we’re moving permanently away from cash (and gold, and real estate). A turn toward financialization means ever-higher equity prices.

The central bank data, however, suggest we shouldn’t be so sure about that. The heights being scaled by Indian markets might prove brittle.

Whatever the impact on savings behavior of demonetization, it’s clear the initiative was a policy failure, even on the administration’s own terms. I’d like to think a lesson was learned.

Not so fast: The government just appointed one of the brains behind the 2016 project to the board of the central bank. The nation’s era of ill-advised intervention may not be over after all.

Mihir Sharma is a Bloomberg Opinion columnist. He was a columnist for the Indian Express and the Business Standard, and he is the author of “Restart: The Last Chance for the Indian Economy.”

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