On 8th November 2016, PM Modi, declared in a special
broadcast that the tender of 500 and 1000 notes will be demonetized in less
than 4 hours, therefore withdrawing their status as legal tenders.
India in general has the highest levels of currencies in circulation at
over 12% of GDP and of this cash, 87 percent is in the notes of 500 and 1000.
Globally, this is not unusual. Central banks of several countries pump
massive amounts of cash into the economy, mostly in very large denominations.
In the US, $100 bills account for 80% of the cash supply. In Japan, ¥10,000
note (about $100) accounts for 90% of total cash holdings.
Survey for business show that coming few months are going to be painful and should be seen
as teething troubles for an economy trying hard to reform its corrupt self.
There will be an urgent need for debit cards, electronic transfers and mobile
payment platforms to be widely adopted.
As an economy we should aim to go less-cash, and not cash-less. The
fundamental idea behind this shock is to increase the cost of illegal
transactions. Besides, the new Rs2,000 bills have been intended with improved
security topographies, so this is not just new money substituting old money in
the system.
Will this eliminate black money and dishonesty in India? Some “experts”
have warned that Indians are imaginative and will find ways to avoid this
demonetization. That’s true—there are ways to bribe officials, make criminal dealings
and avoid taxes without Rs500 and Rs1,000 bills. But elimination of large bills
will make numerous criminal and illegal doings more expensive such as tax
evasion, human trafficking, drugs, extortion and terrorism.
The effect of this policy is not going
to be unchanging crossways the economy. Surveyof business owners show that sectors that have a larger cash constituent in
their contacts will be hit harder, such as real estate, movie production,
campaign finance, etc. However, these are rectifications which will move the
market symmetries to outcomes which reflect honest request and supply in the
real economy. Modi has constricted the straps and honest Indians are hopeful
about the speeding ahead.
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