The Demonetization of Indian Currency

The Demonetization of Indian Currency - Zenkar Kollurmath

On the 8th of November, 2016 the Prime Minister of India, Narendra Modi, declared circulation of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series as invalid effective from the midnight of the same day, and announced the issuance of new ₹500 and ₹2,000 banknotes of the Mahatma Gandhi New Series in exchange for the old banknotes. This was a bold move in the nation's economic landscape. The sudden nature of the announcement and the prolonged cash shortages in the weeks that followed created significant disruption throughout the economy, threatening economic output.

Although there exist many drawbacks of this decision, the problem this move was set to solve was solved. The goal was to combat tax evasion by "black money" held outside the formal economic system, and also to aid the fight against terrorism. There exist many cases where a corrupt citizen was caught when trying to exchange their cash. But the major impact that the policy has had is the eradication of terrorist funding. The surrender rate among radicals, like the Maoists and the Naxalites,  has reached its highest since the demonetization was announced. Many drug cartels have also been brought into the open as their primary source of revenue has been cut off. The introduction of the new notes has also posed a problem for the counterfeiting business. With added measures of security to prevent counterfeiting, the problem has decreased severely in the months following the announcement.

Now looking at the negatives of the decision, we see that although the goal was met, a ripple effect of economic downfalls has befallen the country. With 86% of India’s Currency nullified overnight, Economic output has decreased critically. The stock market crashed the next day and cash shortages still plague the country. There have also been many accounts of deaths in the long queues at banks and even at hospitals, who refused to take the nullified money in exchange for their services. Many riots and strike have also emerged as a result of the cash shortages. The GDP has seen a projected decline in the near future. It is literally the multiplier effect blown out of proportion.

People wait in long line at the bank, trying to exchange their money.

People wait in long line at the bank, trying to exchange their money.

Many Economists have heavily criticized the decision and many have even called the decision a “Massive Man-made disaster”. While the intent and positives make a naive case for the policy, the negatives hold the decision as a poorly executed one. I honestly don’t know which side to take, and thus have qualified the situation to say that this was a lose-lose situation for the policy makers. If they had more people involved in the makings of the policy, the chance of the idea leaking would have skyrocketed and would have nullified the intent of the policy. But with such a small number of people (only 10 people were aware of the situation before the announcement) aware of the policy, the preparation for the announcement was sub-par, bringing about the drawbacks of the situation. What would you do to solve the issues of tax evasion?

Works Cited

"2016 Indian banknote demonetisation." Wikipedia. Wikimedia Foundation, 26 Feb. 2017. Web. 26 Feb. 2017.

Shepard, Wade. "One Month In, What's The Impact Of India's Demonetization Fiasco?" Forbes. Forbes Magazine, 12 Dec. 2016. Web. 26 Feb. 2017.

"When Money Dies - India's Demonetization Is A "Massive Man-Made Disaster"." ZeroHedge. N.p., 24 Nov. 2016. Web. 26 Feb. 2017.