Currency Crackdown

India’s short-sighted ban on large currency risks wrecking the economy, but still aims for long-term success.

By Rajendra Prabhu.

Narendra Modi’s controversial and daring move to bring India’s economy under control has not gone smoothly. Exactly halfway through his five-year term, the Prime Minister who brought the Bharatiya Janata Party to power launched an unannounced midnight “surgical strike” at the hoard of untaxable black money and counterfeit currency drowning the country. With three hours’ notice on November 8, Modi declared that high-value currency bills would no longer be legal tender as of midnight of the same day. The goal was to force tax evaders and “hawala operators”, who clandestinely convert Indian rupees and U.S. dollars, to come out with their hoards or lose them. Modi promised a fifty-fifty amnesty for those who owned up before a deadline. The Prime Minister then assured those with legal currency that they would have a window within which to deposit or exchange their notes at banks and ATMs. The result of the well-meaning initiative has been disastrous.

In December, exactly a month later, the currency storm that Modi let loose countrywide has magnified into a hurricane for the common people. Wage earners as well as small-business owners, street vendors, farmers, and others have had to queue up for days and hours at banks and ATMs to exchange their holdings of demonetized notes for the new valid currency. The reality is that only a very small minority of Indians use credit or debit for day-to-day purchases—it makes up less than 5 percent of transactions. Thousands of factories and businesses were left with little valid currency to pay their creditors, suppliers, and workers. Transporters had to contend with credit promises. Salaried people found even their monthly wages deposited in their bank accounts of little use as banks ran out of new currency—even lower denominations of the old valid currency—faster than the central Reserve Bank of India (RBI) could replace them. Anger against the demonetization swept across the country as the long queues for new currency took its toll. In a single month, nearly 100 people died of exhaustion or heart attacks while standing in the endless queues.

With as much as 86 percent of notes in circulation suddenly becoming worthless paper and government printing presses unable to bring out replacements fast enough, disaster was inevitable. Modi’s hectic anti-corruption push has …

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