India: Demonetisation

In a bid to curtail inflation and black market activates, India have decided to abruptly discontinue their largest bank notes. By invalidating 500 and 1000 rupee bills the Indian Government hopes to reduce the amount of money circulating and to decrease inflation.

Unfortunately, the advantages of rendering $200 billion of hard cash worthless may be somewhat concealed by the overbearing need to punish tax evaders. Most of India’s wealth is held in offshore accounts or in gold and silver and therefore, the new policy may prove to be insufficient

In the latest spate to control India’s inflationary woes, the government have attempted to tackle the black money market which they believe is fuelling inflation.

India’s illegal and mainstream economy are profoundly interlaced. With so many cross-overs between the two, tackling corruption is a heavy feat. To successfully detangle the illegal and mainstream economies the government must revamp the fundamental institutions and mind-sets. This, coupled with a cohesive policy strategy would be more suited for real and lasting change.

Only about 53% of the adult population have a bank account, in rural communities, opening a bank account to exchange the null notes seems alien and unrealistic. Worries that the real burden of the demonetisation will be forced upon the poor are widespread. In addition to this, reduction in purchases of normal goods in the wake of the announcement has hurt farmers and small business owners. .

Analysts warn that if the money supply disorder continues, the result could be more than a 1% decrease in GDP. Discontinuing the bank notes that claim over 86% of India’s currency will add pressure to the value of the other Indian valuables including; gold, silver, real-estate and the 50-rupee and 100-rupee bills.

In the strive to bring down India’s inflation to reach targets of 4%, the government have taken on a cumbersome task in demonetising. However, the strengths of this endeavour will be seen. Due to the sudden surge in deposits, banks may decrease interest rates. The demonetisation will lead to higher transparency and therefore, higher tax collection.

Perhaps demonetisation will decrease the amount of money that filters through the system, untouched by tax. But the underlining issues need to be addressed and policies need to be put in place to punish the guilty instead of the vulnerable.