A problem of cash

ECB has said it will stop printing high-value notes. Such a thing is not possible in India

The European Central Bank has said it will stop printing €500 notes to deter drug dealers or terrorists who deal in high-value notes.

There is already a heated debate in India about why currency in circulation has increased sharply in recent months. Many believe this is linked to the major state elections this year, rather than drug-dealing or terrorist finance.

But even data for more normal times shows that some 83% of the value of currency in circulation is accounted for by Rs.500 and Rs.1,000 notes. What is the reason? An obvious one is that inflation has forced people to carry more cash in their wallets. The other is that the black money needed to fund elections is increasing.

A €500 note is rarely used by ordinary citizens in Europe, and so it is easier for the central bank to pull it out of circulation. India cannot do the same for its high-value notes. A more sensible strategy would be to push for more digital rather than cash payments.