Demonetization is a net positive move4 min read 09 Nov 2016, 11:46 PM IST
Scaling back large bills will not end crime, but it will force the underground economy to employ riskier methods
In a special broadcast on 8 November, Prime Minister Narendra Modi announced a positive exogenous shock to the country. He declared that in less than four hours, Rs500 and Rs1,000 bills would be demonetized, thereby withdrawing their status as legal tender. India has one of the highest levels of currencies in circulation at over 12% of gross domestic product and of this cash, 87% is in the form of Rs500 and Rs1,000 notes. 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. Across countries, most of this cash has been supporting underground black economies. For decades, economists such as Ken Rogoff and Richard Thaler have been arguing for a less-cash economy because it is safer and fairer.