India’s Currency Gamble

Thursday, 1st December 2016

From Dec. 1, 2016

Yes, America, there’s still a “rest of the world.” What’s happening out there? Well, likely lost in all the fear and uncertainty in the US is an economic experiment in India, courtesy of the president, Narendra Modi. On Nov. 8, he declared that all 500 and 1,000 Rupee notes would be worthless and have to be exchanged. Those denominations count for 86% of the country’s currency. It would be like saying that all $10 and $20 bills were worthless, as of midnight today (that’s how¬†fast it happened).

Why did he do this? Ostensibly to combat corruption, kickbacks, bribes, and money laundering. It would force people to use credit cards more, which can be tracked more easily. Will it work? Who knows, but it certainly threw all of India into a tailspin. India is not Sweden, which is also moving away from hard currency, but at a much slower rate, and in a very different society.

If I were an economist, I would be very interested in this as a natural experiment. What’s the effect, if any, on corruption? I have to think that those who want to bribe or launder money at a high level will be unaffected, and this will just hit the small and medium crooks. While that might be fine, the real question is, how do you catch the big crooks? What will this do to the day-to-day economic life in India? Economic forecasts have already been revised downward because of this. And, is forcing people to use cards a prelude to widespread surveillance by a government that a lot of people don’t trust much?

If I were a political scientist, I would be worried about what this models for far-right wing political action. Not that the US ever looks to India for anything other than manufacturing and tech support, but will we in the US be treated to similar “decisive” action after January 20 by the incoming regime? Will it be equally unreflective, disruptive, and oblivious to the effects on people? I would bet, yes it will be. I doubt that anyone is going to cancel currency, but I predict that there will be other sweeping changes that have little basis in research, will be highly disruptive, and will change the face of the country in fundamental ways.

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