mises.org / Carmen Elena Dorobăț / November 13, 2016
Last week, India’s Prime Minister Narendra Modi banned from circulation the country’s two largest denomination banknotes, of 500 rupees ($7.50) and 1000 rupees ($15). The shocking move—kept secret and set to take place overnight—was intended to flush out the cash hoardings of black market participants and stop the corruption currently permeating all levels of business and government in India. The two banknotes, rumoured to account for almost 80% of the cash in circulation, were used primarily to avoid paying taxes and to pay bribes.
However, the rupee ban has managed only to create chaos and desperation for millions of Indian citizens. They were left with no money to buy basic amenities, and saw their dearly earned savings being wiped out overnight. They queued in front of the banks and rushed to their ATMs, scrambling to exchange the worthless banknotes in the brief window of opportunity provided. Both banks and ATMs ran out of money, as India’s printing presses rushed to keep up by printing new lower-denomination currency.
But many Indians are so sick of corruption that they are willing, albeit grudgingly, to bear these hardships if the move should end it. They don’t know that it won’t: the move did little more than temporarily inconvenience the large money launderers and tax evaders, who have already found loopholes allowing them to profit from and minimize the effects of the government’s move—and that is a good thing.