Is India’s Cash Ban A Test Case For The West?

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Source: BBC.com



In November of last year, the board of India ’s central bank has approved the removal of high denomination bank notes. Surprisingly, the central bank didn’t announce the vote count so this decision really seems to have been made in a rush to serve prime minister Modri, as he announced the ban immediately after the vote. This means we have absolutely no idea whether the vote ended on 6-4 or 10-0, and why there were any dissenting opinions (if any).



india-cash-ban-1



Source: BBC.com



The decision to abolish the high denomination bank notes shouldn’t be taken lightly, as they represent almost 90% (!) of all bank notes in circulation and on top of that, India is predominantly a cash-nation. Most businesses and consumers prefer to seal their transactions with cash rather than plastic and digital money, and now hundreds of millions of Indians were forced to line up at the banks to try to convert their cash in new and approved notes. Some even claim the cash ban could actually have a major impact on the economic growth of India in the past and the current quarter.



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Source: bloombergquint.com



India aimed to reduce the size of the shadow economy, but data suggests this wasn’t really necessary as the size of the shadow economy as a percentage of the country’s GDP has been shrinking for several years in a row now. As the majority of this shadow economy has been locked up in tangible assets and real estate, the crackdown on high-denomination rupee bills might miss its target.



On top of that, cash shortages have been reported for the past 8 weeks (confirming the potential impact on the economic growth). One would think the central bank would have an emergency plan ready to go, because after all, the 500 rupee note currently has a value of just $7.35 (using the current exchange rates), so it might not be comparable to the European Central Bank’s move to take the 500 EUR bills out of rotation.



It’s not a secret a cash-less society has been the ‘wet dream’ of policy makers for quite a while now. Pretending it’s a ‘safer way’ to execute monetary transactions whilst preventing the shadow economy to continue to increase in size by cutting down on the larger denominations. Technically, that’s a fair assumption, but you definitely should keep in mind this will reduce the (financial) flexibility of évery participant in the society, and all your monetary movements could easily be tracked whether you have something to hide or not.


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