On Nov. 8, Prime Minister Narendra Modi announced that 500- and 1,000-rupee notes (1,000 rupees is about $15) were no longer legal tender; people were given 50 days to deposit them in bank accounts or exchange them for new notes at banks and post offices — when only half of Indian adults have bank accounts. Beyond a fairly low threshold (under $4,000), people will be required to explain the source of their cash holdings.
Disruptive technology can unleash creative forces through destructive impact on an industry that exists in a stable equilibrium of vested interests. Will the world's fastest growing big economy show similar resilience and regeneration from deep shock therapy, or will demonetization cure the disease but kill the patient? By withdrawing 86 percent of circulating currency when 70 to 80 percent of transactions are cash-based, has the Indian government burned down its economic house in order to eradicate the pest of corruption?
All previous instances of large-scale overnight currency cancellations were in countries ravaged by hyperinflation or facing state or economic collapse. Such shock therapy in a major economy is without precedent, so no one can predict the long-term structural impact and the full range of intended, pernicious and perverse consequences.
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