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What is Behind India’s Demonetization Drive?

With 86% of currency out of circulation, it is India’s poor who have been most affected by demonetization.

On November 8, 2016, India’s government placed an immediate ban on all Rs500 and Rs1,000 notes—an equivalent of $7 and $15. The measure was an attempt to address the problem of “black money”—illicit cash acquired through bribery, corruption and kickbacks that makes up around a third of all transactions in India and nearly a quarter of its gross domestic product (GDP).

In an economy that is over 90% cash-based, these small notes stuffed into mattresses across the country account for the vast majority of currency in India.

A similar measure by the European Central Bank (ECB) in 2016 saw a withdrawal of the €500 note from production after concerns that it was widely used in criminal activity. However, while the hefty note will slowly be phased out until the end of 2018, Indian consumers were given a mere 50 days to exchange their soon-to-be-worthless money and with a limit on the amount they can withdraw from the bank.

In the ensuing chaos, people rushed to besieged banks and businesses that soon ran out of even small change. Some bought travel tickets—one of the few items available for purchase with the banned notes. Others gave up altogether and either donated the money to charity or simply threw the notes away.

With 86% of currency out of circulation, it is the country’s poor who have been most affected.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

Photo Credit: Niteenrk