India Joins Battle Against High-Value Banknotes

Tom Burroughes

9 November 2016

India's prime minister Narendra Modi has surprised the country with a decision to demonetise high-value rupee notes in a bid he says to hit the underground economy and corruption.

Yesterday, Modi announced that the 500 and 1000 rupee notes will not be valid from midnight and they are being replaced with notes of new notes of Rs 500 and 2000, a move finding echoes in the policy of the European Central Bank this year.

According to one publication, Quartz India, "by making the present Rs500 and Rs1,000 currency notes illegal from 9 November onwards, the government has effectively forced the entire country to go to the banks (or post offices) and have their cash (in those denominations) added to their accounts".

India has for a long time had a reputation for corruption, although it has fluctuated. According to Transparency International, a body tracking such matters, India has a score of 38 on its Corruption Perceptions Index, where a score of 100 represents no corruption and where zero is very corrupt.

Observers of government controls on the monetary system in different countries, such as the writer James Rickards, whose book was reviewed by this publication (see here), argue there is another reason why governments, such as those in the West, are moving against high-denomination banknotes. Unless such notes are banned or curbed, it is hard for central banks to impose their policies of "financial repression" via negative interest rates if people choose to hoard cash instead. In the 1930s, for similar reasons, the US administration of F D Roosevelt banned private ownership and transactions in gold.

The , the UK-listed bank that earns the bulk of its revenues in Asia and Africa, has argued that high-value banknotes should be taken out of circulation to foil criminals.