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India’s Currency Reform 2016
A BriefAnalysis of Objectives and Outcomes
Nitin Pai
Anupam Manur The Takshashila Institution
takshashila.org.in
Copyright 2016, The
Takshashila Institution, All
rights reserved. Can be used
with attribution without
prior permission.
2|
Iftheobjectivewasto:
Combatcounterfeitcurrency
What was done
Old notes were withdrawn abruptly.
New notes do not have additional
security features.
What we should expect
One-time removal of stock of counterfeit
currency.
Potential recurrence of counterfeit
currency in the near term.
More counterfeit money can be
smuggled in due to higher denomination
notes.
What should have been done
Remove old notes from circulation
gradually.
Replace with higher security notes.
Promote cashless transaction.
Promote the use of banking system.
Copyright 2016, The Takshashila Institution, All rights reserved. Can be used with attribution without prior permission.
3|
Iftheobjectivewasto:
Counterfundingofterrorism&
insurgency
What was done
Old notes were withdrawn abruptly.
What we should expect
One-time removal of cash stocks.
Terrorists & insurgents will face a
temporary cash crunch impacting
activities that depend on it.
The speed of their recovery will be similar
to that of the rest of the economy.
What should have been done
Remove old notes from circulation,
gradually or immediately.
Promote cashless transactions.
Promote the use of banking system.
4|
Iftheobjectivewasto:
Punishholdersofunaccounted
money
What was done
Old notes were withdrawn
abruptly.
New higher denomination
notes were issued.
Limits and identification
during exchange were
imposed.
Punitive action was imposed
but inconvenienced everyone.
Exemptions were given to
farmers, wholesale traders,
weddings, petrol bunks,
hospitals etc.
What we should expect
Most holders of unaccounted money
in cash incurred losses to various
extents.
Many holders of unaccounted money
could convert into other assets or
new currency notes at various levels
of transaction costs.
Some holders of unaccounted money
are likely to face legal consequences.
No effect on holders of unaccounted
money in other assets like gold, real
estate, art, luxury goods etc.
What should have been done
Remove old notes from
circulation immediately.
Not introduce higher
denomination notes.
Limits and identification while
exchanging old notes.
Targeted punitive action against
those who didn’t use the tax
amnesty necessary for credibility
and fairness.
Holders of legitimate cash
unduly penalised if they are
unable to exchange for various
genuine reasons.
Mass inconvenience of cash
exchange to individuals and
small businesses.
Negative impact on the overall
economy due to cash supply
shock and shortage.
5|
Iftheobjectivewasto:
Eliminategenerationof
unaccountedmoney
What was done
255 million Jan Dhan accounts have
been created.
UPI has been introduced in mid-
2016.
Favourable regulatory climate for
FinTech innovation is in place.
Ecosystem is in place for urban and
semi-urban areas.
What we should expect
Many people will use cashless
mechanisms to tide over the cash
shortage.
Uncertain as to whether fully cash-
dependent persons will switch to
cashless payments in a substantial
way.
Reintroduction of new notes will
reduce incentives for pure cashless
transactions.
Many bank accounts could be used
for laundering unaccounted money.
What needed to be done
Implement structural reforms that lower
licensing requirements, inspections,
onerous compliance requirements and
regulatory overhead.
Eliminate government interventions in
prices of goods and services, including
price ceilings, price floors, tariffs, quotas
etc.
Simplify and lower tax structures.
Implement laws that govern political
parties, including on political
contributions, lifting of limits on
campaign expenditure etc.
Simplify procedures and reduce
stamp duty for real-estate
transactions.
Review the definition of
agricultural land with a view to
reduce its utility as a generator
of unaccounted money.
6|
Iftheobjectivewasto:
Promotecashlesseconomy&
bankingculture
What was done
255 million Jan Dhan accounts have
been created.
UPI has been introduced in mid-2016.
Favourable regulatory climate for
FinTech innovation is in place.
Ecosystem is in place in urban and semi-
urban areas.
What we should expect
Many people will use cashless
mechanisms to tide over the cash
shortage.
Uncertain as to whether fully cash-
dependent persons will switch to
cashless payments in a substantial way.
Reintroduction of new notes will reduce
incentives for pure cashless transactions.
Many bank accounts could be used for
laundering unaccounted money.
What needed to be done
Created incentives and mechanisms for
financial inclusion.
Reduce costs of cashless transactions.
Ensure that there is an ecosystem of
payment banks, telecom connectivity,
wallet providers and IT infrastructure,
security and privacy to enable mass
cashless transactions.
7|
Iftheobjectivewasto:
Replaceoldcurrencynotes
What was done
Old notes were withdrawn abruptly.
Exchange hampered by shortage of
supply of new notes.
What we should expect
Large scale public inconvenience and
economic disruption.
Likelihood of exchange of counterfeit
notes for new legal tender.
Likelihood of introduction of poor quality
new notes due to time constraints.
What needed to be done
Remove old notes from circulation very
gradually to avoid economic disruption.
8|
Iftheobjectivewasto:
Recapitalisethebanking
system
What was done
Individuals and businesses were required
to deposit their old currency with banks
within a short span of time.
What we should expect
Banks are flush with cash, with a low
cost of capital.
Government treasury does not bear the
fiscal burden of bank recapitalisation.
Because recapitalisation is an
unintended consequence of another
policy, banks do not have incentives to
change their lending patterns.
What needed to be done
Use bank restructuring and debt
management bureau to improve bank
balance sheets.
Finance part of the bank recapitalisation
through transparent budgetary
provisions.

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India's Currency Reform 2016

  • 1. India’s Currency Reform 2016 A BriefAnalysis of Objectives and Outcomes Nitin Pai Anupam Manur The Takshashila Institution takshashila.org.in Copyright 2016, The Takshashila Institution, All rights reserved. Can be used with attribution without prior permission.
  • 2. 2| Iftheobjectivewasto: Combatcounterfeitcurrency What was done Old notes were withdrawn abruptly. New notes do not have additional security features. What we should expect One-time removal of stock of counterfeit currency. Potential recurrence of counterfeit currency in the near term. More counterfeit money can be smuggled in due to higher denomination notes. What should have been done Remove old notes from circulation gradually. Replace with higher security notes. Promote cashless transaction. Promote the use of banking system. Copyright 2016, The Takshashila Institution, All rights reserved. Can be used with attribution without prior permission.
  • 3. 3| Iftheobjectivewasto: Counterfundingofterrorism& insurgency What was done Old notes were withdrawn abruptly. What we should expect One-time removal of cash stocks. Terrorists & insurgents will face a temporary cash crunch impacting activities that depend on it. The speed of their recovery will be similar to that of the rest of the economy. What should have been done Remove old notes from circulation, gradually or immediately. Promote cashless transactions. Promote the use of banking system.
  • 4. 4| Iftheobjectivewasto: Punishholdersofunaccounted money What was done Old notes were withdrawn abruptly. New higher denomination notes were issued. Limits and identification during exchange were imposed. Punitive action was imposed but inconvenienced everyone. Exemptions were given to farmers, wholesale traders, weddings, petrol bunks, hospitals etc. What we should expect Most holders of unaccounted money in cash incurred losses to various extents. Many holders of unaccounted money could convert into other assets or new currency notes at various levels of transaction costs. Some holders of unaccounted money are likely to face legal consequences. No effect on holders of unaccounted money in other assets like gold, real estate, art, luxury goods etc. What should have been done Remove old notes from circulation immediately. Not introduce higher denomination notes. Limits and identification while exchanging old notes. Targeted punitive action against those who didn’t use the tax amnesty necessary for credibility and fairness. Holders of legitimate cash unduly penalised if they are unable to exchange for various genuine reasons. Mass inconvenience of cash exchange to individuals and small businesses. Negative impact on the overall economy due to cash supply shock and shortage.
  • 5. 5| Iftheobjectivewasto: Eliminategenerationof unaccountedmoney What was done 255 million Jan Dhan accounts have been created. UPI has been introduced in mid- 2016. Favourable regulatory climate for FinTech innovation is in place. Ecosystem is in place for urban and semi-urban areas. What we should expect Many people will use cashless mechanisms to tide over the cash shortage. Uncertain as to whether fully cash- dependent persons will switch to cashless payments in a substantial way. Reintroduction of new notes will reduce incentives for pure cashless transactions. Many bank accounts could be used for laundering unaccounted money. What needed to be done Implement structural reforms that lower licensing requirements, inspections, onerous compliance requirements and regulatory overhead. Eliminate government interventions in prices of goods and services, including price ceilings, price floors, tariffs, quotas etc. Simplify and lower tax structures. Implement laws that govern political parties, including on political contributions, lifting of limits on campaign expenditure etc. Simplify procedures and reduce stamp duty for real-estate transactions. Review the definition of agricultural land with a view to reduce its utility as a generator of unaccounted money.
  • 6. 6| Iftheobjectivewasto: Promotecashlesseconomy& bankingculture What was done 255 million Jan Dhan accounts have been created. UPI has been introduced in mid-2016. Favourable regulatory climate for FinTech innovation is in place. Ecosystem is in place in urban and semi- urban areas. What we should expect Many people will use cashless mechanisms to tide over the cash shortage. Uncertain as to whether fully cash- dependent persons will switch to cashless payments in a substantial way. Reintroduction of new notes will reduce incentives for pure cashless transactions. Many bank accounts could be used for laundering unaccounted money. What needed to be done Created incentives and mechanisms for financial inclusion. Reduce costs of cashless transactions. Ensure that there is an ecosystem of payment banks, telecom connectivity, wallet providers and IT infrastructure, security and privacy to enable mass cashless transactions.
  • 7. 7| Iftheobjectivewasto: Replaceoldcurrencynotes What was done Old notes were withdrawn abruptly. Exchange hampered by shortage of supply of new notes. What we should expect Large scale public inconvenience and economic disruption. Likelihood of exchange of counterfeit notes for new legal tender. Likelihood of introduction of poor quality new notes due to time constraints. What needed to be done Remove old notes from circulation very gradually to avoid economic disruption.
  • 8. 8| Iftheobjectivewasto: Recapitalisethebanking system What was done Individuals and businesses were required to deposit their old currency with banks within a short span of time. What we should expect Banks are flush with cash, with a low cost of capital. Government treasury does not bear the fiscal burden of bank recapitalisation. Because recapitalisation is an unintended consequence of another policy, banks do not have incentives to change their lending patterns. What needed to be done Use bank restructuring and debt management bureau to improve bank balance sheets. Finance part of the bank recapitalisation through transparent budgetary provisions.