India Cash Crackdown is a failure

by | Sep 8, 2017

The decision by the Indian government to ban several kinds of bank notes last year was met widely with disdain, and recent news has shown that it may have been entirely in vain. 

Demonetisation of ₹500 and ₹1000 rupee notes was enacted in order to crack down on corrupt officials, businessmen and criminals hoarding large sums of illicit cash. India’s Prime Minister Narendra Modi hoped that the dramatic action would wipe away a huge amount of ‘black money’ that was circulating in the economy. 

However a report from India’s central bank has shown that the attempts to expose and remove undeclared wealth has failed. Illegal notes worth up to 15.28tn rupees were deposited in the country’s banks since the move by Modi, showing that most of the illegal cash wasn’t destroyed but simply reentered the banking system. 

The Reserve Bank gave its findings in its March 2017 report ‘Macroeconomic Impact of Demonetisation – A Preliminary Assessment’. It reads, “Demonetisation announced on November 8, 2016 was aimed at addressing corruption, black money, counterfeit currency and terror financing. Although demonetisation holds huge potential benefits in the medium to long-term, given the scale of operation, it was expected to cause transient disruption in economic activity.” The bank noted that the immediate impact was significant, but by mid-February 2017 the effects were less widespread. Interestingly, demonetisation was a key factor which caused a sharp increase in the use of digital transactions.

However, Raghuram Rajan, ex-governor of the Reserve Bank of India, told CNBC that demonetisation has had a negative longer-term effect on the economy. He said, “I think undoubtedly it has had some effect because we were growing between 7.5 and 8 percent in the first quarter of 2016, and then we’ve slowed considerably since then. And we’ve slowed when the world economy had taken off.”

Despite the upset that the policy caused to many Indians especially those who relied on cash-in-hand transactions, key equity markets have had a bumper year, with the NIFTY50 growing by over 1500 points since December 2016.

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ALL RIGHTS RESERVED © INVSTR LTD. 2017

Risk Disclosure:

Invstr is a technology platform, not a registered broker-dealer or investment adviser. Invstr does not offer its own recommendations of any security or provide its own research to any user regarding any security transaction or order. Brokerage services, including fractional trading of US securities, are provided to Invstr users by DriveWealth LLC, a regulated member of FINRA/SIPC. DriveWealth may not establish investment accounts to residents of certain jurisdictions. For more information, including disclaimers, risk and transaction fees click here. Please note, investing involves risk and investments may lose value. Past performance does not guarantee future results.

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