The Death of the Rupee Denomination

BY: RAHUL MEPANI, CONTRIBUTOR

Earlier this month, India took a major step in countering black market transactions and other illegal dealings by canceling the 500 and 1000 note Rupee. As Prime Minister Narendra Modhi looks to deliver on his campaign promise of fighting corruption, the news of high denomination notes being canceled was ill received; hundreds of thousands of Indians poured onto the streets and into banks, as the CB (Canara Bank), and CBI (Central Bank of India) all reported record numbers of deposits and funds being deposited. While Prime Minister Narendra Modi said in an unscheduled address to the nation that the notes in circulation will have to be deposited in banks by the end of December, the news was ill received as many Indians kept large notes of cash on hand. However, after analyzing the stipulated impacts of canceling such larger denominations, it can be concluded that the long term benefits for the country plagued with the highest rate of systematic corruption outweigh the short term economic ramifications:

• India can (finally) now increase its infrastructure spending:

As millions of Indians have dodged taxes on income for decades, the Indian Central Government can finally reverse the trend of poor tax revenue and begin spending on its domestic issues like infrastructure. Global Financial Integrity (a Washington think tank) stipulates that India has lost over $344 billion in unaccounted for transactions and illicit outflows over the past few decades. This money could have been taxed and spent on growing the economy, social reform, and transforming the public sector. The Union Minister of State (responsible for overseeing electricity production and infrastructure development including generation, transmission, and delivery, as well as maintenance projects), recently announced that India’s infrastructure was deteriorating at startling rates, as unfinished projects stretched from Mumbai to Kerala. With the increases in taxable assets, the expected funds for government bodies, like the Department of Infrastructure, are expected to rise.

• India will experience a long term increase in foreign investments.

Investors don’t like instability. We saw this when Donald Trump won the presidency, with the Dow Future Assets plunging 900 points over night. But once the markets recovered due to the fact that his tax plan would favor the wealthy, the Dow and S&P 500 recorded all time highs. Similarly, foreign investment is almost guaranteed to drop in the next year or two, as investors watch to see whether the Central Government continues its involvement in the private sector and corruption fighting or takes a step back. However, as foreign investors begin to realize that currency elimination actually indicates a stabilizing government and as the economy stabilizes as well, they will be more willing to trust and invest in Indian entities. “This is Modi’s transformational reform,” said Deepak Parekh, chairman of Housing Development Finance Corporation, one of India’s largest mortgage lenders.“It will be disruptive, it will be inconvenient, but in the medium term, it will be very good.”

• India will experience a drop in corruption rates with the trending digital currency.

India is well known for its notoriously corrupt election systems, where bribery for votes play a significant role in every outcome, from the municipal to international level. With the new limits on ATM withdrawals being restricted to Rs 10,000 a day and Rs 20,000 a week, it will drive the card payments across the country (in simpler words card transactions will slowly replace the cash transactions in daily activities). This means most major transaction can be traced, which creates a problem for those dealing in only elicit activities.

For the next few months, the world’s fastest growing economy might experience some stagnation. However, the benefit of creating more stability, fighting corruption, and creating a more digital and updated country will set a strong precedent and foundation for India’s future.

Photo Credits: By Parvathisri (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons