What’s the logic behind Demonetisation? – A layman’s analysis of RBI’s stated motive

The Indian government’s decision to demonetise ₹500 and ₹1000 currency notes has sparked a great debate. The layman is caught between the wise economists and the politicians, calculating the move and developing his opinion on it. Apart from the statistics and numbers, there is something any layman can examine in order to check whether some action is coherent or not. When any person, before acting, states his motives and the means to achieve those motives, a layman has with him the very premises which can be examined. Below is the statement of the Reserve Bank of India, stating the motive behind demonetisation.

“The incidence of fake Indian currency notes in higher denomination has increased. For ordinary persons, the fake notes look similar to genuine notes, even though no security feature has been copied. The fake notes are used for antinational and illegal activities. High denomination notes have been misused by terrorists and for hoarding black money. India remains a cash based economy hence the circulation of Fake Indian Currency Notes continues to be a menace. In order to contain the rising incidence of fake notes and black money, the scheme to withdraw has been introduced.”

https://rbi.org.in/scripts/FAQView.aspx?Id=119

Analysis:

  1. As you yourself said, India remains a cash based economy. So if you withdraw notes of the value of 85% of the cash in circulation, wouldn’t it obviously lead to chaos. But okay. If it leads to cleanup of the system, why not? Let’s examine.
  2. Any currency notes in circulation are subject to counterfeit. Now you have the new ₹500 & ₹2000 notes. You are taking time printing them, the counterfeiters will take time counterfeiting them. So what’s up with your boasting that no counterfeiting is happening now? Well the news stories of fake 2000 notes have already surfaced.
  3. High denomination notes which are in circulation are subject to bad use too. Once these new notes are in circulation, they too shall fall into the hands of the criminals. Recently a news story surfaced where it was reported that two gunned down terrorists in Bandipora, Kashmir, had two ₹2000 notes with them.
  4. As said that any kind of notes in circulation will be used for any kind of activity, good and bad. Some shall be accounted and some shall not be. The unaccounted is the black money you were talking about. I have white money and I purchase goods without receipts, which makes my white money, the seller’s black money. He then buys stuff with it and gets receipts. Lo, it’s again white. It is the use which makes the money black or white. Once these currency notes are in circulation, would you again withdraw them and introduce new notes?
  5. As for the use of high denomination currency notes in hoarding black money (cash alone), what’s up with introducing ₹2000 notes? You held ten ₹1000 notes for ₹10000, and now you just hold five. Hoarding is obviously easy with the new ₹2000 notes, isn’t it?

The things which the RBI is intending to prevent, can happen again irrespective of what they’ve done. Anyone can see the logical incoherence between their goals and means. And well, when it is bound to cause chaos, why would anyone do such a thing?