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Black Money in India

indian-rupeeSurely one of the most curious and potentially costly monetary experiments ever is taking place right now in India. Prime Minister Narendra Modi abruptly decided—without warning—that the 500- and 1,000-rupee notes in circulation were no longer valid currency, effectively turning 86% of his country’s paper money into colorful scratch pads. The Reserve Bank of India is printing new replacement bills to restock its banking system, but reports say it will take five or six months before the money removed from circulation can be replaced—in a country where cash represents 98% of all transactions by volume and 68% by value. Sales across the country have fallen by 20-30%, reducing estimates of India’s GDP growth this year.

The goal was to flush out vast hoards of undeclared wealth that had either escaped taxation or was acquired through illicit means—called “black money” in Indian economic circles. Yet estimates show that about two-thirds of the dark funds managed to escape the “demonetisation” by finding their its way into “white” channels. A more permanent solution is a proposed switch to electronic payments for most transactions.

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