What Are the Consequences of India’s Currency Reform?

On November 8, India’s government announced that it would ban existing 500- and 1000-rupee notes, the country’s two largest denominations. The aim is to undercut counterfeiters and combat the corruption and crime that rely on paper money. But most ordinary Indians keep their savings in paper currency as well. Since the announcement, they have rushed to convert their holdings into new denominations, with long lines and shortages at banks and ATMs. Others may simply give up their savings to avoid paying taxes. Businesses dependent on cash are expected to suffer, and some observers say that demonetization, as it is called, could even spark a recession. Yale SOM’s Shyam Sunder sketches what he sees as some of the effects this move is likely to have on the Indian economy.