![]() ![]() Numeracy and literacy-financial and general-will not rise overnight and thus will create opportunities for unscrupulous employers, bankers and others to exploit people. This heretofore unbanked population will become more aware of their financial opportunities and try to become more literate and numerate to protect their wealth and interests. A fraction of the new bank accounts will belong to the people who had no accounts in the past, or had dormant accounts with few transactions. The number of bank accounts, their balances, and the number of transactions will rise sharply. This change has less obvious intermediate and long term consequences-policy interventions set off many chain reactions which are difficult to forecast-but here is an attempt to do that. The immediate consequences of the demonetization of 500- and 1,000-rupee notes and their replacement by new 500- and 2,000-rupee versions have been widely discussed. Yale SOM’s Shyam Sunder sketches what he sees as some of the effects this move is likely to have on the Indian economy. Businesses dependent on cash are expected to suffer, and some observers say that demonetization, as it is called, could even spark a recession. ![]() Others may simply give up their savings to avoid paying taxes. Since the announcement, they have rushed to convert their holdings into new denominations, with long lines and shortages at banks and ATMs. But most ordinary Indians keep their savings in paper currency as well. The aim is to undercut counterfeiters and combat the corruption and crime that rely on paper money. On November 8, India’s government announced that it would ban existing 500- and 1000-rupee notes, the country’s two largest denominations. This commentary is an updated version of an article originally posted on November 29. ![]()
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