World's Biggest Currency Modification: Economics and Logistics

An economic and numbers perspective of Demonetisation of India’s high denomination notes.

- Dr. Satyendra Nayak

THE WORLD’S BIGGEST exercise in currency demonetization of $230 bn is in operation in India amounting to 86% of currency in circulation. The only parallel, significantly large, we have in history is the issue of Euro currency in 2002 in Euro zone amounting to Euros 350 bn. However, this was an exercise in remonetization of currencies of the member states replaced by the newly launched Euro currency notes.

In India high denomination notes of ₹1000 and ₹500 account 86% currency in circulation in value of $265 bn (₹17,54,000 crores) are replaced by the new ₹ 500 and ₹ 2000 notes. ₹ 1000 notes account for 40% in value and ₹ 500, 46%.

Not only is it the biggest currency conversion in the world, in terms of value, but also the quantity. It involves issues of 23bn new notes across the country.

The World Bank in July, 2010 estimated the size of the shadow economy for India at 20.7% of the GDP in 1999 and rising to 23.2% in 2007.

The move is aimed to immobilize undeclared hoards of income and wealth in cash to curb black money and the growth of parallel economy. It is estimated that out of ₹ 14,18,000 crores, 30% would not be presented for conversion resulting in ₹ 4,25,000 crores ($62bn), 3% of India’s GDP, being immobilized.

Demonetization would also terminate the operation of counterfeit currency notes whose proportion rose fast in the past few years.

The operation would offer the biggest accounting bonanza to the Government of India through its central bank, the Reserve Bank of India. Estimated ₹4,25,000 crores immobilized through this operation would reduce the liabilities of the Reserve Bank in its Issues Dept. by equivalent amount and would create Capital Reserve.