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Why Narendra Modi’s demonetization move is unprecedented

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According to the world newspapers, The demonetizations or radical recall, re-denominations, replacements of currencies by governments have been in response to the hyper inflations.

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Why Narendra Modi’s demonetization

move is unprecedented

According to the world newspapers, The demonetizations or radical recall, re-

denominations, replacements of currencies by governments have been in response to

the hyper inflations. India newspapers have reported many such cases of complete

withdrawal of notes from circulation being resorted to. The primary and main purpose

has always been to control the runaway inflation and accompanying the loss of faith

among investors and the larger public in the domestic currency.

The best example world newspapers have is of Germany under the Weimar Republic.

On November 20, 1923, they introduced a new currency ,the Rentenmark and affirmed

all old Reichsmark notes to be no longer legal tender. This took place because domestic

prices were already 14 times their 1913 levels in the mid 1921 and 1,475 times towards

end of 1922. They had skyrocketed to 1,422,900,000,000 times by November next year.

Just as this happened, the currency lost value by the minute, so people rushed to spend

their wages the exact moment they received them.When the credibility got restored,

inflation fell and the run on the currency, too, ended.

The Narendra Modi government’s demonetization of Rs 500 and Rs 1,000 banknotes

constituted of over 86% of the total value of currency in circulation. This is remarkable

because it hasn’t been undertaken in response to any hyper inflation or any loss of

assurance in the rupee. The rupee has been quite strong, both in terms of its internal

and external value.

The Annual consumer inflation price was 4.2% in October, while the rupee has been

stable at Rs 66-68 against the dollar for the last one year and more. In real effective

terms, against a basket of 36 currencies after adjusting for inflation differentials, the

rupee’s average trade-weighted exchange rate in October was the strongest since July


Modi’s demonetization does not follow the conservative logic of the currency

‘stabilization’ measure. The Indian economy is barely suffering any hyper inflation or can

run on the rupee today to even remotely warrant such an action. It’s a structural

reform, which focuses on reshaping attitude of public towards the currency to step

forward to build a cashless economy.In India, the majority economic transactions take

place in cash outside recorded market channels and hence these go largely untaxed.

This action apart from promoting a parallel ‘black’ economy with clear security

implications prevents the government from investing sufficiently on public goods to

pursue long-term growth and equity objectives. Demonetization sends out a clear

message that cash is no longer cool and should also be seen with the other planned big


The Modi government has told India newspapers that the withdrawing of Rs 500 and Rs

1,000 denomination notes will be replaced with the new currency notes with many

improved security features. According to some estimates, The total demonetized

banknotes numbered 2,300 crore pieces may require 5-6 months. Even after printing,

the new currency has to be delivered to bank branches and ATMs not just in Delhi and

Mumbai, but to even Nabarangpur, Robertsganj, Dantewada, Cherrapunji, Leh, and


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