India grapples with the effects of withdrawing 86% of cash in circulation

A short, sharp liquidity shock

A NEW strain of trickle-down economics has been spawned by the decision, on November 8th, to withdraw the bulk of India’s banknotes by the end of this year. As holders of now-useless 500-and 1,000-rupee ($15) notes rushed to deposit them or part-exchange them for new notes, an e-commerce site offered helpers, at 90 rupees an hour, to queue outside banks in order to save the well-off the bother.

Elsewhere, a chronic shortage of banknotes in a cash-dominated economy has left most trades depressed. Seven out of ten kiranas (family-owned grocers) have suffered a decline in business, according to a survey by Nielsen, a consultancy. Supply chains, in which wholesalers and truckers deal mostly in cash, have fractured. Some 20-40% less farm produce reached markets in the days after the reform. City folk admit to hoarding the 100-rupee note, the largest of the old notes to remain legal tender. Taxi drivers refuse to break the new 2,000-rupee note. Road-tolls have been suspended until at least November 24th, to prevent queues. Beggars have disappeared from parts of Delhi; no one has…Continue reading

This post was originally published in the Economist.

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India grapples with the effects of withdrawing 86% of cash in circulation

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