Kenneth Rogoff: India’s Currency Exchange and The Curse of Cash

RogoffToday in our blog series by Kenneth Rogoff, author of The Curse of Cash, Rogoff discusses the controversy over India’s currency exchange. Read other posts in the series here.

On the same day that the United States was carrying out its 2016 presidential election, India’s Prime Minister, Narendra Modi, announced on national TV that the country’s two highest-denomination notes, the 500 and 1000 rupee (worth roughly $7.50 and $15.00) would no longer be legal tender by midnight that night, and that citizens would have until the end of the year to surrender their notes for new ones. His stated aim was to fight “black money”: cash used for tax evasion, crime, terror, and corruption. It was a bold, audacious move to radically alter the mindset of an economy where less than 2% of citizens pay income tax, and where official corruption is endemic.


Is India following the playbook in The Curse of Cash? On motivation, yes, absolutely. A central theme of the book is that whereas advanced country citizens still use cash extensively (amounting to about 10% of the value of all transactions in the United States), the vast bulk of physical currency is held in the underground economy, fueling tax evasion and crime of all sorts. Moreover, most of this cash is held in the form of large denomination notes such as the US $100 that are increasingly unimportant in legal, tax-compliant transactions. Ninety-five percent of Americans never hold $100s, yet for every man, woman and child there are 34 of them. Paper currency is also a key driver of illegal immigration and corruption. The European Central Bank recently began phasing out the 500 euro mega-note over these concerns, partly because of the terrorist attacks in Paris.


On implementation, however, India’s approach is radically different, in two fundamental ways. First, I argue for a very gradual phase-out, in which citizens would have up to seven years to exchange their currency, but with the exchange made less convenient over time. This is the standard approach in currency exchanges. For example this is how the European swapped out legacy national currencies (e.g the deutschmark and the French franc) during the introduction of the physical euro fifteen years ago. India has given people 50 days, and the notes are of very limited use in the meantime. The idea of taking big notes out of circulation at short notice is hardly new, it was done in Europe after World War II for example, but as a peacetime move it is extremely radical. Back in the 1970s, James Henry suggested an idea like this for the United States (see my October 26 new blog on his early approach to the big bills problem). Here is what I say there about doing a fast swap for the United States instead of the very gradual one I recommend:

 “(A very fast) swap plan absolutely merits serious discussion, but there might be significant problems even if the government only handed out small bills for the old big bills. First, there are formidable logistical problems to doing anything quickly, since at least 40% of U.S. currency is held overseas. Moreover, there is a fine line between a snap currency exchange and a debt default, especially for a highly developed economy in peacetime. Foreign dollar holders especially would feel this way. Finally, any exchange at short notice would be extremely unfair to people who acquired their big bills completely legally but might not keep tabs on the news.

In general, a slow gradual currency swap would be far less disruptive in an advanced economy, and would leave room for dealing with unanticipated and unintended consequences. One idea, detailed in The Curse of Cash, is to allow people to exchange their expiring large bills relatively conveniently for the first few years (still subject to standard anti-money-laundering reporting requirements), then over time make it more inconvenient by accepting the big notes at ever fewer locations and with ever stronger reporting requirements.

Second, my approach eliminates large notes entirely. Instead of eliminating the large notes, India is exchanging them for new ones, and also introducing a larger, 2000-rupee note, which are also being given in exchange for the old notes.


The idea in The Curse of Cash of eliminating large notes and not replacing them is not aimed at developing countries, where the share of people without effective access to banking is just too large. In the book I explain how a major part of any plan to phase out large notes must include a significant component for financial inclusion. In the United States, the poor do not really rely heavily on $100 bills (virtually no one in the legal economy does) and as long as smaller bills are around, the phase out of large notes should not be too much of a problem, However, the phaseout of large notes is golden opportunity to advance financial inclusion, in the first instance by giving low income individuals access to free basic debt accounts. The government could use these accounts to make transfers, which would in turn be a major cost saving measure. But in the US, only 8% of the population is unbanked. In Colombia, the number is closer to 50% and, by some accounts, it is near 90% in India. Indeed, the 500 rupee note in India is like the $10 or $20 bill in the US and is widely used by all classes, so India’s maneuver is radically different than my plan. (That said, I appreciate that the challenges are both different and greater, and the long-run potential upside also much higher.)

Indeed, developing countries share some of the same problems and the corruption and counterfeiting problem is often worse. Simply replacing old notes with new ones does have a lot of beneficial effects similar to eliminating large notes. Anyone turning in large amounts of cash still becomes very vulnerable to legal and tax authorities. Indeed that is Modi’s idea. And criminals have to worry that if the government has done this once, it can do it again, making large notes less desirable and less liquid. And replacing notes is also a good way to fight counterfeiting—as The Curse of Cash explains, it is a constant struggle for governments to stay ahead of counterfeiters, as for example in the case of the infamous North Korean $100 supernote.

Will Modi’s plan work? Despite apparent huge holes in the planning (for example, the new notes India is printing are a different size and do not fit the ATM machines), many economists feel it could still have large positive effects in the long-run, shaking up the corruption, tax evasion, and crime that has long crippled the country. But the long-run gains depend on implementation, and it could take years to know how history will view this unprecedented move.


In The Curse of Cash, I argue that it will likely be necessary to have a physical currency into the far distant future, but that society should try to better calibrate the use of cash. What is happening in India is an extremely ambitious step in that direction, of a staggering scale that is immediately affecting 1.2 billion people. The short run costs are unfolding, but the long-run effects on India may well prove more than worth them, but it is very hard to know for sure at this stage.

Kenneth S. Rogoff, the Thomas D. Cabot Professor of Public Policy at Harvard University and former chief economist of the International Monetary Fund, is the coauthor of the New York Times bestseller This Time Is Different: Eight Centuries of Financial Folly (Princeton). He appears frequently in the national media and writes a monthly newspaper column that is syndicated in more than fifty countries. He lives in Cambridge, Massachusetts.

Find Kenneth Rogoff on Twitter: @krogoff






Bird Fact Friday – Birds protected by religious tradition in India

From page 20 of Birds of India:

The enlightened and benevolent attitudes of Hinduism and Buddhism towards wildlife have helped to conserve the rich natural heritage of the Indian subcontinent. India has a tradition of protection of all forms of animals dating back at least 3,000 years when the Rig Veda mentioned the right of animals to live. Sacred groves, village tanks, and temples where the hunting and killing of all forms of life is prohibited can be found throughout India.

Birds of India: Pakistan, Nepal, Bangladesh, Bhutan, Sri Lanka, and the Maldives
Second edition
Richard Grimmett, Carol Inskipp & Tim Inskipp

IndiaThe best field guide to the birds of the Indian subcontinent is now even better. Thoroughly revised, with 73 new plates and many others updated or repainted, the second edition of Birds of India now features all maps and text opposite the plates for quicker and easier reference. Newly identified species have been added, the text has been extensively revised, and all the maps are new. Comprehensive and definitive, this is the indispensable guide for anyone birding in this part of the world.

Raghuram Rajan to take charge of the Reserve Bank in India amidst spike in economic challenges

Photo by Dan Dry. © University of Chicago Booth School of Business

Photo by Dan Dry. © University of Chicago Booth School of Business

Raghuram Rajan was one of the few economists who warned of the global financial crisis before it hit. Now, he is preparing to take charge of the Reserve Bank in India during a spike in economic challenges for the country.

In India, growth is at its slowest in several years, and the rupee has hit a low of 61.80 to one U.S. dollar. Rajan, who was previously the Eric J. Gleacher Distinguished Service Professor of Finance at the University of Chicago Booth School of Business and former chief economist at the International Monetary Fund, has spent the past year as counsel on India’s economic reforms. Come September, when Rajan takes office, he plans to initiate a series of measures to stabilize the rupee involving decreasing imports and increasing exports.

While the challenge is great, Rajan has been praised for his rare and essential record of speaking out about economic instability (of the U.S. financial system), as well as his sound warnings regarding India’s economy the past few years. In a now-famous encounter, he predicted the impending crisis at a conference in Jackson Hole in 2005 for outgoing Chairman of the Federal Reserve Alan Greenspan, for which he was attacked as an anti-market Luddite. Three years later, he was proven right and has demonstrated how imbalances—both within the U.S. as well as between the U.S. and the rest of the world—brought about an unstable system which led to the financial crisis in 2008.

In Fault Lines: How Hidden Fractures Still Threaten the World Economy, winner of the Financial Times and Goldman Sachs 2010 Business Book of the Year Award, Rajan shows how the individual choices that collectively brought about the economic meltdown—made by bankers, government officials, and ordinary homeowners—were rational responses to a flawed global financial order in which the incentives to take on risk are incredibly out of step with the dangers those risks pose. He traces the deepening fault lines in a world overly dependent on the indebted American consumer to power global economic growth and stave off global downturns. He exposes a system where America’s growing inequality and thin social safety net create tremendous political pressure to encourage easy credit and keep job creation robust, no matter what the consequences to the economy’s long-term health; and where the U.S. financial sector, with its skewed incentives, is the critical but unstable link between an overstimulated America and an underconsuming world. Rajan outlines the hard choices we need to make to ensure a more stable world economy and restore lasting prosperity.

“Mr Rajan is no administrator but will also have to reform the RBI,” wrote the Economist. “In the 1990s [the RBI] toyed with relinquishing some of its vast empire—it runs everything from monetary policy to public-debt issuance and bank regulation. Recently it has clung to its powers only to find that its multiple goals of stability, growth and low inflation conflict. Mr Rajan’s task is to resolve those contradictions. If he succeeds, Western central bankers, who have seen a proliferation in their responsibilities since the crisis, will have another reason to listen to his views.”

More by Raghuram Rajan:
Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Opportunity
The Squam Lake Report: Fixing the Financial System

More on India:
Awakening Giants, Feet of Clay: Assessing the Economic Rise of China and India by Pranab Bardhan
An Uncertain Glory: India and its Contradictions by Jean Dreze and Amartya Sen