As India continues to struggle with a countrywide cash shortage as a result of the November 8 demonetization in which the government unexpectedly removed the highest denomination bills out of circulation and which has brought various mostly rural part of the cash-driven economy to a halt, the government is resorting to ever more novel solutions how to restock outlets with new, "clean" cash.
As the Times of India reports, authorities have managed to cut down the transportation time of cash from printing to the main distribution centers from 21 days to six and by using all modes of transport, including helicopters and Indian Air Force planes, to move the cash quickly. The government is hopeful that the situation will improve over the next week. With availability of cash improving in urban areas, the government is concentrating on rural areas.
While even tenured economists have predicted that the short-term may lead to a shock for the Indian economy, senior government sources are hopeful that the level of economic activity should climb back to normal levels by January 15. Referring to any "windfall" from the decision to demonetise 500- and 1,000-rupee notes, sources said any gains could be used for recapitalisation of banks, building infrastructure and purchasing advanced weapons systems for the armed forces.
"RBI may transfer higher dividend or there could be a special dividend," the sources said. There is a probability of the government getting a "windfall" as a significant portion of the notes may not come back. This will reduce the liability of RBI and increase its ability to pay higher dividend. "Even in 1978 when the government resorted to demonetisation, 20% of the notes did not come back," the sources said.
They said they would not like to speculate about the number of notes that may not come back into the system.
Meanwhile, logistical challenges have emerged. The Indian newspaper writes that according to sources, Rs 2,000 notes could not be put in the tray meant for Rs 1,000 notes as the recalibration required both hardware and software changes.
Finally, while there has been much speculation just why India engaged in this shock "purging" of the shadow economy, here is the explanation from Ravi Bansal, JB Fuqua Professor of Finance and Economics at Duke University
As you know, India demonetised. Several billion dollars worth of rupees will essentially vanish from the shadow (black) economy, due to the very tight window to convert the black money to some other valued asset. Let’s assume $50 billion worth of rupees are destroyed because they cannot be converted to alternative assets like gold or some other hard currency; this essentially is wealth tax on the holders of black money. What is remarkable, and less understood, is that it also writes-down (lowers) the debt of the government by the amount of notes destroyed by the demonetisation. If roughly 25 percent of the notes are not converted then the debt write-off is about $50 billion. That is about 2.5 percent of the Indian GDP!
In other words, the Indian "demonetization" was merely a quick and easy way to eliminate some tens of billions of sovereign debt, while at the same time "cleansing" the economy of cash whose source can not be documented. It is likely that should India's experiment prove to be successful, it will be followed in many more cash-rich nations.