Kislaya Prasad on India’s Currency Withdrawal

Hot Topic Alert   Jan. 29, 2014

Last week’s announcement of the Reserve Bank of India withdrawing pre-2005 notes was initially interpreted in the media as targeting “black money (currency used in transactions where taxes are avoided)" and to prevent counterfeiting. Subsequently, officials have deflected such interpretation and defined the move as a “technical action” to remove from circulation notes that have relatively fewer security features.

Kislaya Prasad, a research professor and director of Smith’s Center for International Business Education and Research, elaborates on the development.

“The newer notes are harder to counterfeit, so counterfeiters are making copies of old notes. Although the move will have some benefits in reducing counterfeiting, its impact in terms of curbing black money will be small.

“There is some truth to the argument that those who have hoarded currency from such illegal transactions will find themselves in an inconvenient position. But much of the money from illegal transactions has been invested in commodities or property, and the actual amount hoarded is a small fraction of the underground economy.

"The proposed reforms also are rather weak. This is understandable, as anything more draconian would be quite disruptive. So don’t anticipate anything dramatic happening."

Prasad’s principal research focus is on the computability and complexity of individual decisions and economic equilibrium, innovation and diffusion of technology, and social influences on economic behavior.

His recent study, “Economic Liberalization and Violent Crime” in the Journal of Law and Economics, investigates India’s early 1990s free market transition and shows it curbed black market – especially gold smuggling – activity, and subsequently cut the murder rate.

Contact him at 301-405-6359 or Kislaya_Prasad@rhsmith.umd.edu.