Why did India choose Rs. 500 and Rs. 1000 notes for Demonetisation?
By Soumyadip Pal
Pareto, with his 80:20 rule, is everywhere. We, in India, realised how Pareto Principle has its hands in Indian money supply, with the Hon’ble Prime Minister’s surprise announcement yesterday evening. How, you ask? A quick analysis of the data on Indian currency stock indicates that about 86% of the current circulating money in India is in the form of notes of Rs. 500 and Rs. 1000. In terms of volume, the two denominations together account for only a shade over 24%.
Figure 1:Pareto Chart showing Indian currency notes in circulation Rs 500 & Rs 1000 vs. Other denominations - Volume % and Value %
As suspected, though the volume of high-value currency notes in circulation is rather small, the value locked in them was huge.
Further, and probably of greater concern was the growth of these currencies. According to the Secretary of the Department of Economic Affairs, between 2011 and 2016, the Indian economy grew by 30%, and on expected lines, the currency in circulation grew by 40%. However, the circulation of Rs. 500 notes grew by 76% and that of Rs. 1000 notes grew by 109% during this period.
For decades, the shadow economy has been believed to have been thriving on high-value currency notes and the all-cash transactions using these notes. The data too points to a preeminence of the highest denomination notes.
However, the prevalence of high-denomination notes itself is not a problem. Does data support the belief that the high denomination notes are commonly counterfeited? In 2014-15, a total of 594,446 counterfeit notes were detected. Out of these, 273,923 notes were denominated Rs. 500 and 131,190 notes were denominated Rs. 1000.
Figure 2:Total Notes in Circulation vs. Counterfeit Notes Detected
Figure 3: Counterfeit notes detected across different currency denominations as a percentage of notes in circulation
We clearly see a preference for higher-denomination notes among counterfeiters. The volume-to-value ratio and the cost of producing counterfeits obviously provide the highest value for their evil plans in these currencies.
Figure 4: Growth in total currency notes in circulation and M1
India is a fast growing economy, and this demonetisation is likely to be only a short blimp in the people’s day-to-day lives. However, this is going to have a lasting impact in India’s fight against black money and corruption.
As for the data on our currency stocks, every statistical model of prediction would fail to forecast the money supply in the next fortnight. The “random factor” that nobody knew, was the Government’s master plan that was revealed late yesterday evening.
Soumyadip Pal is a retail analytics professional and a passionate educator with more than 8 years in the industry and more than 7 years in the academia, currently working as a consultant with Manipal Prolearn.