Redenomination and its requirement in the Indian economy

Often, an economy might suffer from a purge of economic crises that gravitates the value of its domestic currency on international standards. It may also happen that an economy decides to replace it’s currency in circulation altogether with some other currency. The face value of the currency continually depreciating in value, if left unattended and unaltered, may as well lead to hyperinflation and further aggravation of economic problems for that country. This is where the process of redenomination conceptualize. In other words, Redenomination of a currency is described as the process of replacing old currency with new currency ( for example-  Rial being replaced by Toman as the domestic currency of Iran) or altering the face value of the domestic currency which is currently in circulation.

Some Global Examples of redenomination

A recent incident would perhaps throw some more light on the concept – In 2006, the economy of Zimbabwe was suffering from hyperinflation wherein the price of commodities shot up to about 10000 times their initial values. In order to save the economy from wastage of tremendous amount of resources in printing loads of older currency bills to successfully facilitate transactions in the country, the government decided to redenominate the older currency into a newer one whereby 1,000 old Zimbabwe dollars were worth 1 new Zimbabwe dollar.

Another instance which reflects the process of redenomination is when countries join monetary union resulting in acceptance of a common currency by them. For example, the economies of the European Union accepted the Euro as their domestic currency in place of their own.

Now the question that we are concerned with is whether the Indian economy at present is in need of Redenomination wherein the value of the older Indian currency bills would be translated into a newer currency bill of lower face value? For example, INR 2000 currency bill be converted into a newer currency bill whose face value would say, Rs 1000 but the number of goods that it would purchase would be same as what the older Rs 2000 bill would have purchased. In other words, one currency bill of new 1000 INR would be equivalent to a currency bill of older INR 2000 in terms of economic worth.

Is there a requirement for such an economic action in the Indian economy presently?

The most rational answer here would be a no. Firstly because the Indian economy is not suffering from severe inflationary conditions as of now and redenomination would just be a nuisance for it’s progressing economic stability. Another reason behind the no is the fact that the Indian economy has recently recovered from a somewhat similar bid in 2016 (The Demonetization of Indian currency bills) which had almost tumbled the smooth functioning of the economy and pushing the economy back to a similar path of turmoil would prove to be disastrous for the already ailing economy. Moreover, the Indian economy just like others has been passing through a grim situation for the past few months driven by the Covid-19 pandemic and any such decision now might plunge the economy into a deep crisis.

These three facts are more than enough for a rational person to decide against any need for a redenomination in the Indian economy, at least for the next few years.

Author
Sheo Rama
MA Economics