How does banning 500 & 1000 rupee notes solve black money problem?

Banning the 500 and 1000 rupee notes was intended to solve the black money problem by making it difficult for individuals to hoard large sums of cash, which was believed to be a significant component of black money. However, this strategy did not achieve its intended goals for several reasons:

1. Assumptions about Black Money: The government assumed that black money was primarily held in cash. However, most black money is actually held in other forms such as real estate, gold, and foreign bank accounts, not in cash14. As a result, the demonetization effort did not significantly reduce black money.

2. Return of Demonetized Notes: Almost 99.3% of the demonetized notes were returned to banks, indicating that most of the cash was not destroyed but rather found its way back into the banking system14. This suggests that those holding black money were able to launder it through various means.

3. Lack of Impact on Counterfeiting: While one of the goals was to reduce counterfeit currency, very little counterfeit money was detected among the returned notes1. Additionally, new counterfeit notes were quickly introduced into circulation after demonetization.

4. Introduction of New High-Denomination Notes: The introduction of a new Rs 2,000 note shortly after demonetization seemed to undermine the purpose of removing high-denomination notes, as it provided a new means for hoarding cash1.

In summary, banning the 500 and 1000 rupee notes did not effectively solve the black money problem due to incorrect assumptions about how black money is held and the ability of those holding black money to adapt and find ways to reintegrate their funds into the economy.