Even for a risk-taker, Narendra Modis abrupt announcement last week that his government

was voiding Indias two highest value currency bills is an audacious gamble. Between them,
the demonetized 1,000 rupee ($14.80) and 500 rupee ($7.40) bills account for about 85% by
value of the $241 billion worth of cash in circulation in the Indian economy. As
replacements, the government is phasing in a redesigned 500-rupee bill and a new 2,000
rupee bill.

The move has divided the country between those cheering Mr. Modi for stirring boldness and
those decrying him for staggering rashness. But while the economic consequences of the
decision are not entirely clear, theres no question that the governments obsession with so-
called black money will have far-reaching political consequences for the prime minister
and the ruling Bharatiya Janata Party.

Demonetization is part of a larger effort to curb Indias parallel economy, estimated by the
World Bank as about one-fourth the size of the formal economy. But while Mr. Modis goals
are laudable, his methods are unsound. By unleashing Indias notoriously capricious tax
authorities on the business community, the prime minister appears to be betting that the
upsides of being viewed as an anti-corruption crusader outweigh the risks of smothering a
fragile economic recovery.

Elections early next year in Uttar Pradesh, Indias largest state, will be the first test of
whether the gamble pays off. If the BJP wins, demonetization will be hailed as a stroke of
political genius. A loss will raise questions about the wisdom of a focus on curbing illicit
cash, rather than on creating jobs and boosting growth.
For the past week, demonetization has dominated the headlines in India, managing to edge
out even Donald Trumps surprise election victory. The defining image of the week: snaking
lines in front of banks as depositors queued for hours, often without success, to swap the
demonetized currency or withdraw cash in small bills for day-to-day expenses.

Indians appear sharply divided over Mr. Modis move. For the prime ministers fans, the
decision underscores his ability to take tough decisions in the national interest, and his
commitment to clean up a parallel economy awash with so-called black money.

Once the initial inconvenience of lining up to exchange the old bills or withdraw cash from
overburdened ATMs subsides, the argument goes, India would have taken a giant step toward
using credit cards, electronic payments and checks rather than cash. This ought to draw more
people into the tax net and reduce the amount of untaxed income sloshing around the
economy. The only people who stand to lose are corrupt politicians and businessmen sitting
atop mountains of untaxed cash, and terrorist groups that traffic in counterfeit Indian
currency.

For Mr. Modis critics, however, the move is no stroke of genius. It raises fears that a small
group of ham-handed bureaucrats and economically illiterate politicians are running Asias
third-largest economy. Only the most gullible Indians believe that crooks store their money in
bundles of cash. In fact they prefer gold, real estate and foreign bank accounts.

Moreover, the critics argue, the government has underestimated the economic costs of drying
up casheven if only temporarilyin a largely cash-based economy. They paint a chilling
portrait of disrupted food supplies and large labor-intensive sectors of the economy
effectively paralyzed for months.

For the most part, the media have focused on tales of grief, dislocation and uncertainty: the
housewife forced to reveal her rainy day stash to an abusive husband, the parents who
allegedly lost their baby after a hospital refused to accept old bills, the roadside vendor loath
to enter a bank manned by unhelpful staff who look down on her.

It remains to be seen if the more apocalyptic predictions of severe economic distress sparked
by demonetization will come to pass. But one thing appears certain: Mr. Modi owns this
decision as arguably the most far-reachingat least in terms of the number of people
affectedof his two and a half years in high office.

As for skeptics, the BJPs quixotic pursuit of black money suggests confused economic
priorities and a distressing belief that a heavy-handed bureaucracy holds the solution to all
problems. During his 2014 election campaign, Mr. Modi promised to unearth billions of
dollars of what he claimed were illicit funds held in overseas bank accounts. At one point, he
even claimed that he would repatriate enough black money to deposit 1.5 million rupees in
each poor Indians bank account, a promise later walked back by BJP President Amit Shah.

Part of the problem with the approach adopted by Mr. Modi and Finance Minister Arun
Jaitley is their apparent belief that Indias tax officials are paragons of probity and efficiency.
Instead of focusing on simplifying rules and lowering taxeswhich would automatically
boost complianceMessrs. Modi and Jaitley appear to prefer ginning up a kind of hysteria
about illicit wealth. Earlier this week, Mr. Modi promised to go after fraudulently held
property next.

With exports flat and industrial growth sluggish, you might expect the prime minister to
empower businesses rather than bureaucrats and tax officials. But Mr. Modi appears to have
chosen his path. Now all that remains to be seen is whether the gamble pays off or backfires
badly.

Mr. Dhume is a resident fellow at the American Enterprise Institute, and a columnist for
WSJ.com.