Narendra Modi’s abrupt Nov. 8 decision to make nearly 90% of India’s cash unusable continues to cause huge disruption to the economy, inspiring protests against the Prime Minister. He insists the sudden demonetization of 500 and 1,000 rupee notes (worth $7.40 and $14.80) is necessary to fight “black money,” the fruits of corruption and crime. But by failing to cut taxes and deregulate first, he is curtailing economic freedom.

It’s not just bad guys who hold large amounts of cash in India. The informal or underground economy...