Prime Minister Narendra Modi fired a direct
shot at India’s endemic corruption with a surprise move
on Tuesday to ban the country’s largest currency bills, starting the next
morning.
The ban is intended both
to curb the flow of counterfeit money and to take aim at terrorist
organizations that rely on unaccounted-for cash. It is also expected to help
the government clean up a system that has relied on cash to pay bribes and to
avoid taxes.
But the announcemet led
to an immediate upheaval in the country. Abolishing the current version of the
500 and 1,000 rupee notes will effectively remove 80 percent of the currency in
circulation.
A.T.M.s around the
country were overrun Tuesday night with people confused about the plan and
trying to complete financial transactions before the machines closed the
following day. In some places, hundreds stood in line in front of a single
A.T.M.
Cash is so prevalent in
Indian society that the ban came with a 72-hour exception for paying for
hospital bills and airline tickets.
“It will be disruptive,
it will be inconvenient, but in the medium term, it will be very good.”
Mr. Modi was elected in
2014 after running on an anticorruption platform that included a pledge to
fight unaccounted-for cash, also referred to as “black money.” The results have
been mixed.
Under one tax amnesty
program, Indians owned up this year to about $10 billion in income on which
taxes had not been paid, the Modi administration said last month. But another
effort encouraging people to declare hidden assets and income abroad met with
limited success.
“There’s a perception
that whatever he has done on the corruption front is not enough,” said Harsh
Pant, a professor of international relations at King’s College London, noting
that elections in India’s most populous state, Uttar Pradesh, were expected to
take place early next year. “Politically he probably felt he needed to do
something more visible.”
While the currency plan
had been under discussion for some time, few had expected such a bold step. Mr.
Modi kept the decision quiet to prevent holders of vast amounts of
unaccounted-for cash from outwitting the ban.
The problems run
deep.But it is unclear what the full impact of the ban will be. Studies have
shown that corruption can be curtailed by reducing cash transactions, but it is
unlikely to be eliminated by the move.Even so, the ban on large bills is very
likely to hasten India’s transition away from cash. About 78 percent of
transactions in India last year were made in cash, compared with 20 percent to
25 percent in the United States, Britain and other countries, according to a
report by Google India and the Boston Consulting Group.
The new policy puts
India at the “leading edge of countries restricting the use of
high-denomination currency notes that are now seen as mostly fueling illegal
activities rather than legitimate commerce,” said Eswar S. Prasad, a trade
policy professor at Cornell.
As the ban works its way
through the system, the real estate market could face a shock.
Indian politicians,
among others, not only hold vast amounts of cash, but they are also heavily
invested in real estate, where it has historically been easy to convert
unaccounted-for money into legal currency. A large percentage of real estate
deals are done in unaccounted for cash.
Without that cash, real
estate prices could fall sharply. And developers holding large amounts of
unaccounted for cash would find it suddenly rendered virtually useless, making
it hard for them to pay their bills and finish their projects.
For some time,
people will be able to exchange only 4,000 rupees a day. People holding vast
sums of unaccounted for cash will find it hard to exchange the money at banks
because they will need to explain where they got it, risking tax
investigations, experts said
The honest citizen has to face some inconvenience and
difficulties but is willing to sacrifice for the cause of nation.
