Indian PM Modi’s currency ban is a masterstroke in his drive to clean up the ‘dark’ economy
Priya Virmani says Indians will need to bear the initial pain of the 500- and 1,000-rupee notes being discontinued, in the interests of a corruption-free future for the country
On the day of the US presidential election, Indian Prime Minister Narendra Modi unleashed a masterstroke. In an 8pm televised address, he announced to the nation that in four hours (that is, at the stroke of midnight), the largest denomination banknotes – of 500 and 1,000 rupees – would cease to be legal tender.
India has a “dark” economy that is arguably more powerful than the legitimate one. The International Economic Journal has estimated that the shadow economy accounted for around a quarter of India’s GDP between 1999 and 2007. This parallel economy is coloured by “black money” – hoarded mainly by the political class, the mafia and the business community. It is from this cash that the surreptitious funding for elections comes, most of it accumulated in the highest denomination notes (pegged at 86 per cent of the cash economy).
Organic change would have taken generations, but after Modi’s bold move, a rapid purge of the system has begun. Illicit funding of elections and terrorist activities, and the taking and giving of bribes, will become more arduous.
The move appeared sudden but there had been a quiet build-up, with the income disclosure scheme for owners of black money, together with other banking schemes introduced over the past two years.
The 8pm and 12am timings were crucial. The first meant there could be no rush to the shops, mainly jewellery stores, to spend any stashed cash. The second meant that cash bets made on the US election – worth millions – would go sour, as the results were expected after midnight in India.
Such a corrective measure was in order, despite the painful adjustment it entails. The impact has been greatest on the two-thirds of the Indian population who live in villages and have no access to banking facilities. They are struggling to find ways to change their higher currency notes, their sustenance for everyday living.
Many, despite the pain, are supportive of this clean-up drive as they are rightly impatient to see less corruption. Yet many are also incensed. Social media has been flooded with posts of praise together with those querying whether selective quarters were tipped off. However, the real worry is the capability of the infrastructure that is required for a country of 1.25 billion to enable this move.
To take India into a cleaner economy, the infrastructure for cashless transactions will need to be improved. Until then, persevering with the withdrawal symptoms of this “cleanse” is crucial. For once, India has a politician seen to be working in the national interest.
Dr Priya Virmani is a political and economic analyst