India withdrawing big banknotes causes chaos in cash economy
Print Edition
INDIANS struggled to pay for basics goods like food and fuel yesterday and fretted about their savings, after the government withdrew 500 rupee (US$7.50) and 1,000 rupee notes from circulation in a bid to flush out money hidden from the tax man.
The shock measure also sent shudders through the investment community on a day when the markets were also reeling at the election of Republican candidate Donald Trump as the next US president.
India’s National Stock Exchange share index slumped 6.3 percent in early trade before recovering most losses to close the day off 1.3 percent.
The currency move, announced on Tuesday night by Prime Minister Narendra Modi, aims to bring billions of dollars worth of unaccounted wealth into the mainstream economy and curb corruption.
The biggest disruption in decades to cash transactions, which power much of the rural economy, comes months before a series of state elections including in India’s most populous Uttar Pradesh state.
Critics have warned that ordinary people who do not have access to the banking system will be hardest hit, and that Modi risks upsetting his ruling party’s support base of small traders and businessmen who largely deal in cash. It will also affect politicians running for office in a country where there is no state financing for elections and many campaigns are funded by unaccounted wealth.
“This is a pre-election disaster for political parties, the piles of cash sitting with them are worthless,” said one tax official, who asked not to be named.
Modi, however, came to office in 2014 promising a war against the shadow economy that won him support from middle-class Indians who accuse elite politicians and businessmen of cheating the system.
“If elections can become cheaper as a result of this decision, it would be a good beginning,” Finance Minister Arun Jaitley told a news conference.
The replacement of the old currency was also designed to stop anti-India militants suspected of using fake 500 rupee notes to fund operations.
Not enough cash
From midnight, the larger banknotes ceased to be legal tender for transactions other than exchanging them at banks for smaller notes.
Retailers refused to accept the bills, worth around US$7.50 and US$15 respectively, and people were unable to access ATMs after banks closed them down.
Deepak Urs, a staff trainer at a financial services company in India’s southern tech hub of Bengaluru, said he would need to take time off work to exchange his old notes.
“Once the ATMs start operating, there will be long queues,” he said. “Maybe tomorrow onwards, every two, three weeks, I will have to go the ATM or bank to get cash.”
India’s “black economy,” a term widely used to describe transactions that take place outside formal channels, amounted to around 20 percent of gross domestic product, according to investment firm Ambit.
New bills of 500 and 2,000 rupee will be introduced from today. Jaitley said it would take two to three weeks to replace the old notes, amid concerns over the availability of cash.
Deepak Chhatoi, a salesman at a car varnishing store in Mumbai, said he had to turn away customers wanting to pay with larger bills, and could not buy the popular potato sandwich known as the vada pav.
“I couldn’t even have breakfast this morning because there seems to be a shortage of change in the market,” he said.
The extent of the impact of the measures became evident as petrol stations and hospitals also refused to accept larger-denomination banknotes, even though the government had given them a waiver to continue accepting them.
Bank ATMs were closed and banks prepared for people seeking to exchange larger banknotes for smaller ones.
They will have to fill a form and show proof of identity to exchange no more than 4,000 rupee worth of the old notes at any bank, which is likely to cause further chaos.
The main opposition Congress party said it backed moves to attack the shadow economy, but that withdrawing bigger banknotes would hit the common man first.
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