Six ques­tions on In­dia’s ru­pee shake-up

Kuwait Times - - BUSINESS -

In­dia’s govern­ment yes­ter­day with­drew the two largest-de­nom­i­na­tion ban­knotes from cir­cu­la­tion in a bid to tackle tax eva­sion and cor­rup­tion.

Here are an­swers to key ques­tions sur­round­ing the shock move:

What has hap­pened?

Prime Min­is­ter Naren­dra Modi an­nounced late Tues­day that 500 and 1,000 ru­pee notes ($7.50, $15) would be with­drawn from cir­cu­la­tion. As of mid­night Tues­day the notes were no longer le­gal ten­der. Cus­tomers have un­til De­cem­ber 30 to ex­change their old bills for new ones or deposit them in bank ac­counts. All banks and cash ma­chines were or­dered closed on Wed­nes­day to pre­pare for the new notes.

Why has it hap­pened?

Modi came to power in 2014 pledg­ing to crack down on so-called black money fi­nan­cial trans­ac­tions in which cash is used to avoid tax. Tues­day’s an­nounce­ment was part of that prom­ise but there are also po­lit­i­cal rea­sons. The rul­ing Bharatiya Janata Party faces key state elec­tions next year and this de­ci­sion may hin­der at­tempts by its op­po­nents to stock­pile cam­paign cash.

The move is likely to curb the high use of fake notes, a com­mon prob­lem in an heav­ily cash­based econ­omy. Modi par­tic­u­larly sin­gled out Pak­istan-based ex­trem­ist groups, say­ing they fi­nance at­tacks on In­dia us­ing coun­ter­feit notes.

Has this hap­pened be­fore?

Yes. In Jan­uary 1978 the govern­ment re­moved 1,000, 5,000 and 10,000 ru­pee notes from cir­cu­la­tion at short no­tice, spark­ing a brief panic with con­sumers rush­ing to banks. How­ever, the over­all dis­rup­tion was limited as the mon­e­tary value of 1,000 ru­pees was so high back then that the move did not af­fect most In­di­ans.

How has it been re­ceived?

Long queues formed out­side ATMs ahead of the mid­night dead­line as cus­tomers made a last­minute dash to with­draw 100 ru­pee notes-the high­est dom­i­na­tion note left in cir­cu­la­tion. There was also a rush by motorists to petrol sta­tions, which will con­tinue to ac­cept the old bills un­til the end of the week as will trans­port op­er­a­tors and hos­pi­tals.

The Bom­bay Stock Ex­change plunged six per­cent at the open yes­ter­day be­fore sta­bi­liz­ing at around three per­cent down in late-morn­ing trade. De­spite the slump busi­ness lead­ers widely praised the move, say­ing it would force more money into the for­mal econ­omy and boost GDP.

Who are the main win­ners and losers?

There were a lot of ner­vous In­di­ans yes­ter­day, par­tic­u­larly those who hoard cash at home to avoid pay­ing tax. Only around three per­cent of In­di­ans pay any in­come tax at all and they face the prospect of se­ri­ous scru­tiny if they can­not ac­count for a sud­den in­crease in their bank bal­ance. Tem­ples and ashrams, where lav­ish do­na­tions can be a front for money-laun­der­ing, will be fig­ur­ing out what to do next, as will those run­ning il­le­gal cricket bet­ting rings and prop­erty deal­ers who of­ten deal in black money.

Small traders who deal in cash trans­ac­tions and work­ers such as maids and driv­ers who may not have bank ac­counts are likely to be hit in the short term. The mid­dle classes and com­pa­nies who op­er­ate in the for­mal econ­omy, how­ever, will ben­e­fit from a re­duc­tion in the cost of do­ing busi­ness due to a drop in back­hand pay­ments.

What hap­pens next?

Banks and ATM will re­open on Thurs­day when cus­tomers will be able to swap their old notes and with­draw the new 500 ru­pee and 2,000 notes-but there will ini­tially be a limit on the value of trans­ac­tions. A newly-de­signed 1,000 bill will be also grad­u­ally rein­tro­duced in com­ing months.

An­a­lysts an­tic­i­pate a mas­sive drop in con­sump­tion over the next few days as con­sumers will be short of cash. It will also likely take some time for the new notes to cir­cu­late widely. — AFP

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