In­dia tries to stem ru­pee panic

The Myanmar Times - - Business -

IN­DIA tried yes­ter­day to quell the panic caused by a bomb­shell de­ci­sion to with­draw 500 and 1000 ru­pee notes from cir­cu­la­tion after cash ma­chines ran dry and shares slid.

A day after Prime Min­is­ter Naren­dra Modi an­nounced the notes would no longer be le­gal ten­der in a blitz against “black money”, his fi­nance min­is­ter said re­place­ment 500 and 2000 ru­pee bills would be avail­able from to­day and only tax dodgers stood to lose out from the move.

All banks and cash ma­chines were or­dered to close yes­ter­day in prepa­ra­tion for the turn­around, trig­ger­ing a late-night rush by cus­tomers to with­draw smaller notes from ATMs.

Cus­tomers will be able to ex­change their old bills for new notes or de­posit them in their ac­counts but face ma­jor scru­tiny by tax au­thor­i­ties if they can­not ac­count for a sud­den swell in their bal­ance.

“Housewives with small cash sav­ings and farm­ers have no need to worry. Peo­ple who with­draw money from the banks have noth­ing to worry about. All they have to do is ex­change it or de­posit it in the bank,” Fi­nance Min­is­ter Arun Jait­ley said.

“But if you have il­le­gal money, then you have to give its source. If you have crim­i­nal money, then you are in se­ri­ous trou­ble.”

While the move was praised by busi­ness lead­ers and com­men­ta­tors, In­dian stocks fell 6 per­cent in early trade be­fore stag­ing a slight re­cov­ery and were around 3pc lower at lunchtime than at the open­ing.

Su­jan Ha­jra, an econ­o­mist at the Mum­bai-based bro­ker­age firm Anand Rathi se­cu­ri­ties, said there would be an in­stant neg­a­tive im­pact on con­sumer spend­ing that would af­fect the whole econ­omy.

“The govern­ment’s de­mon­eti­sa­tion scheme will af­fect con­sump­tion across In­dia as peo­ple won’t have enough cash to con­duct ma­jor trans­ac­tions for the next few days,” he said.

Ma­jor queues built up outside cash ma­chines ahead of the mid­night dead­line as cus­tomers tried to with­draw 100 ru­pee bills.

There was also a rush by mo­torists to gas sta­tions, which will con­tinue to ac­cept the old bills un­til the end of the week as will trans­port op­er­a­tors and hos­pi­tals.

The 500 and 1000 ru­pee notes, which are worth around US$7.50 and $15, are the largest bills in use in In­dia which is still a mas­sively cash­in­ten­sive econ­omy.

Many ma­chines ran out of cash be­fore mid­night while other cus­tomers had to go away dis­ap­pointed after fail­ing to ac­cess their funds in time.

While the use of debit and credit cards has in­creased in the last decade in In­dia, many small busi­nesses in­sist on tak­ing cash to evade tax or else ask for mark-ups to cush­ion the blow. Some $439 bil­lion left the coun­try il­lic­itly from 2003 to2012, ac­cord­ing to es­ti­mates from the Global Fi­nan­cial In­tegrity group in Wash­ing­ton.

Many of In­dia’s wealth­i­est ci­ti­zens chan­nel money to tax havens and con­vert it into jew­ellery and an­tiques to avoid tax.

Do­mes­ti­cally, tar­gets for in­ves­ti­ga­tion in­clude tem­ples and ashrams, where lav­ish do­na­tions can be a front for money laun­der­ing, and cricket bet­ting. The prop­erty sec­tor too is awash with black money.

Only 2.89 per­cent of In­di­ans pay any in­come tax at all.

Since com­ing to power in 2014, Mr Modi has pledged to crack down on so-called black money with a series of new mea­sures, in­clud­ing 10year jail terms for evaders. The lat­est an­nounce­ment comes a lit­tle over a month after the govern­ment raised nearly $10 bil­lion through a tax amnesty for In­di­ans to re­port un­de­clared in­come and as­sets.

“This is a log­i­cal next step in clean­ing of the sys­tem and weed­ing out the black money,” said Dhi­raj Relli, chief ex­ec­u­tive of the In­di­a­based bro­ker­age HDFC Se­cu­ri­ties Lim­ited.

“This will clean up the real es­tate sec­tor and bring down the cost of do­ing busi­ness. As there will be no mo­ti­va­tion to gen­er­ate black money, the econ­omy will see more in­flows and the GDP will go up.” –

Photo: AFP

In­dian Eco­nomic Af­fairs Sec­re­tary Shashi Kant Das (left) and gov­er­nor of the Re­serve Bank of In­dia Ur­jit R Pa­tel hold up a sam­ple of the new 2000 ru­pee note at a press con­fer­ence in New Delhi on Novem­ber 8.

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