India tries to stem rupee panic
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.” –
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.