In­dia’s bold move is painful but nec­es­sary for the econ­omy

7 Days in Dubai - - SPECIAL REPORT -

eliv­er­ing one of In­dia’s big­gest-ever eco­nomic up­sets, Prime Min­is­ter Naren­dra Modi last week de­clared the bulk of In­dian cur­rency notes no longer held any value and told any­one hold­ing those bills to take them to banks.

Only those hold­ing huge stashes of un­taxed “black money” need worry, Modi said. But in In­dia, many oth­ers are deeply wor­ried. About 80 per cent of In­dia’s fi­nan­cial trans­ac­tions are con­ducted in cash, of­ten to evade taxes.

While some of that ac­tiv­ity is il­le­gal, hun­dreds of mil­lions of ru­ral poor, scrappy en­trepreneurs and small-time traders also keep their sav­ings in cash, some­times just be­cause there is no bank branch nearby.

In­dia’s in­dus­try lead­ers, bankers and mar­ket an­a­lysts ral­lied be­hind Modi’s move, view­ing it as a much-needed cor­rec­tive in a cash-re­liant cul­ture that has en­abled cor­rup­tion. Within hours of Modi’s an­nounce­ment that all 500 and 1,000ru­pee notes – worth about $7.50 and $15 – would hold no value as of Wed­nes­day, the hash­tag “ModiFight­sCor­rup­tion” be­gan trend­ing on Twit­ter.

In the short term, eco­nomic ac­tiv­ity is slow­ing un­til new notes worth 500 and 2,000 ru­pees can be printed and put into circulation, an­a­lysts said. They also pre­dicted a rush on gold, for­eign cur­rency and other forms of wealth.

“The erad­i­ca­tion of the black money men­ace from the In­dian econ­omy is a big pos­i­tive in the long-term, and the In­dian econ­omy will be on a very strong foot­ing once the short-term teething prob­lems are done,” said Sachin Shah, fund man­ager at the Mum­bai-based Emkay Global Fi­nan­cial Ser­vices.

Mor­gan Stan­ley hailed the de­mon­eti­sa­tion as a “bold move to curb black money” and bring mil­lions more In­di­ans into the tax regime. As of now, only about 1.6 per cent of In­dia’s 1.25 bil­lion peo­ple are pay­ing in­come tax.

The sur­prise cur­rency swap would “have a de­bil­i­tat­ing im­pact on the par­al­lel econ­omy in the coun­try”, said Har­shavard­han Neo­tia, the head of the Fed­er­a­tion of In­dian Cham­bers of Com­merce and In­dus­try, re­fer­ring to busi­ness con­ducted us­ing il­licit cash.

“We ap­peal to all sec­tions of so­ci­ety to sup­port this ini­tia­tive,” he said. Not ev­ery­one is on board. “Will it put an end to black money? Hardly. Peo­ple with large amounts of black money will con­vert it into gold and for­eign cur­rency,” the news­pa­per Eco­nomic Times said in an edi­to­rial.

Cit­i­group warned that scrap­ping so much cur­rency would spur short-term mar­ket volatil­ity, though it said it does “ex­pect longert­erm pos­i­tives for eq­ui­ties”. As ex­pected, In­dian stock mar­kets tum­bled on Wed­nes­day be­fore re­cov­er­ing some ground be­fore clos­ing. It was hard to tell how much came from the Modi cur­rency shock and how much was due in re­ac­tion to Don­ald Trump win­ning the US pres­i­den­tial elec­tion.

Modi has been seek­ing to elim­i­nate black money since his 2014 elec­tion, launch­ing a govern­ment scheme to open bank ac­counts for all ci­ti­zens and grant­ing wealthy In­di­ans a tax amnesty for dis­clos­ing un­de­clared as­sets and cash hold­ings.

The one-time amnesty raised $10 bil­lion – far less than what the govern­ment ex­pected.

Modi said in his tele­vised ad­dress on Tues­day night that au­thor­i­ties had dis­cov­ered 1.25 tril­lion ru­pees, or about $18.8 bil­lion, in il­le­gal cash over the last two and a half years.

CHANGE: In­di­ans form long queues at a bank to ex­change or de­posit the dis­con­tin­ued cur­rency notes

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