India currency decree did little to rid market of illegal ‘black money’
Nearly all of the currency removed from circulation in a surprise 2016 attempt to root out illegal hoards of cash has come back into the financial system, India’s reserve bank has announced.
The confirmation indicated the move had done little to slow the underground economy.
Prime Minister Narendra Modi’s currency decree, which was designed to destroy the value of billions of dollars in untaxed cash stockpiles, caused an economic slowdown and months of financial chaos for tens of millions of people.
Mr Modi announced in a November 2016 television address that all 500-rupee and 1,000-rupee notes, then worth about $7.50 (£5.80) and $15, would be withdrawn immediately from circulation.
The banned notes could be deposited into bank accounts, but the government also said it would investigate deposits over 250,000 rupees, or about $3,700.
The government eventually released new currency notes worth 500 and 2,000 rupees.
In theory, the decree meant corrupt politicians and business people would suddenly find themselves sitting on billions of dollars in worthless currency known in India as “black money”.
Mr Modi said in a surprise night-time announcement of the original order: “A few people are spreading corruption for their own benefit.
“There is a time when you realise that you have to bring some change in society and this is our time.”
But even as the decree caused turmoil for those in India who have always depended on cash – the poor, middle class and millions of small traders – the rich found ways around the currency switch.
In the months after the decree, businesspeople said even large amounts of banned currency notes could be traded on the black market though middle men charged heavy fees.
The reserve bank report said in its Wednesday report that 99.3 per cent of the $217 billion in notes withdrawn from circulation had come back into the economy. Some officials had originally predicted that number could be as low as 60 per cent.
“Frankly, I think demonetisation was a mistake,” Gurcharan Das, a writer and the former head of Proctor & Gamble in India, said.
He said while it did broaden the country’s tax base, it was a nightmare for the immense, cash-dependent informal economy.
“You can’t overnight change that in a country which is poor and illiterate,” Mr Das said. “Therefore for me it’s not only an economic failure, but a moral failure as well.”
The Indian rupee fell to a record low yesterday morning, following a declining trend all year.