Imagine what would happen if $10 and $20 bills in the U.S. or Canada were suddenly made invalid. That’s pretty much what happened in India on November 8th.
Nearly 90% of the available paper money in India was rendered worthless a week ago when Prime Minister Narendra Modi made all 500- and 1000-rupee bills illegal in an attempt to reduce corruption, tax evasion, and counterfeiting and money laundering often associated with financing terror. Unfortunately, it means that nearly 90% of Indian cash in circulation can’t be used, creating a crisis for just about anyone in India trying to get through their day.
The government justified the move in part due to concerns over a proliferation of counterfeit notes (not unusually, it pointed the finger at neighbouring Pakistan), which it claims is fuelling the drug trade and funding terrorism. But its main impact will be on “black money”, cash from undeclared sources which sits outside the financial system. Perhaps 20% of India’s economy is informal. Some of that is poor farmers, who are largely exempt from tax anyway. But the rich are perceived to be sitting on a vast illicit loot. Though a large part of that sits in bank accounts in predictable foreign jurisdictions, a chunk of it is held in high-value Indian notes. Purchases of gold or high-end real estate have long been made at least in part with bundles (or suitcases) of illicit cash.
These most often-used rupee notes — in U.S. terms, they’re analogous to the $10 and $20 bills — were made immediately invalid on November 8th and people have until December 30th to get these old bills replaced with new 500- and 2,000-rupee ones. The result has been long-even-by-Asian-standards lines at banks and ATMs, and confusion among that part of the population that lives in poverty, doesn’t have a bank account, and doesn’t know what to do with what little suddenly worthless money they have.
In case you were curious, here’s a “Cost of living in India” page showing the prices of everyday things.
For more, see:
- Forbes: India Demonetizes Banknotes To Combat Tax Cheating, The Poor Suffer As A Result
- The Economist: Why India scrapped its two biggest bank notes
- BBC: Tourists struggling to find cash in India
- Quartz: One week of demonetisation in India: The good, the bad, and the ugly
- The Indian Express: Demonetisation: 11 deaths reported so far as India queues up outside banks
- Of course this event has its own Wikipedia page!