India demonetizes large banknotes to eradicate black market
India’s current Prime Minister Narendra Modi has announced the removal of certain bills from circulation in an attempt to eliminate counterfeit money. After having withdrawn both the 500 and 1,000 rupee notes from the economy, people flooded the banks in the hope of exchanging and depositing new bills. People intended to deposit their remaining 500 and 1,000 rupee notes into their bank accounts, but the machines had reached their acceptance limit after only two people. Hundreds of ATM services went down in India.
ATM lines reached irresolvable, long queues and crashed within minutes after the first couple of people deposited money. Some people were left entirely without cash for a few days after the announcement. Different groups of people started to come out, confessing about hidden money. Indian homemakers, for example, labeled “India’s desperate housewives,” had to tell their husbands about the money that they had stashed in clandestine in order to use for protection if necessary.
Credit is not a viable option in many parts of India since the dominant monetary transactions take the form of cash. The usually bustling markets in the streets of Mumbai went silent after the change was publicized.
The government revealed soon after that a new note—the 2,000 rupee note that has a current value of about $30—has been introduced, although ATM machines have not yet been configured to dispense those.
According to an article from Reuters, “In the past five years, circulation of all currency notes grew 40 percent, compared with 30 percent growth in Asia’s third-largest economy. The growth in 500 and 1,000 rupee banknotes was even steeper; 500 rupee notes grew 76 percent between 2011 and 2016, while in the same period, 1,000 rupee notes rose by 109 percent.”
Out of the fear that the 500 and 1,000 rupee notes would get nullified and invalidated, some bosses urged their employees to refuse to accept those notes on the job. Almost 40 percent of the Indian economy relies on cash exchanges in order to thrive. Small businesses and insubstantial companies are the ones that primarily contribute to cash flow in India’s economy.
The removal of the two bills was an attempt to crack down on corruption and counterfeit currency at the hands of the wealthy. It was expected to bring in billions of dollars in unaccounted wealth into the open economy.
The black market in India, which expands the divide between the rich and the poor, has been on the government’s agenda since 2014, when the current ruling party discussed options to eradicate it. Certain measures have failed, and Modi has resorted to this drastic change in order to bring the money out of dark shadows and into the formal economy.
Despite intentions to target wealthier and more corrupt individuals, it seems as though poorer people were hit the hardest. As a result, people are scrambling around trying to adjust to the economical alterations.
Another one of the prime motivators behind the decision was the fact that militants and terrorists rely on counterfeit money in order to carry out transactions across borders, according to Modi. An article on Reuters about the issue writes that, “The surprise move was designed to bring billions of dollars worth of cash in unaccounted wealth into the mainstream economy, as well as hit the finances of militants who target India and are suspected of using fake 500 rupee notes to fund operations.”
Although the movement did not solely target corrupted people, the Reserve Bank of India reassured the public and said that the they must be patient in the coming days. All outdated bills must be exchanged by Dec. 30.