Why India’s government made Indian banknotes worthless

by Hans Dembowski

Modi’s campaign against black money may backfire politically

Prime Minister Narendra Modi has a surprise in stock for his nation this week. The banknotes worth 500 and 1000 rupees are no longer valid. They were the country’s most valuable bills. The policy is meant to fight terrorism, counterfeit and criminal business in general.

Modi made the announcement on Wednesday, and by midnight, the bank notes were no longer legal tender. The step caused huge disruption in economic life, which is overwhelmingly cash-based. The policy is not without merit. Government agencies cannot track cash properly, so tax evaders and the perpetrators of other crimes like it.    

Until the end of the year, people in India can go to banks and put the old bills in bank accounts. They can also exchange sums of up to 4000 rupees into legally valid cash there. IDs are required. Accordingly, the authorities will get unprecedented insight into where the paper money actually is. That may help to discover corruption, for example, and take perpetrators to court.

Nonetheless, the policy is not entirely convincing. For instance, it has no bearing at all on the black money that is held in foreign bank accounts. Accordingly, the richest law offenders will hardly be affected.

At the same time, the policy is hard on the poor who depend on the informal sector. They do not have to pay taxes at all, because they earn too little, and only few of them have bank accounts. Their paper-money savings have suddenly become a burden.  

There is a gender angle too. In poor communities all over the world, many women secretly save some money in order to have a cushion in times of crisis. Typically, their husbands do not know  anything about that money. If the women must go to a bank and start a bank account, it will become more difficult to hide the savings from the men who may well want to spend the money fast – on drinks, for instance. Yet another issue is that there are not many banks in India’s rural regions. Marginalised people in remote areas will struggle to get their savings exchanged.

It must also be said that raking in lots of paper money now has no impact on preventing corruption in the future. New bills are being introduced, and of course they will serve as black money just as the old ones did. A special dimension of corruption is election-campaign finance. It is normal for political parties in India to use black money to buy votes and influence. As the Economic Times, a business paper, points out, the new policy does nothing to change that.

Indians know that black money is a huge problem in their country. They want something to be done about it. No doubt, the Modi government hopes its surprising banknote policy will make it look strong. However, Modi may have underestimated how frustrating people find the disrupting impact on their daily life. For this reason, the Hindustan Times reckons that the “currency switch is a political blunder”.

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