Why India wiped out 86% of its cash overnight
India is in the middle of an extraordinary economic experiment.
On 8 November, Prime Minister Narendra Modi gave only four hours’ notice thatvirtually all the cash in the world’s seventh-largest economy would be effectively worthless.
The Indian government likes to use the technical term “demonetisation” to describe the move, which makes it sound rather dull. It isn’t. This is the economic equivalent of “shock and awe”.
Do not believe reports that this is primarily about bribery or terror financing, the real target is tax evasion and the policy is very daring indeed.
You can see the effects outside every bank in the country. I am in Tamil Nadu in the south of India and here, as in every other state in the country, queues of people clutching wads of currency stretch halfway down the street.
Mr Modi’s “shock and awe” declaration meant that 1,000 and 500 rupee notes would no longer be valid.
These may be the largest denomination Indian notes but they are not high value by international standards – 1,000 rupees is only £12. But together the two notes represent 86% of the currency in circulation.
Think of that, at a stroke 86% of the cash in India now cannot be used.
What is more, India is overwhelmingly a cash economy, with 90% of all transactions taking place that way.
And that is the target of Mr Modi’s dramatic move. Because so much business is done in cash, very few people pay tax on the money they earn.
According to figures published by the government earlier this year, in 2013 only 1% of the population paid any income tax at all.
As a result huge numbers of Indians have stashes of tax-free cash hidden away – known here as “black money”.
Even the very poorest Indians have some cash savings – maybe just a few thousand rupees stored away for a daughter’s wedding, the kids’ school fees or – heaven forbid – an illness in the family.
“On 8 November, Prime Minister Narendra Modi gave only four hours’ notice thatvirtually all the cash in the world’s seventh-largest economy would be effectively worthless.”
this was huge but was lost in the fog of an election..the best time to air dirty laundry..
“And that is the target of Mr Modi’s dramatic move. Because so much business is done in cash, very few people pay tax on the money they earn.”