India Pays Steep Price for Cash Withdrawal

On Nov. 8, Indian Prime Minister Narendra Modi unexpectedly scrapped banknotes accounting for 86% of all money in circulation. His targets: tax evaders with stockpiles of illicit cash and currency counterfeiters, who would be forced either to reveal themselves by exchanging their dirty cash for newly issued notes or to destroy their ill-gotten wealth. But in a country where only about 10% are estimated to have ever made a noncash payment, the move has sparked chaos.

NEW MONEY

The policy replaces the old 500- and 1,000-rupee notes (worth about $7.50 and $15) with a refreshed 500- and a new 2,000-rupee bill. Modi said people could exchange their old money at banks and post offices.

CASH CRUNCH

The switch is easier said than done, however. Hours-long queues are forming daily outside banks amid a scramble for the new currency. Many ATMs have been shut down until they can be reconfigured to accept the new notes. Millions of poor Indians, who operate outside the formal banking sector, have been hardest hit. Small businesses too are suffering losses, with the property and retail sectors seeing demand plummet.

BOTTOM LINE

Modi’s government seems to be betting that support for tackling cash hoarders and tax cheats will temper public frustration. But the bigger threat may be the hit to India’s economy, whose current rate of growth is, at over 7%, among the world’s fastest. The long-term impact is unclear at this stage, but analysts warned growth could be stunted if the situation isn’t resolved soon.