In what on the face of it seems like an odd decision, the Indian authorities have withdrawn current 500 and 1000 rupee bank notes from circulation, literally overnight (Tuesday). The notes will be replaced with revised versions shortly (500 and 2000 rupee notes) and Indians will be able to freely exchange them at banks when available. The banknotes are worth roughly $7.6 and $15.2 respectively, so there are vast numbers of these banknotes in circulation.
The aim of the upheaval is to crackdown on corruption and undeclared cash holdings. The Indian PM, Narendra Modi announced the move, claiming that: “Black money and corruption are the biggest obstacles in eradicating poverty.
Given that India is still very much a “cash” economy and that at least 45% of transactions involve notes of 500 rupees or more, this is no small undertaking, the notes being withdrawn are the highest face value notes in circulation. The public will have 50 days in which to exchange the old banknotes (which are no longer legal tender) with modest exchanges attracting no interest. However, anybody wishing to exchange large sums of cash will be attracting the attention of the banks and tax authorities. Substantial exchanges will, of course, be permitted, but those making such requests will need to show that the sums exchanged are legitimately held.
The government recently netted roughly $10 billion in tax receipts during a recent tax amnesty.
Following the law of unintended consequences, a substantial industry will surely spring up over the next 50 days where individuals are given old cash to exchange for the new notes, up to a reasonable limit, by shady people, in exchange for a small commission, of course. This is probably going to be one of the few instances where “trickle-down economics” actually works for poorer members of society