India’s start-from-zero solution to corruption and counterfeiting
Last Tuesday night, the Indian Ministry of Finance announced that 500 and 1,000 rupee notes would no longer be considered legal tender. The large-scale and immediate demonetisation policy is the latest deployment in Modi’s arsenal attack on corruption, and has been outlined as a bid to combat terrorist financing and the widespread circulation of counterfeit banknotes.
The old notes, which reportedly accounted for 86% of the currency floating around the country, are to be replaced with new 500 and 2,000 rupee banknotes. Some analysts and commentators have praised the move, arguing that the short-term difficulties will soon give way to the benefits gained from a long-term crackdown on structural deficiencies prevalent within the Indian economy – lowering inflation rates and reducing the risks of bribery and corruption. By moving away from a cash-based economy, rates of tax evasion should reportedly reduce.
But a closer look at the casualties of the ‘war on black money’ points to more than mere inconveniences. In communities where more than 90% of transactions are cash-based, the removal of high-value notes effectively removes a large portion of economic mobility. Indeed in the short term, the country has been sent into chaos. Banks and ATM’s nation-wide have run out of currency; with shops and public transport have stopped accepting the old notes, many have been left unable to meet the costs of their basic daily expenses.
People have until the end of the calendar year to deposit large sums of the old notes in bank accounts, and since Tuesday’s announcement, many have done so; more than $44 billion worth of the now-defunct notes have been deposited. However, more than half of the 1.3 billion Indian population do not have a bank account, and a large number lack the required documentation and paperwork to facilitate the opening of one, pointing to prolonged difficulties.
The logic behind Modi’s cabinet’s decision is evident; India has long been plagued by issues of corruption, and carries a reputation to match – just two years ago it scored 38 out of 100 on the Transparency International Corruption Perceptions Index. A large-scale overhaul of the current system has been and is still required to weaken the power of the illicit economy and the industries it finances, empowering the people it continues to suppress.
Government efforts to remedy the chaos are palpable – particularly after having succeeded in raising the initial daily cash withdrawal limits from 2,000 to 2,500 rupees yesterday. However, in looking to cut off the head of the illicit economies, they’ve paralysed those most in need of greater movement.