India cancel 500 and 1,000-rupee bank notes
India has long suffered lost taxes, stemming from illicit transactions built on the back of an overwhelmingly cash-based economy. In a surprise move, the Indian government is to suspend the use of 500 and 1,000-rupee bank notes. All old notes deposited in banks will be subjected to tax laws in an attempt to recover revenue from off the books activity. Keen to calm concerns, Indian Finance Minister Arun Jaitley says "honest people" have no need to worry about the decision to scrap 1,000 and 500 rupee notes.
The two banknotes earmarked for cancellation represent a staggering 85% of cash currently changing hands in India. New 2,000 and 500-rupee denomination notes will be introduced over the next three to four weeks, forcing much of the undeclared money to cross banking counters.
Unsurprisingly, as a result of the announcement on Tuesday, there were long queues at local cash machines with many attempting to withdraw as many 100 rupee notes as possible. This note is to remain legal for the time being, and will be crucial to many in a still cash dependent society. There are hopes this decision will help India move towards a cashless economy, as more people adopt online banking. Many argue even farmers out in the sticks should look to store their income in banks.
For the next 50 days’ banks will accept the old notes, putting pressure on all the black market funds. Banks will be happy to exchange a few thousand rupees, but will be asking questions of those who turn up with hundreds of thousands. It is unclear exactly how much money is circulating on the black market, but it has been a real issue for the Indian economy. This process will at least make some of the funds visible for tax purposes.
People will be able to pay in as much money as they’d like (providing they can prove its legitimacy), but withdrawals will be limited to small amounts for the moment. Prime Minister Narendra Modi said the move would "cause some hardship" but asked people to "ignore" it, calling the step a "celebration of honesty".