India Launches War on Corruption, Hits Cash, Chaos Ensues

“Economic Shock & Awe” turns into “Nightmare Without End”

On Tuesday November 8, Narenda Modi, the prime minister of India, the world’s second most populous nation and Asia’s third largest economy, announced in a public address to the nation that India’s two biggest denomination notes, the 1,000 rupee and 500 rupee bills, were now worthless and would have to be replaced with newly designed bills.

That was six days ago. Since then all hell has broken loose.

Official Motives

There are plenty of reasons for the government’s action. Partly it was intended to flush out the cash hoardings of black market operators and stop the rampant corruption permeating all levels of business and government in India. It is also part of the government’s plan to thwart counterfeiters and bring more stashed currency into the banking system.

One of the biggest beneficiaries will be the nation’s nascent digital economy. Paytm, India’s largest digital wallet startup, hailed the move. “This is the golden age to be a tech entrepreneur in India. Especially a fintech one,” tweeted Vijay Shekhar Sharma, the company’s founder, whose investors include Alibaba Group Holding Ltd. “Keep the money digital.”

The coffers of both the nation’s government and banks are also expected to benefit handsomely. According to some reports, banks’ non-performing loan ratios have already shrunk in recent days as small and mid-sized businesses that had been defaulting on repayments suddenly started rushing to banks to repay the money they owed. As for the government, it hopes to boost its tax revenues from the current anemic level of 17% of GDP to somewhere closer to the OECD average of 34%.

The problem is that India is not an OECD nation and it does not have the financial logistics or architecture to accommodate such a bold move. In fact, even the world’s most advanced economies would struggle to cope with such a radical financial shake-up

Continue reading the article at WOLF STREET

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