Journal : Global Times (Chinese) Date : Author : NA Page No. : 16

Indian Prime Minister scraps large denomination currency notes

Mainstream media abuzz discussing “risky decision”   Ordinary people queue up whole night to exchange money

Global Times special correspondents in India, Germany and Canada: Zou Song, Qing Mu, Tao Duanfang

Different from most other countries in the world, the most popular news on November 9 in India was not the US election, but the “time limited scrapping” of high value notes! On November 8 Indian Prime minister Narendra Modi suddenly announced the scrapping of India’s largest denomination currency notes of Rs. 500 and Rs. 1000 (equivalent of about 50 RMB and 100 RMB; 1 RMB is approximately 9.8 rupees) from midnight of November 8. The people holding the scrapped currency notes will have to either deposit or exchange them for lower denomination notes at different banks, post offices or relevant agencies within a limited time. The Indian Government claimed that the move was meant to combat corruption and black money, but such a sudden move by the government has caught everyone off guard. A large number of Indians crowded at their nearest braches of banks on the same evening, and the queues in front of the ATMs have also reached the main roads. While praising Modi’s bold decision, Indian public opinion also worried about the inevitable volatility of Indian market in the near future. But as for the long term impact of the move, people from all walks of life still have misgivings, because the culprits will always find an end-run around the rules.

Modi throws a stun grenade to fight corruption

In his 40 minute long speech in Hindi and English on Tuesday night, Modi declared that from midnight of November 8, Rs. 500 and Rs.1000 will cease to be legal tender. Although the two currencies would become “waste papers”, these bills can be used in a few places like government hospitals, railway and airline ticket booking offices and petrol bunks before November 11. In other words, the vast majority of the people in India can only use the Rs. 500 and Rs. 1000 notes in their hands in very limited places for two days.

“It is not that I want to snatch the money from your hands, this is done to fight the black money that wrecks India’s financial system and the corruption that renders India uncompetitive,” stressed Modi during his speech. He said that the small denomination currency notes which are currently in circulation in India, as well as electronic currencies like credit cards and debit cards would not be affected. In addition, the Reserve Bank of India will issue new version Rs. 500 and Rs. 2000 notes, and people can exchange their old notes for new currency at the bank before the end of the year. So for the common man, there will a 50 day grace period, “no need to rush to the bank tomorrow itself.”

However, as this super stun grenade was thrown out, it still terrified the ordinary people of India.  Shortly after the announcement, the Indian television channels showed scenes of people lining up in front of petrol bunks and ATMs. On November 9, all the Indian banks were closed, and the government’s explanation was that they were preparing new currency for the bank counters and ATMs. It is reported that Indians can only draw a maximum amount of Rs. 2000 from banks or ATMs, and from November 19, this ceiling will be raised to Rs. 4000.

Shortly after Modi finished his speech on Tuesday night, there were long queues in front of ATMs in the neighborhood where this Global Times reporter stays in New Delhi, and the nearby petrol bunks also were extremely overcrowded.  After the scrapping of India’s old high value notes, India’s highest denomination banknote is Rs.100 (approximately 10 RMB). Although it is not easy to spend with small denomination currency, spending all the high-value notes and keeping back the small-value ones as far as possible has become the only choice of the people of India. An elderly man named Rasdil told this Global Times reporter that he understands government’s decision to combat black money, but as a small businessman, he doesn’t know what to do with the large denomination currency notes in his hand. Most people like him were left with only 1 hour to make a decision. A parking lot attendant said: “the company didn’t tell us about this news, I only came to know from customers.” A civil servant in the government also said: “I support the central government’s decision, it will contain illegal activities. But the implementation of this initiative was rather too sudden; I even don’t know how to pay the servant in my home.”

Mr Purat, an Indian businessman who has long been engaged in Sino-Indian trade told the Global Times: “At present more than half of Indian people don’t have bank accounts or ATM cards, especially those working in the big cities. Their lives will become difficult for a short time.”

Surgical strike to fight corruption

“This move is a surgical strike on black money,” said India’s Finance Minister on November 8. He said that Indian people holding currency earned through legitimate sources, as well as income tax-paid money will not encounter any difficulties, but people with huge amount of cash obtained through illegal activities will be exposed. However, India’s main opposition party Congress said that despite the party’s support for the fight against black economy, the biggest victims of demonetization are actually ordinary people. The party spokesman, Randeep Surjewala, said that the ordinary Indian people are now suffering because of this measure while preparing for weddings and doing business.

At the beginning of his term in office, Modi had vowed to fight the black money, corruption and tax evasion. Many people in India don’t deposit their money in bank. They like to store away large denomination currency notes at home; this money could be from normal income, and also could be black money for which tax has not been paid, money acquired through bribery and other shady incomes. These people think that as long as they don’t deposit the money in bank, the income tax and anticorruption departments won’t be able to find out. Modi has previously called for honestly declaring the income. In September, the government launched a plan where tax evaders could avoid criminal charges if they voluntarily paid the tax dues with an additional 45% fine. However, this appeal was not at all helpful. Therefore, the Modi Government has resorted to this extreme move.

The move to scrap the high-value notes has become the biggest news in India overnight. All the major television channels in India have reported the news during prime time in the night of November 9, focusing on the interpretation of Modi’s new policy and informing the public how to deal with the high denomination currency in their hand.

The reports of the relevant news in India’s major television channels, newspapers and websites on November 9 were even more overwhelming. On November 9, Times of India dedicated 7 pages for reporting this “decisive battle” launched by Modi on black money and corruption.   The front page article in this newspaper said that Modi Government had said they would declare a war on black market transactions and corruption at the beginning of their term and it seems that he wants to honor that promise more than half way through his term. Just as he said in the speech, the large amount of high-value notes circulating outside the regulatory system has always been a hotbed for the growth of tax evasion and corruption in government and businesses. It has also become the main driving force for the growth of terrorists and their erosion of the Indian financial system.

Another article in Times of India mentioned the huge risks that could be brought about by this move, saying “this is a risky decision made by a brave leader”. Modi’s this move will inevitably bring unpredictable reactions in real estate, commercial organizations as well as other political forces. This sudden move will cause panic in the market, and there will be difficulty in consumption in the short term because of shortage of cash. These are the “backlashes” that Modi Government has to bear. However, the article quoted one of Modi’s aides as saying: “it is proved that lukewarm governance programs were not able to melt the hard ice, leaders have to boldly take risky decisions.” Another analyst points out that Modi’s this move undoubtedly has overtones of hitting the financial foundations of his political opponents, but this “purging” move is fair, because his own political party BJP will also be inevitably affected. This amply demonstrated Modi’s determination in fighting corruption till the end.

India’s Economic Times said Modi’s decision was a “correct assessment of the situation”. The report says that India’s demand for paper currency has grown 40% in the past 5 years, Rs. 500 notes have increased by 76% and Rs. 1000 notes have increased by 109%.  86% of the value of Indian currency in circulation comes from Rs.1000 and Rs. 500 notes. Who really needs such large denomination notes? The newspaper said quoting World Bank data that the grey economy represented by black money accounts for 1/5 of India’s GDP, and its upward growth trend has still not been effectively curbed. The article also took note of the timing when Modi announced his reform. It comes just at a time when several States in India are going to polls, and using cash for canvassing is a big malpractice of Indian elections. The new policy is helpful in stopping this custom.

Can scrapping high-value notes fight corruption in one stroke?

India’s this move has also attracted international media attention. According to Reuters, Modi’s sudden scrapping of two high-denomination notes has sparked great chaos in India, and the shock measure of it was not less than that generated by the sudden unexpected result of the United States election on the same day. Although some analysts say the move is good for India, because “it can achieve transparency and the money which had previously entered the black market can be brought back to the regular economy”, however India’s National Stock Exchange showed a huge crashing trend on that day, share index slumping as much as 6.3 percent for a time in early trade on November 9.

CNN said that corruption and money-laundering are considered to be “diseases” and “obstacles” to the country’s economic success. In recent years, the Modi Government has taken many steps to fight corruption. In two years, India’s ranking in the global corruption perception by Transparency International has improved from 100th to 76th position. However, in practice, these policies had largely failed to root out corruption.

The New York Times said, Mr. Modi was elected in 2014 after running on an anticorruption platform that included a pledge to fight black money. But the results so far have been mixed. Although the Modi Government has taken this bold decision, it is unclear what the impact of the ban will be. Studies have shown that corruption can be curtailed by reducing cash transactions, but it is unlikely to be eliminated by such a move. “Despite the good intentions, this policy will be disruptive. This is Modi’s transformational reform,” said Deepak Parekh, chairman of Housing Development Finance Corporation of India.

“Black money troubles India”, Germany’s Finance and Economy website said on November 9 that corruption has always been a developmental roadblock for the world’s largest democracy. Although the pace of India’s economic development in recent years has been at the world’s forefront, still there is a wide gap between India’s and the neighbouring China’s economies. Indian government’s move to scrap the high denomination notes to fight the underground economy was a helpless option.

Transparency International’s South Asia and China region Senior Director Liao Ran told Global Times on November 9 that Indian government’s move of scrapping high-denomination currencies is an operation against underground banking. This measure can combat corruption, money laundering and the underground economy funding terrorism. He said that many developing countries are plagued by corruption. In General, the Indian Government’s ability to fight corruption is low.

Indian Institute of Technology economics Professor Jayan Jose Thomas told in an interview with the Global Times reporter on November 9 that Modi Government’s scrapping of large denomination currency notes will undoubtedly produce clear results in combating black money, this kind of move is not first time in India, and has also been used in other countries. But India has always been a society where “cash is the King”; the popularity of bank accounts and ATM cards is comparatively low. The sudden scrapping of high value notes that make up more than 80% of money in circulation will inevitably cause inconvenience to people’s lives, and the popular discontent is also a test for the Government’s administrative capability. Mr. Thomas said that although the Government’s strong move will also help to curb corruption, the practical effect of this initiative remains to be seen. Most of the corrupt people do not store away their assets only in cash; gold, land, real estate and overseas assets are all used by them to carry out illegal transactions. We can say that there are hundreds of thousands of ways which breed corruption, and cutting of cash flow alone is far from being enough.

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