India's bold financial solution for the Black Market
Sometimes we can literally see history in the making, and I'm not referring to the Syrian civil war or to Trump's victory. In the past few week India is conducting one of the most elaborate and vast social, economic and political experiments that has ever taken place in the economy of a country and society.
Almost three weeks ago, in a move that was kept secret and classified, the Indian government led by Narendra Modi announced the immediate abolishment of the all the 500 and 1000 rupee bills and their instant replacement with new bills. What began as a rumour turned out to be a real and obligating decision – a decision that rendered millions of rupees stored in mattresses, in the attic and in rice bags virtually worthless.
Anyone that has traveled to India probably noticed that the "black economy" in the country is running wild without any legislative intervention. In fact, in the past few weeks there have been various publications claiming that there are more black economy money conversions in the sub-continent than legitimate conversions.
Much of the black currency is in the hands of different wealthy members of society that are hiding it under their mattresses rather than "putting it to work" in the banking system, but the combination between a rapidly growing economy and a predominantly conservative society that relies on village agriculture are hindering real growth. That, in addition to years of complete lack of trust in government institutions, law enforcement and the banks has brought many Indians to refrain from reporting their income - either to avoid paying taxes or because they don't trust the banks or because they physically don't know how to use banking services and to the best of their knowledge, the safest place for their money is stashed away in an accessible (yet secret) safe place. The cumulative amount of cash is astronomical and is estimated to be billions of undisclosed (and untaxed) rupees – most of it is in the hands of the rich and wealthy.
Since his election, Prime Minister Modi has often spoken about his desire to transform India from a weak and dilapidated economy that relies mainly on hard currency to a progressive one relying mainly on computer bytes and not physical bills. In the past six months Modi's government has promoted a "No questions asked" policy that called on the people of India to deposit their money in the banks without having to answer how they accumulated such sums. Some Indians answered the call, but most of the rich and wealthy decided to ignore it and continued to hold their cash under the floor boards.
And so, one fine morning, the people of India (and current tourists) woke up to find that all their 500 and 1000 rupee bills were worthless and they only had valid 10, 50 and 100 rupee bills. Anyone holding large bills had to get to the bank and deposit them and in effect – report the amount of wealth they have. Modi's government was adamant. After allowing 6 months to "launder" any amount of wealth without having to answer for it, today, anyone who converts over 250000 rupee from old bills to new ones must report their income and heavy fines and even incarceration is expected for anyone who is suspected of evading high level taxes.
To re-cap, in a single piece of legislation, the Indian government almost entirely erased the black market in the country and put all the legal money in the country under scrutiny. Reports detail endless queues to the banks without the mandatory caste system distinction. Rich are in queue with the poor, farmers stand side by side with bankers, merchants, industrialists and entrepreneurs with the same goal – to save their money. In addition, there is a large spike in purchases of luxury goods such as Rolex watches, gold, diamonds and jewels, etc.
The Indian government has chosen not only to put the Black Market under check, but to also encourage villagers and desolate communities to open bank accounts and learn to use bank services. Therefore a larger tax watch attached to the act of exchanging bills in comparison to a smaller tax to those who deposit their money. This was also put in place to prevent banks going bankrupt due to the massive run to the banks and the possibility of banks running out of cash and collapsing and forcing the Indian public to open bank accounts.
It's way too early to see if this social-economic experiment will succeed. Humanity is known for finding and exploiting loop holes – especially when it comes to money. Despite many praises that the move has generated, there is a lot of criticism, namely regarding the suddenness of the legislation and its execution. There are a lot of unknowns such as its impact on the wealthy and their willingness to cooperate (some even go to the extent of talking about suicides). There is a wall to wall agreement that this is the first real national legislation that is attempting to root out corruption and transform India's economy to a modern one.