Indian PM Modi’s currency ban is a masterstroke in his drive to clean up the ‘dark’ economy

Priya Virmani says Indians will need to bear the initial pain of the 500- and 1,000-rupee notes being discontinued, in the interests of a corruption-free future for the country

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A vendor displays a sign relating to new nationwide currency regulations in Siliguri city, in the Indian state of West Bengal, on November 13. Photo: AFP

Published: 11:29am, 15 Nov 2016Updated: 7:21pm, 15 Nov 2016

On the day of the US presidential election, Indian Prime Minister Narendra Modi unleashed a masterstroke. In an 8pm televised address, he announced to the nation that in four hours (that is, at the stroke of midnight), the largest denomination banknotes – of 500 and 1,000 rupees – would cease to be legal tender.

India has a “dark” economy that is arguably more powerful than the legitimate one. The International Economic Journal has estimated that the shadow economy accounted for around a quarter of India’s GDP between 1999 and 2007. This parallel economy is coloured by “black money” – hoarded mainly by the political class, the mafia and the business community. It is from this cash that the surreptitious funding for elections comes, most of it accumulated in the highest denomination notes (pegged at 86 per cent of the cash economy).

Organic change would have taken generations, but after Modi’s bold move, a rapid purge of the system has begun. Illicit funding of elections and terrorist activities, and the taking and giving of bribes, will become more arduous.

A police officer tries to get people to wait patiently in queues to exchange or deposit discontinued currency notes, outside a bank in New Delhi on November 11. Photo: AP

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The move appeared sudden but there had been a quiet build-up, with the income disclosure scheme for owners of black money, together with other banking schemes introduced over the past two years.