On November 8, Indian Prime Minister Narendra Modi announced in a broadcast to the nation that Rs500 ($7.40) and Rs1,000 currency notes would no longer be recognized legally as currency. “Great,” said Corporate India, economic commentators, foreign investors, international think tanks and global rating agencies. “Masterstroke,” echoed the Confederation of Indian Industry (CII).
The aim behind the government’s action was to combat tax cheating, counterfeiting and corruption. Eliminating large denominations makes it harder to hide large amounts of cash. Modi noted that the move complements the country’s swachh bharat abhiyan (Clean India campaign). “For years, this country has felt that corruption, black money and terrorism are festering sores, holding us back in the race towards development,” he said. “To break the grip of corruption and black money, we have decided that the currency notes presently in use will no longer be legal tender from midnight tonight.” Added Finance Minister Arun Jaitley: “The goal of this is to clean transactions, [to] clean money.”
“This announcement appears to be the most significant change made by the Modi government to date,” says Girish Vanvari, partner and head (tax), KPMG in India. “Its impact could be even bigger than GST (the Goods and Services Tax which is still running the gauntlet of politicians).” Adds a report by Crisil, a global S&P company: “Tuesday’s move could change the face of the Indian economy, improve the government’s fiscal position and tax compliance. The size of the cash economy will shrink, as will black money generation avenues, because of the better cash-flow trail.”