In most countries, whenever your nation’s head of state announces an ‘important national address’, it’s prudent to take notice. (The obvious exemption being Venezuela, where the infamous Hugo Chavez was known for delivering marathon snooze-fests of up to ten hours). That’s exactly what happened in India on November 8, when Prime Minster Narendra Modi took the podium to deliver a sweeping speech on the national economy.
The media had been briefed in advance that the address would focus on corruption and the ‘black economy’, which has long been a drag on economic growth. Yet the entire nation was left gobsmacked when Modi announced that its two most prolific currency notes, the 500-rupee (US$ 7.50) and 1,000-rupee (US$ 15) would no longer be considered legal tender. Together the two notes comprise 85% of all fiat currency in circulation. In one of the more understated (not to mention Orwellian) quotes that we have seen lately, Modi stated that the move would “cause some hardship” but asked people to “ignore” it, calling the step a “celebration of honesty”.
The ensuing chaos was momentous. The government announced a bank holiday and shut down all ATM machines until the following day, at which point the now-defunct notes could be exchanged for viable currency. But exchanges were limited to 4,000 rupees (US$ 60) per day. Frustration was rampant across the country as long queues formed in thousands of banks and post offices across the country. The government limited withdrawals to 2,000 rupees (equivalent US$ 30) per day, and attempts to convert larger amounts were sure to invite close scrutiny from bank and tax officials. An Indian businessman, who spoke to Frontera News on the condition that his name be withheld, said that many people were frantically visiting as many banks as they could.
While state-owned Indian media praised the government’s decision, social media accounts were ablaze with irritation and anger. One prominent businessman asked what purpose it served to inconvenience the poor and middle-class – many of whom remain unbanked in India and conduct all transactions in cash – while the wealthy remain free to launder much larger amounts of money into property and offshore investments.
The ‘kitty party’, a long-time and popular tradition that has served to empower middle-class Indian women, is now also under threat. Many Indian housewives traditionally siphon away small amounts of money that can grow into substantial reserves over time, which the lady can use outside the confines of her husband’s bidding. Many of these women join ‘kitty parties’, or informal savings groups normally comprised of 10-20 ladies who meet once a month to hold a raffle where the winning participant receives the proceeds from the group’s collective savings. Given that up to 80% of Indian women remain unbanked as of 2014, it is likely that this practice is now under threat.
Legitimate savers will be able to exchange the old notes at their local bank branches until 30 December, at which point any redemptions will have to be conducted directly with the Reserve Bank of India. Many Indian expats who were not planning to return home within that timeframe are now wondering how they will redeem their funds before the window closes.
Perhaps unsurprisingly, Modi’s decision to nullify the vast majority of his national currency has created many new entrepreneurs. Reports indicate a substantial increase in the number of small-time money launderers across the country, who are happy to convert your now-worthless 1,000-rupee notes to valid currency – for a 500-rupee fee. And India’s bitcoin exchanges have reported a spike in the number of frantic calls from new customers seeking to convert cash.