India & Its Missing Cash

Technical Analysis
09 gru 2016
India & Its Missing Cash

This week we turn to yet another corner of the world that is going through a crisis – India. Just a few weeks ago India’s Prime Minister Narendra Modi decided to remove from circulation all 500 and 1000 rupee banknotes – a good-intentioned measure that has since wreaked havoc on India’s economic landscape. Modi’s decision was to a large degree an answer to some of the country’s most serious problems, such as corruption and money-laundering. Tax evasion is one of the greatest financial issues in the India, where only about 2% of people pay their income tax. The large sums that remain unaccounted for are hidden away in cash, so by making the old notes invalid, Modi ensures only documented income would be legitimate, greatly increasing the transparency in India’s economy. However, this decision didn’t come after a long period of public debate and consideration, but was announced in an unscheduled speech instead, to come into effect just hours later. The people of India were unprepared for drastic measures of this scale and this has caused immense suffering during the past month. The notes that were discontinued amount to about 80% of all the cash in India’s economy. It is easy to see how making such a large amount of money suddenly invalid could make the lives of millions of Indian difficult. Ever since Modi’s announcement there have been long lines in front of ATMs and bank clerks as people try to exchange the now out-of-circulation notes. Many people have still not been able to do so. There aren’t enough ATMs to meet the demand, and there also aren’t enough of the new 2000 rupee notes printed yet. Those who had been lucky enough to get rid of the discontinued 500 and 1000 notes have met further difficulties in their daily activities. Vendors and sellers are out of change and for many people it has been impossible to acquire basic goods such as food simply because salespeople couldn’t break down the newer 2000 rupee notes Indians are now using. In many cases this results in people’s inability to buy food, water, or medication. In addition, a staggering percent of India’s poorest are paid in cash and due to the lack of smaller change they have trouble receiving payment. The Reserve Bank of India (the country’s central bank) has defended Modi’s reform by stating that it was planned but it had to be kept secret in order to be effective. Many analysts see this as a step in the right direction. Nevertheless, there are also those who have criticised the severity of the measures and the seemingly poor planning of the reform. India’s expected growth rate was lowered by the RBI as the regulator remains alert about further complications.

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