On November 8, 2016 Indian Prime Minister Narendra Modi made a surprise announcement: all circulating 500- and 1000-rupee notes were being recalled from circulation, to be replaced by new 500- and 2000-rupee bills. 500 rupees is worth about $7.35 in US dollars.
People had until December 31 to exchange their old notes for new bills, but restrictions applied. Only 4,500 rupees could be swapped for cash: Any additional money had to be deposited. Also, people caught with more than 250,000 rupees in old notes are subject to investigation.
With its immense population including many people in poverty, India is a cash-focused economy. Casual laborers, food and vegetable vendors, and many others rely entirely on cash. Small shopkeepers have experienced business drops of up to 80% because their poor clientele depend exclusively on cash.
It’s also a society with lots of corruption, including bribery and tax evasion. Diminishing the black market, preventing corruption, defeating counterfeiting and increasing the monetary paper trail are among Modi’s motives, but it’s resulted in chaos in India as old bills are refused.
Almost 400,000 trucks were immobilized. Businesses paid employees with the soon-to-expire bills, jeopardizing their economic solvency. A serious economic slowdown may result. “You have stopped market transactions for 70 percent of the economy” warns K.C. Chakrabarty, a former deputy governor of the central bank. Rural areas are hit hardest, where there are fewer than 10 bank branches for every 100,000 people, and many banks are open only two days a week.
Electronic payments are booming. While last year 78 percent of Indian transactions were in cash (compared to 20 percent in the US), the number of Indians using electronics has soared to 230 million. 70,000 merchants per day are signing up for a popular mobile app, and transactions on it have increased 350 percent. While the Prime Minister considers a cashless economy to be a useful tool in the fight against corruption, the campaign’s overwhelming impact is one of chaos and uncertainty, as banks and the mints themselves struggle to meet demand for new currency.