India’s Scramble to Switch 23 Billion Banknotes: QuickTake Q&A

Here’s one way to tackle corruption -- remove 86 percent of currency from circulation. That’s what India Prime Minister Narendra Modi tried with his unexpected announcement Nov. 8 that all 500-rupee ($7.5) and 1,000-rupee notes would be banned. When the Dec. 30 deadline passed to exchange the notes, about 23 billion now-worthless bills had been switched for new ones or converted into electronic deposits. Modi says his goal is to combat counterfeit cash and unaccounted-for money and to nudge a cash-dominated society in a digital direction. The immediate impact was cash shortages, long lines at banks and post offices, a slowdown in economic activity and a likely delay for another of Modi’s major reforms, a national sales tax.

The World Bank in July 2010 estimated the size of India’s shadow economy at 20.7 percent of the GDP in 2007. Black money, or income that escapes taxes through illegal means, spurs inflation and deprives the government of revenue that can be used for welfare and development activities. Modi struck a chord in the 2014 national polls by promising to give the impoverished as much as 2 million rupees each from such funds stashed abroad. An amnesty program that ended in September resulted in the declaration of 652.5 billion rupees in unaccounted money, about 0.5 percent of GDP.