India’s Anti-Graft Banknote Move Hurting Poor, Summers SaysBy
500 and 1,000 Indian rupee notes still in widespread use
Invalidated cash hurting small businesses and merchants
Indian Prime Minister Narendra Modi’s move to withdraw higher-value bank notes from circulation is hurting ordinary citizens rather than making a serious attempt at combating corruption, according to former U.S. Treasury Secretary Lawrence Summers.
Modi this month announced that 500 and 1000 rupee notes will no longer be legal tender in a bid to crack down on counterfeiting and graft, effectively scrapping more than 85 percent of notes in circulation. It caught citizens by surprise in an economy where businesses and consumers often transact in hard cash. Frustrations have boiled over across the country as bank machines ran out of money and customers waited in long lines to exchange their old notes for new ones, while shopkeepers complained of slower sales.
“We strongly suspect that those with the largest amount of ill-gotten gain do not hold their wealth in cash but instead have long since converted it into foreign exchange, gold, bitcoin or some other store of value,” Summers and co-author Natasha Sarin wrote in a blog post on his website Monday. “So it is petty fortunes, not the hugest and most problematic ones, that are being targeted.”
Summers said that same argument he’s advocated for abolishing large denominations in the U.S. and Europe can’t be made for poorer India. The 500-rupee note -- the equivalent to about $7.30 -- is widely used in the Asian nation, while the biggest denomination in the U.S. -- $100 bills -- are rarely handled by even the richest Americans, according to the blog.
"The ongoing chaos in India and the resulting loss of trust in government fortify us in this judgement," Summers wrote.
The authors also questioned the efficacy of the measures. While the government assesses that the move could expose as much as $74 billion in unaccounted cash, opinions are mixed about its impact on future tax evasion.
“Without new measures to combat corruption, we doubt that this currency reform will have lasting benefits,” Summers and Sarin said. “Corruption will continue albeit with slightly different arrangements.”
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