India Prime Minister Narendra Modi stunned the country on Nov. 8 by announcing that 500-rupee ($7.30) and 1,000-rupee notes, which account for more than 85 percent of the money supply, would cease to be legal tender immediately. The announcement set off days of turmoil as millions of Indians tried to swap their suddenly worthless old notes for hard-to-find new notes of 500 and 2,000 rupees or older ones in smaller denominations. On Nov. 17 the central bank tried, with little effect, to reassure the nation that the situation was under control. “There is sufficient supply of notes,” the Reserve Bank of India said in a statement. “Members of the public are requested not to panic.”
Modi’s action is aimed squarely at the cash-driven shadow economy, which accounts for about 25 percent of gross domestic product. Fewer than 5 percent of all Indians file tax returns. Many shop owners use cash for their transactions and don’t declare their income. Wealthy Indians often avoid taxes by paying cash for property and jewelry. Those businesses “are where black money is hidden,” says Capital Economics economist Shilan Shah. With so much money going untaxed, Indian governments have had difficulty funding infrastructure projects and other public spending.
