Nearly a year has passed since Indian Prime Minister Narendra Modi implemented a stringent ban upon the usage of certain rupees in an effort to reduce the amount of black money (illegally obtained currency) within the country. However, Prime Minister Modi’s plan to rescue India’s sluggish economy has seemed to backfire, as the country’s economic growth has been falling steadily since the ban and is currently sitting at an all time low.
This is not the first time that the Indian government has attempted to reduce the black money market. In 1978, Prime Minister Morarji Desai enacted a similar law in New Delhi by banning the use of ₹1,000, ₹5,000 and ₹10,000 bills, giving holders only one week to exchange their notes. This ban was ineffective for two reasons. First, at the time these notes made up less than 2% of India’s circulating bills. Second, the time period was so short and the ban so sudden that very few people actually stuck to the rules and exchanged their larger notes. Despite this past act not remaining in effect, some anti-corruption campaigners have recently embraced Prime Minister Modi’s idea to enforce a revised version of the act to help with the issue of black money.
Last November, a new law was enacted across the country stating that 500 and 1,000 rupee notes, worth approximately $7.50 and $15 respectively, were not allowed to be used for any transactions, other than purchasing state-owned gas or for payment in government hospitals. Due to this, a whopping 86% of all rupee notes in circulation—worth over $220 billion—were deemed ostensibly worthless. Until the end of 2016, these notes were still allowed for bank deposits or to be exchanged for new currencies. Besides these few uses, the notes were useless. The basic idea was that, in order to reduce the use of black money, the notes would be banned, forcing black money hoarders to either step forward and attempt to exchange such a large amount or lose it altogether.
Even though there is logic to the idea that reducing the amount of bills in circulation will reduce the use of black money altogether, the Indian system is much different than that of most other countries. Often times, usage of black money is not even in physical notes, but appears in the form of property and gold. To these citizens, barter is a legitimate form of payment and not associated with corruption. Surjit Bhalla, a senior Indian analyst for a New York economic consultancy, states that “there is not a soul in India who has not paid black money.” This is because their form of bartering is incredibly easy and accessible. Bhalla confessed that even he has fallen victim to the pressures of the black money market. Considering the breadth of black market, even with Prime Minister Modi’s ban of the ₹500 and ₹1,000, India is still failing to suppress its rampant corruption.
As economists predicted, and contrary to Prime Minister Modi’s intentions, the Indian economy’s growth has come to a screeching halt. The country’s GDP, or the total value of goods produced and services provided within a country, has fallen to a three-year low. Since January of 2016, their GDP of about $2.2 trillion has dropped 3.5%, representing the country’s weakest growth rate since the first quarter of 2014.
Yet, despite the falter in the country’s economic standing, most people’s faith remains in their prime minister. Local companies and larger corporations alike have seen an upwards of 60% decrease in sales since the ban began, yet they know that Prime Minister Modi’s intentions are for the good of the whole country. There is a belief among the people that only those who were not paying their taxes—which does not encompasses a large amount of the population—were stealing from the government, and therefore have to worry about the ban. The hope is that Prime Minister Modi's plan to create a more honest fiscal system will also create a more honest population, and that his candid enthusiasm towards purging black money will appeal to investors, and ultimately lead to great economic growth.