By: Monisha Rao

You can follow Monisha on Twitter @mrao27

On November 8, 2016, India’s Prime Minister Narendra Modi announced that the country’s two highest value bank notes would become legally worthless.[1] Anyone in possession of these 500 and 1,000 rupee notes will be left with two options: trade in the currency at a bank or post office within the end of the year or reconcile with losing the loss.[2] The simplistic solution to the current situation would be to go to a bank and trade in the worthless currency, but this new legislation allows banks to keep track of all currency being traded in and give the government the ability to tax the cash.[3] This legislation, which took an almost immediate effect, is an attempt to combat illicit income from underground businesses.[4] Cash is still a common form of currency in India and a way for the rich and famous to hide illegal money.[5]

Who gains from this legislation? While the Indian government certainly hopes that discontinuing these higher value bank notes will reduce corruption and illegal business deals, banks have a lot to gain at this point.[6] Currently, the majority of Indians hold their savings outside of the banking system and many workers do not utilize bank accounts and are unable to use other forms of payment such as credit cards or smartphone based payment services.[7] The number of Indians with bank accounts has been rising since the introduction of a government financial-inclusion scheme, but it is likely that banks will gain significantly as more citizens will have to open bank accounts or utilize other banking services to avoid the risk of forfeiting their savings.[8]

What impact does discontinuing bank notes actually have? There are two possibilities and both result in the common man losing money. The first option is to voluntarily disclose the money and potentially have to answer questions about how that money was acquired, and additionally have to pay taxes on that money; the other option is to forfeit the money completely.[9] Either way, both the domestic and international business communities will be impacted. On the lowest level, households will have to cut costs, which will impact local businesses and businesses that solely rely on cash.[10] On a global level, companies such as Amazon and other e-commerce sites can also be impacted, as over two thirds of their sales are settled in cash.[11]

Why does this matter? In our globalized and interconnected world, one country’s economy has the ability to sway the rest of the world. Currently, India is in the top ten of the world’s largest economies and is projected to continue to grow.[12] If other countries choose to follow India’s example and flush out currency to reduce corruption and “black money,” the impact will certainly be felt globally.

[1] Taking Note: The government transforms base money into nothingness (and gold), The Economist, (Nov. 12, 2016), https://www.economist.com/news/finance-and-economics/21709988-government-transforms-base-money-nothingness-and-gold-taking-notes.

[2] Id.

[3] Lakshmi, Rama, India invalidates large bank notes in crackdown on crime, The Washington Post, (Nov. 8, 2016), available at https://www.washingtonpost.com/world/asia_pacific/india-invalidates-large-bank-notes-in-crackdown-on-crime/2016/11/08/cc705ee2-a5c6-11e6-ba46-53db57f0e351_story.html.

[4] Taking Note, Supra Note 1.

[5] Lakshmi, Supra Note 3

[6] Taking Note, Supra Note 1.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] World’s Larges Economies, (Feb. 11, 2016), available at https://money.cnn.com/news/economy/world_economies_gdp/.