Modi’s money medicine: Kill or cure? – BBC News

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India's Prime Minister Narendra ModiImage copyright
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This week will be decisive for Prime Minister Narendra Modi’s audacious experiment in tackling tax evasion and corruption in India.

Two weeks ago he gave the world’s seventh biggest economy four hours notice that he was going to cancel 86% of its cash – $220bn (£176bn) in total.

But on Friday the Supreme Court warned that unless something changes – and quickly – there could be riots on the streets.

So is India on verge of chaos?

I described the policy if scrapping India’s two biggest notes – 1,000 rupees ($15, £12) and 500 rupees – (£7.50, £6) as economic shock and awe, and the effects have certainly been dramatic and for many Indians very disruptive.

But I am going to go out on a limb here. I think India is through the worst, and things are going to start to improve – probably quite rapidly.

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Getting hold of a new 2000 Rupee note is taking time

“Your hardship won’t go to waste,” the Indian prime minister reassured Indians at a massive rally of his Bharatiya Janata Party (BJP) on Sunday. “The country will emerge from this like gold.”

It was an appeal for patience, but also a clear sign that Modi recognises the execution of his economic shock therapy was not highly polished.

The so-called “demonetisation” is designed to target what in India is known as “black money” – stashes of corrupt cash on which no tax has been paid.

Indians have until 30 December to deposit their old notes in bank accounts or exchange them in small quantities over the counter for new currency.

Pay in more than 250,000 rupees and the tax authorities will want evidence that you have paid tax.

It is an effort to tackle the endemic corruption in the country, but opposition politicians have been united in their criticism.

They say the policy has been spectacularly ill-planned and has brought virtually the entire Indian economy to a juddering halt.

And there is truth in these claims.

The key was always going to be getting the new 2000 and 500 rupee notes into circulation as quickly as possible.

That has not happened.

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NARINDER NANU/AFP/Getty Images

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Long queues of people wanting to exchange the old notes formed across India

Ninety per cent of business in India is done in cash, and often it has seemed as if the entire population of almost 1.3 billion people has joined the same queue – the one you are standing at the wrong end of.

Quite rightly people want to know why more cash wasn’t printed in advance; the new notes, obviously, but also the 100 rupee notes, which suddenly became the lifeblood of the economy.

They also want to know why the new notes are too small to fit in the ATM machines. That has been a huge problem because it means most of the new cash has had to be withdrawn from bank counters – a far slower process.

And they want to know why he chosen a time when lots of Indians need extra cash.

It is planting season on the vast Gangetic plain – the breadbasket of the country – and farmers complain they do not have the cash to buy seeds and fertiliser.

It is also the start of the marriage season, and across India heart-broken brides and grooms have seen their elaborate wedding plans beached as the cash dried up.

And, as always, the poor are the worst affected. Day labourers, for example, suddenly found it impossible to find work and, as a result, many of them and their families have been going hungry.

Yet there are a number of reasons to believe the tide is beginning to turn, and the “temporary hardships” Mr Modi warned Indians to expect when he announced the policy, are at last beginning to ease.

First off, despite the privations many have suffered there has been no significant public disorder.

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PRAKASH SINGH/AFP/Getty Images

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These notes are effectively valueless in India’s cash economy

Yes, you meet lots of very frustrated people, but very few are actually angry.

Indeed, even after two weeks of queuing, it is rare to find anyone who doesn’t support the intentions of the policy.

That might change if India has to endure many weeks more of this, as some economists suggest is possible.

There are elaborate calculations showing how long it will take to replace the almost 15 trillion rupees demonetisation has taken out of circulation.

But the government doesn’t have to replace anywhere near that amount. Indeed, the logic of the policy implies the aim will be to significantly reduce the amount of cash in circulation to stop new stocks of black money building up.

And there is evidence that the cash crunch is already loosening up.

The queues outside banks are certainly getting shorter in Delhi, the Indian capital, and other large cities.

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Getty Images

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Most people were shocked to know that 500 and 1,000 rupee notes in their pockets had suddenly become illegal

As a result there is a less urgency about getting cash and people are at last beginning to use it again.

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