Indian 'black money' measures a defining moment for Modi

7:30 pm on 21 November 2016

Analysis - Indian Prime Minister Narendra Modi has always been a politician mired in controversy borne of bold actions.

A man poses with replica prints of the demonetised 500 and 1000 rupee notes as part of a street art exhibition in Mumbai November 20, 2016.

A man poses with replica prints of the demonetised 500 and 1000 rupee notes as part of a street art exhibition. Photo: Indranil MUKHERJEE / AFP

Halfway through his first term as Indian Prime Minister, he and his Bharatiya Janata party are struggling with a number of social and economic issues, and a feeling among many voters that he has not delivered the promised reforms.

But his first official action following the 2014 election was to establish a special investigation team into so-called "black money", and the way it could be brought back into the mainstream Indian economy.

And his anti-black market credentials have been boosted immeasurably by the recent game-changing move to get rid of the 500 and 1000 rupee notes.

They are worth roughly $NZD10 and $20 respectively, but they represent very large-denomination bills, commonly used by the burgeoning Indian middle class.

Together they represent a huge 80 percent of the cash available in India.

With changes that came in earlier this month, Modi has stood up in a nation where black money has a huge and unregulated role in public festivals, private extravagance, and all kinds of commercial activity from real estate to street restaurants.

90 percent of India's transactions are cash based.

With most people relying solely on cash to meet their daily needs, there has been a scramble to change their large bills for small - or deposit them into a bank account. Tens of thousands of people have been queuing for hours each day desperate to get their hands on legal tender in smaller denominations.

Tens of millions of Indians do not have bank accounts, and many that do have one have no desire at all to combine their black money activity with mainstream banking.

The public annoyance has been made worse by the government policy that limits bank account withdrawals to just 24,000 rupees per day.

With banks and ATMs now running perilously low on cash, a sense of panic can be seen taking hold - the situation worsened with a change in the amount an individual can convert from old notes to new - reduced to 2000 rupees from 4500 rupees, in an attempt to ensure that more people could get hold of at least some cash.

Meanwhile, the average daily income in India remains around 272 rupees, or about $NZD5.70 at today's conversion rate, according to the Indian Labor Bureau.

A number of deaths have been reported of people waiting in the huge queues for access to a bank.

Prime Minister of India Narendra Modi.

Prime Minister of India Narendra Modi. Photo: AFP

The economic and political implications of the move are being regarded as hugely positive. With one move, Modi has effectively killed much of the black economy, estimated to be worth more than 30 percent of the formal economy.

A sum estimated to be around $NZD625 billion has been used in "black money" cash transactions, or hidden under the proverbial mattress in countless Indian homes.

By forcing the people to deposit or exchange cash at banks, the government collects information about identity, income, and the tax paid - or not. Current data shows only around 2 percent of the Indian population pays income tax.

Unexplained deposits will attract unwanted investigation and possibly severe penalties, and those running the black economy now face the questioning of authorities regarding a failure to declare their unaccounted wealth under the "Income Declaration Scheme", which was scrapped in September.

The tax amnesty scheme raised over $NZD10 billion.

The new policy will also impact the hugely corrupt real estate industry, parts of which will no longer be a money-laundering agency for ill-gotten gains.

The black market's grip on the political process will also be lessened, with huge cash funds held by many politicians now open to scrutiny. At least one major political party has already demanded Modi retract his policy on the large denomination notes. There is little chance of that.

Professionals, tradesmen, and developers may be cautious of being paid in cash, but the formal Indian economy will receive a massive shot in the arm in a sweeping move, that while disruptive and annoying for the Indian people, was a bold idea whose time had come.

For Narendra Modi though, the deepening crisis is becoming a defining moment in his leadership.

He met with Chief Minister K Chandrasekhar Rao over the weekend to discuss solutions to the current crisis.

He had earlier appealed to people to give him time to end their hardship, and defended his government's decision, saying "This is an important step in my fight against black money and corruption."

"I have asked the country for just 50 days.

"If after December 30, there are shortcomings in my work, or there are mistakes or a bad intention found in my work, I will be prepared for the punishment that the country decides for me," he said.

Get the RNZ app

for ad-free news and current affairs