India Banned 500 and 1,000 Rupee Notes to Fight Corruption

India can withdraw high-denomination banknotes in the nation’s biggest crackdown against corruption in nearly four decades.

The notes in circulation will need to be deposited in banks by the end of December, he said during a late evening speech. Prime Minister Narendra Modi said in an unscheduled address to the nation, 5 hundred rupee ($7.5) and 1,000 rupee notes will cease to be legal tender from Wednesday.

While the S&P BSE Sensex tumbled the maximum amount as 6.1 % before trading 2.6 % lower at 9:54 a.m. in Mumbai, Chaos prevailed across major cities as people lined up outside money dispensing machines late on Tuesday following the announcement.

Modi’s unprecedented move follows similar action taken by the european central bank, that is discontinuing the use of 500-euro ($575) notes to prevent their use in “illicit activities.” The step by Modi, is an attempt to fulfill his election promise of curbing tax evasion and recovering illegal income, stashed overseas.

At a similar time “the average Indian wakening to this goes to think ‘what goes on’,” he said. Milan Vaishnav said, Modi is “changing the narrative at a time when everybody was saying this government’s moves on black money were mainly hype.”

This is the first time since 1978 the govt. has withdrawn cash from circulation, according to the central bank’s web site. New Delhi and Mumbai, the nation’s business hub, witnessed huge rush outside fuel stations that are exempted from the curbs till November. 11.

Retrieve Overseas Funds

Shreet Agarwal, 21, small business owner said, “I had problem to require out my car from parking because the attendant wouldn’t settle for five hundred rupee currency notes,” as he parked his car at a fuel station in central Delhi filled with near 3 dozen vehicles.

Citigroup INC. analysts including Samiran Chakraborty wrote during a note, “This could be a short-term risk for the economy that we’d be tracking closely.” depending on however those funds get deployed, there could be an impact on growth and inflation, tho’ it should not last. Economists said, Banks are set to see a jump in deposits.

Struck Chord

While an income declaration program this year had met with a mixed response, A one-time likelihood to return clean on unaccounted wealth led to declarations of only about twenty five billion rupees in tax last year. The Indian premier struck a chord with 1.3 billion Indians within the 2014 national polls by promising at a political rally to retrieve funds stashed overseas and provides the impoverished as much as 2 million rupees every from the money recovered.

According to central bank Deputy Governor R. Gandhi, There are regarding 16.5 billion of 500 rupee currency notes and 6.7 billion of 1,000 rupee bank bills in circulation, amounting to fifteen trillion rupees or $224 billion.

“Despite various steps, we’ve improved only to seventy six.” Modi said, referring to India’s growth rate, “On one hand, we are number one in economic process and on the other we are ranked one hundred in world corruption rankings.”

According to N. Bhaskara Rao, cash for votes could be a common practice, as is handing out gifts, chairman of the New Delhi-based Centre for Media Studies, that revealed a report in 2014 on the subject. It comes simply before key state elections. The timing of the move is critical.