India industry say shock currency swap painful but necessary

NEW DELHI – Delivering one of India’s biggest-ever economic upsets, Prime Minister Narendra Modi this week declared the bulk of Indian currency notes no longer held any value and told anyone holding those bills to take them to banks.

Only those holding huge stashes of untaxed “black money” need worry, Modi said.

But in India, many others are deeply worried.

About 80 percent of India’s financial transactions are conducted in cash, often to evade taxes. While some of that activity is illegal, hundreds of millions of rural poor, scrappy entrepreneurs and small-time traders also keep their savings in cash, sometimes just because there is no bank branch nearby.

India’s industry leaders, bankers and market analysts rallied behind Modi’s move, viewing it as a much-needed corrective in a cash-reliant culture that has enabled corruption. Within hours of Modi’s announcement that all 500- and 1,000-rupee notes — worth about $7.50 and $15 — would hold no value as of Wednesday, the hashtag “ModiFightsCorruption” began trending on Twitter.

In the short term, economic activity is slowing until new notes worth 500 and 2,000 rupees can be printed and put into circulation, analysts said. They also predicted a rush on gold, foreign currency and other forms of wealth.

“The eradication of the black money menace from the Indian economy is a big positive in the long-term, and the Indian economy will be on a very strong footing once the short-term teething problems are done,” said Sachin Shah, fund manager at the Mumbai-based Emkay Global Financial Services.

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