The stealth decision to abruptly cancel and replace most of India’s currency is a radical economic experiment, and political gamble, with few precedents. Nearly 80 per cent of consumer transactions are in cash. In India, circulating cash is 14 per cent of GDP, compared with less than 5 per cent in other large economies. There are also questions about its impact on the wider economy. They may ruin me because their loot of 70 years is in trouble.” Vidya Ram, a farmer, leaves a bank in Dadri, Uttar Pradesh, with his new Rs2,000 notes © BloombergĪs the Indian government struggles to overcome logistical bottlenecks that have impeded distribution of the new currency, debate is raging over just how effective the draconian measure will be in combating black money. “I know the forces up against me,” Mr Modi said in a speech this week. Markets are deserted, except for banks and automatic teller machines deluged by desperate Indians on a quest for cash.

The cash ban, which Mr Modi had kept secret until it was announced on November 8, has shocked India just as it was beginning its frenetic high-spending wedding season. But income tax officials will be alerted to any deposit of more than Rs250,000, a sign of the widening campaign against corruption and tax evasion. Until December 30, the notes, worth $7.50 and $15 respectively, can be deposited in bank accounts or exchanged in small quantities over the counter for new currency. The scrapped currency - together worth more than $220bn, or 86 per cent of India’s circulating cash - is no longer legal tender and the notes are not supposed to be used for any transactions, except buying fuel at state petrol pumps or in government hospitals. The campaign hit its apogee last week, with New Delhi’s surprise ban on the use of Rs500 and Rs1,000 notes - a radical action intended to catch black money hoarders. Strict monitoring of large cash payments was the opening salvo in Prime Minister Narendra Modi’s campaign to crack down on “black money” - cash earned through illegal activities, or earned legally but never declared to tax officials. “People are no longer able to make cash purchases of expensive products without the risk that they will be called by the income tax department inquiring where they got so much cash from,” Yasho Saboo, Ethos’s owner, told the Financial Times a few months after the new regulation took effect.

Before the new rule, 45 per cent of the company’s sales were of Swiss timepieces worth more than Rs200,000 - often bought with suitcases full of notes. The impact on Ethos Watches, a luxury watch retail chain with 45 stores, was immediate: sales plunged 60 per cent. India, at the start of this year, began requiring retailers that received more than Rs200,000 ($3,000) in cash from a customer to report details of the sale - and the buyer’s taxpayer identification number - to tax officials. Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

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