Demonetization. That is what the
Indian government is calling the almost complete, overnight elimination of cash in one of the world’s top 10 economies and most
populated countries.
But Why?
On November 8, Prime Minister Narendra Modi surprised a huge part India’s population when he announced that roughly 86 percent
of the total rupee notes in circulation would suddenly become void and would need to be exchanged by new ones issued by the Reserve
Bank of India. Banning the old
500 and 1,000 rupee bills will be a large step in combating tax evasion and corruption, Modi explicated, refuting reports that
claimed the move was about financing terror or plain-old bribery.
While some analysts are praising the decision, people in India are quite angry — but remain peaceful — as cash shortages
increase and lines to exchange the old currency get longer and longer. Take into account that India’s economy relies heavily on
cash, as 90 percent of transactions are completed this way. Against this backdrop, credit or debit are not options for most
people.
Cash Economics
Nonetheless, this is exactly why Modi decided to move forward with this plan. A cash economy means that only about 1 percent of the population is paying income taxes.
"The poor are sleeping peacefully, while the rich are running around trying to buy sleeping pills,” Modi said in a speech he
delivered on Monday.
ETF Reactions
Top India ETFs like the Ishares MSCI India ETF (BATS: INDA), the WisdomTree India Earnings Fund
(ETF) (NYSE: EPI), the iShares S&P India
Nifty 50 Index Fund (NASDAQ: INDY) and the
PowerShares India Portfolio (ETF) (NYSE: PIN)
were little changed on Monday trading, posting gains or losses of no more than 0.3 percent.
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