A few hours ago, Narendra Modi, one of the most popular and charismatic Prime Ministers in recent times, announced a bold move to scrap the highest value currency notes of INR 500 & 1000 effective midnight tonight (an hour from the time of this writing).

Why this move?
The Indian government had announced a leeway for tax evaders to report their incomes and wealth and pay the corresponding taxes. Those who had been under-reporting their incomes and avoiding paying taxes now had the opportunity to rightly report those incomes and pay the necessary taxes. A few months time was allowed during which this could be done. With that time coming to an end, the Prime Minister has taken a drastic step to rein in those who hadn't been persuaded by this leeway.

Enough of the good cop. Enter bad cop.

Who is affected?
If you have black money stashed away in the big currency notes, then you're affected. For the rest of us, it is business as usual. For the most part. Those of us who do have 500 and 1000 rupee notes on us have the little inconvenience of taking them to a bank or a post office and getting them exchanged for the still valid currency denominations, a.k.a hundred rupee notes. And we have time till the 30th of December to do this. So, take your time. While depositing, you have to share your PAN so that the deposits can be tallied against your expected earnings. If you have way more black money than what you're expected to be earning (i.e. if you have been taking bribes or not reporting your incomes like rent, business profits, real estate profits, etc), then donate the notes to the makers of Monopoly.

What's the immediate effect? Why are people queueing up outside ATMs tonight?
Banks won't be entertaining any transactions tomorrow. ATMs won't be functioning for the next two days either. So, those that are in need of cash flow over the next couple of days are queueing up. Also, those that have money stashed away that is unaccounted for are making a last ditch attempt to deposit as much as they can. If you don't fall in either of these categories, chill at home.

What's the long term effect?
Tax evaders will now find it much harder to continue fooling the government. Corruption will be harder to carry out as it gets harder to move money around. I am optimistic that the government will use the additional income to make the infrastructure of the country better.

Was Modi ballsy to make such a move?
Not really. If you think about it, he couldn't have had a better time to make such a move. The people who are adversely affected by this move (rich people with black money) are in the minority compared to poor people and rich without black money. So, I expect a net gain in the vote-share for Modi if he were to go to an election now. You would think that businesses will take this negatively. But again, I think not. If this reduces corruption, which I have a strong feeling it will, businesses benefit by having a fair playing ground and transparent policies. The bad billionaires (as Ruchir Sharma calls those that inherit wealth through businesses that deal in commodities, in his book Rise and Fall of Nations) who lobby politicians and fund their election campaigns will be adversely affected. This means that the money to fund election campaigns will be low. But that is true across political parties. Even if the other parties were to gain an upper hand over BJP in terms of election funding, this is a good time to make this move when BJP practically rules the country with no recognisable opposition.

Won't things go back to the way they were once the dust settles down?
New 500 and 2000 rupee notes will be introduced that will have nano GPS trackers (not confirmed by the government at the time of this writing) which will make it that much harder for tax evaders to hoard black money. So, things won't easily go back to the way they are (or dare I say were?).

What's in it for me?
Possibly less hassle at government offices. Possibly lower real estate prices (the real estate industry is largely funded by black money at the time of this writing). Possibly higher spending power. If the money with you is the same, and the money with tax evaders (at least one in two around you) goes down, then your spending power in the market goes up. Simple economics.

Should I worry?
You're the best to answer if you are sitting on top of black money, not me.


If you have any more questions regarding this, add them as comments and I'll update the article with answers.