Few will cavil at Indian Prime Minister Narendra Modi's resolve to attack tax evasion and the menace of the black, or parallel, economy. Whether or not his bold moves yield sufficient results, it was high time for the political leadership to act. Indians are notoriously poor tax payers - less than 2 per cent pay income tax and the country has one of the most dismal tax to gross domestic product ratios. Mr Modi needs significantly enhanced collections to fix his country's critical infrastructure gaps, improve healthcare and raise the quality and availability of education for its teeming millions. A share of the funds for these tasks ought to come from unreported wealth, which is said to account for a fifth of the economy. Instead, such money greases and feeds government corruption, and boosts real estate prices which put decent homes out of the reach of many workers.
It is this massive canker that Mr Modi has taken on with his shock move to order the cancellation of old 500 and 1,000-rupee notes. These highdenomination notes form about 2 per cent of the total currency in circulation but account for 86 per cent of the value. Holders of the notes can bank in the cash within 50 days from Nov 8 but need to declare their identities. Those unwilling to do so risk losing their pile. Naturally, all this has jarred a nation whose rural heartland is substantially a cash economy, affecting demand and potentially holding down growth in the current quarter. The government says the pain is worth the spin-offs in an enhanced formal economy. Improved access to banking and potentially lower interest rates can benefit consumers. And banks with more funds will be in a better position to support trade and investment.
The decision has become controversial as traders, travellers, workers and others have to stand in long queues before cash machines that swiftly run out of notes. With nine in 10 Indian jobs going without a formal contract, and about half of the national output being likewise informal, not just the wealthy but even those who live on the margins are being affected.
One cynical interpretation is that the administration executed the move, planned in great secrecy, to starve opposition parties of funds as they prepare for elections to several provincial legislatures, including prize catch Uttar Pradesh. While the government could have done more to guard against economic disruptions, this had to be weighed against the risk of news leakage which would have negated the impact of the exercise. Indeed, any forewarning would have spawned underground trading to enable hoarders of black money - including those financing terror - to launder their ill-gotten gains. Difficult but important steps, like fighting graft, are often what leaders elsewhere shy away from. Mr Modi deserves credit for taking the bull by the horns.