![\"graph-48-an\"](\"https:\/\/latribune.lazardfreresgestion.fr\/wp-content\/uploads\/2016\/12\/GRAPH-48-AN.png\")
<\/p>\nCHART OF THE WEEK<\/b><\/p>\n
On November 8th, Narendra Modi\u2019s government declared that \u20b9500 and \u20b91000 banknotes would cease to be legal tender from midnight, suddenly demonetizing 86% of the total value of the currency in circulation. Citizens have until December 30th to exchange their old banknotes, with direct cash exchanges being restricted to \u20b92000 per person ($30) and the rest being credited to bank accounts.<\/p>\n
Deposit account credits exceeding \u20b9250,000 ($3,700) will be liable for tax investigation. ATM cash withdrawals are restricted and many machines still need recalibrating to dispense the new \u20b9500 and \u20b92000 notes. Several machines have already run out of notes. This strong move, aimed at tackling corruption, tax evasion and counterfeiting, has led to a sharp fall of the currency in circulation, as shown on the graph below.<\/p>\n
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OUR ANALYSIS<\/b><\/p>\n
In a country where 98% of transactions are cash-based (PwC estimate), and the shadow economy accounts for 25% of GDP (World Bank estimate), or the equivalent of Belgium\u2019s GDP, the cash shortages resulting from demonetization will weight on economic growth. Given the absence of current economic data, accurately evaluating the extent of the impact is difficult.<\/p>\n
However, the repercussions should be temporary and dissipate as the economy remonetizes. Moreover, in the medium term, if the government\u2019s decision results in some of the economy exiting the shadows, this will improve public finances.<\/p>\n
The government\u2019s move may also spark a switch by citizens from a costly cash-based system (storage, transport, time) towards banks and promote financial saving instead of investments in physical assets (property, gold), which could have positive effects on growth.<\/p>\n
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The opinion expressed above is dated November <\/i>29<\/i>th<\/i>, <\/i>2016 and is liable to change.<\/i><\/p>\n
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This document is not pre-contractual or contractual in nature. It is provided for information purposes. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Fr\u00e8res Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest. This document is the intellectual property of Lazard Fr\u00e8res Gestion SAS. <\/span><\/p>\n","protected":false},"excerpt":{"rendered":" CHART OF THE WEEK On November 8th, Narendra Modi\u2019s government declared that \u20b9500 and \u20b91000 banknotes would cease to be… <\/p>\n","protected":false},"author":101016,"featured_media":4311,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[148],"tags":[],"class_list":["post-4314","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-chart-of-the-week"],"yoast_head":"\n