The International Monetary Fund said on Thursday it supports India’s efforts to fight corruption through the currency control measures announced this week, but stressed taking care to minimize disruptions in the economy.
Banks reopened on Thursday after a one-day break following the government’s decision to withdraw Rs 500 and Rs 1000 notes from circulation in a shock move designed to tackle widespread corruption and tax evasion.
“We support the measures to fight corruption and illicit financial flows in India,” IMF spokesperson Gerry Rice told reporters.
“Of course given the large role of cash in everyday transactions in India’s economy, the currency transition will have to be managed prudently to minimize possible disruptions.”
Some banks in New Delhi had received the new Rs 2,000 bill and a number of ATMs were working again Thursday, two days after Prime Minister Narendra Modi’s big announcement.
Economists and some businesses, especially those involved in cashless payments, have welcomed the “demonetisation” scheme as a vital step towards broadening the formal economy and improving tax compliance.
But it has disrupted the daily lives of hundreds of millions of Indians who live in the cash economy that is estimated to account for a fifth of India’s $2 trillion gross domestic product and who have low confidence in banks or plastic cards.
“The eradication of the black money menace from the Indian economy is a big positive in the long-term, and the Indian economy will be on a very strong footing once the short-term teething problems are done,” said Sachin Shah, fund manager at the Mumbai-based Emkay Global Financial Services.
Morgan Stanley hailed the demonetization as a “bold move to curb black money” and bring millions more Indians into the tax regime. As of now, only about 1.6% of India’s 1.25 billion people are paying income tax.
The surprise currency swap would “have a debilitating impact on the parallel economy in the country,” said Harshavardhan Neotia, the head of the Federation of Indian Chambers of Commerce and Industry, referring to business conducted using illicit cash.