Capital controls often lead people to alternative assets, and it seems India’s decision to phase out 500 notes and 1000 notes is doing just that as India’s jewelry stores were left with empty shelves as gold demand spikes in the region.
Many people came in and cleaned up the shelves with the big notes, but by Tuesday they had disappeared and now a thaw has taken hold over the gold market. There’s panic in India.
People must endure long bank lines to exchange or deposit old currency notes after the government’s demonetization plan to undermine countefeiters and Indians with undeclared income stashed away. 1/4 of India’s economy is on the black market, according to the Finance Ministry, and not many Indians pay income taxes.
Prime Minister Narendra Modi seeks to end corruption. He says the move is a fight for the “honest” citizens against those with “cash lying under the mattresses and in the sacks of the corrupt.” He wants to steer the country, which is historically cash centric, towards bank accounts and digital payments.
“The people who have their vaults can shake governments. They are very powerful people. Should I be scared of such people?” Modi said at a rally Monday in the state of Uttar Pradesh.
“No!” the crowd roared back.
“I have your blessings. That is why I have taken on such a big fight,” Modi said.
Half of the citizens in India are said to use cash, and the decision has caused great concern for these individuals. ATMs are short on cash and who knows how long until they can be reconfigured.
“Parents cracked open their piggy banks, the sick deferred medical procedures, and others struggled to find ways to pay tea sellers, auto rickshaw driver and vegetable merchants who take cash only,” according to the Washington Post. “Civic offices, hospitals and gas stations were instructed to accept the old currency but this edict has not always been followed, resulting in some panic, fistfights and even sporadic reports of looting.”
Thus, few are buying gold. Some jewelers were raided. They were suspected of accepting the old currency and issuing forged receipts. Some shops didn’t open, fearing raids.
Jewelers believe in a few months, sales will continue once more. Gold imports will likely have fallen on the year after posting more than 900 tons last year.
The government added new excise duty on gold in recent years, and last spring a 42-day jewelers’ strike added to the issues in the gold market.