Economist Article Must Read:

NOT much distinguishes a valuable banknote from any old piece of printed paper, as Indians discovered this week. In a surprise televised address on November 8th,
Narendra Modi, the prime minister, announced that the countrys two highest-denomination notes, worth 500 and 1,000 rupees ($7.50 and $15), were to be legally worthless
with near-immediate effect. This odd variant of alchemy is the latest in a series of moves to curb illicit income; economists hope long-term gains will justify a chaotic spell as
India adapts.

The idea is not as barmy as it might first appear. Mr Modi has implemented a flurry of schemes to flush out black money, the term Indians use for cash which is both
unaccounted for and outside its formal financial system. Piles of ill-gotten income have long been easy to launder into gold or property, where using notes for at least part of a
purchase is the norm. Demonetising high-value tender means existing notes must be traded in at banks and post offices before the end of the year. That will force those with
suitcases of cash either to come clean or to renounce their loot.

Still, it is dramatic: central banks usually balk at moves that call into question the legal worth of the notes they issue. The hastily discontinued tender represents 86% of all the
currency in circulation (equivalent to 11% of GDP) in a country where cash remains king. Many Indian residents found themselves with little still-legal cash on hand ahead of a
forcibly imposed bank holiday and a two-day shutdown of ATMs. A senior bank executive in Mumbai admitted to raiding his daughters piggy bank to pay for tolls on his way
to work.

The prospect of life with little or no cash, at least for a few days, cheered those who think Indians should be switching to smartphone apps and card-based payments, which
are easier for the authorities to track and tax. That laudable aim will take time in a country where nine out of every ten workers still toil in the informal sector. Though the
number of Indians with bank accounts has risen sharply thanks to a government financial-inclusion scheme, most savings are still held outside the banking system. One-fifth
of total economic output is said to be informal.

Banks are among those who should gain from the scheme: much cash now secreted under mattresses should make its way into their coffers or into the mutual funds they
offer. Against that, the black-money crackdown will probably dent (or worse) already-fragile property prices, especially in big citiesand so the value of the collateral the
banks lend against.

Most economists expect the dislocation to dampen growth in the short-term. Households will probably put off big-ticket
purchases such as motorbikes or white goods. Jewellers, doctors and others in professions where cash still rules will
also be hard hit. Political parties hoarding cash for election-time handouts to voters will have to tidy up their finances.
Even e-commerce sites like Amazon will be affected: over two-thirds of their sales are settled by the buyers in cash on
delivery.

A new, shady line of work is already emerging: opportunists are said to be snapping up 1,000-rupee notes at a deep
discount from those with too much stashed cash to declare. They will profit handsomely if they can find smaller savers
willing to swap the old notes for new ones on their behalf, for a fee. The government has indicated it is gunning for those
with suitcases full of rupees rather than merely a few stapled or elastic-banded wads.

Some aspects of the plan are difficult to fathom. Prominent economists, such as Kenneth Rogoff of Harvard University,
are keen to scrap big-denomination notes altogether. But India will merely replace them. Worse, it will add a 2,000-rupee
seriesintroducing a note that will have few conceivable uses other than mattress-stuffing, smuggling or gambling
(getting change for even a 500-rupee note is already close to impossible).

The timing is also odd. India has recently introduced a system that makes it easy for anybody to make or receive
payments from their mobile phone, whether they be businesses or individuals. But the Unified Payments Interface, as it
is known, is still in the early stages of implementation, so cannot really help overcome the current cash-crunch. Mr Modi
also took the cash out of circulation just as polls opened in America, eventually roiling markets.

Cancelling banknotes is usually the work of desperate or misguided regimes. This looks different. Indeed, the assault on black money is justified and overdue. But
governments change the rules on the worlds simplest financial instrumentthe humble banknoteat their peril. Gold is already favoured by those who want to keep their
savings beyond the reach of government and taxman. Gold bugs may feel vindicated; others will have taken note.