Cashing in on India's Black Economy

India has one of the world's most cash-heavy economies. An A.T. Kearney study found that 90 percent of the country's consumer transactions are conducted in cash, a trend that extends to the country's labor market. But many of these transactions go unrecorded. In fact, by some estimates, India's so-called "black economy," which covers a number of furtive activities, from under-the-table wage payments to racketeering, accounts for roughly 25 percent of the country's gross domestic product. (Meanwhile, only an estimated 1 to 3 percent of the population pays income tax.)

Now, New Delhi is undertaking a bold measure to reclaim the revenue it has lost to the black economy. On Nov. 8 Indian Prime Minister Narendra Modi surprised his country with the announcement that all 500- and 1,000-rupee notes — 86 percent of the cash in circulation — would become null and void overnight. Indians will have until Dec. 30 to redeem the notes for new ones, and then the bills will become worthless. If the initiative goes as planned, it will deal a sizable blow to the unofficial economy. But the logistical challenges and political risks entailed are immense.