Currency Demonetisation and Future course of Indian Economy

nandakumar · Post by **nandakumar** » 15 Nov 2016 17:39

The task of replacing notes (Rs 1000 and Rs 500) withdrawn from circulation and substitute it with legal tender of new Rs 500 and balance in combination of Rs 2000 will be a mammoth exercise even if we assume that 75% of the notes demonetised are are black money and is unlikely to be tendered. Here is the maths.
The notes in circulation under Rs 1000 and Rs 500 as of March 2016 was 6,326 and 15,707 million pieces respectively. The figure might have since gone up before the demonetisation. But for the sake of argument let us assume that no new notes were added in the period between April and October or at least what was added was restricted to replacing soiled notes. So we are stuck with March 2016 numbers as the starting point.
If we assume the most optimistic scenario of 75% of it is black money and is unlikely to be tendered that still leaves the Government with the challenge of replacing the balance with new currency notes. This works out to 5,507 million pieces of currency notes. The Rs 500 currency notes need to replaced on a like to like basis. So we are looking at replacing 3,927 million pieces on a like to like basis. The Government has done away with Rs 1000 currency notes and replaced it with Rs 2,000 notes. While you could print half the number of existing Rs 1,000 notes post adjustment for frozen black money notes (1,581 million) in Rs 2,000 denomination the actual maths would work somewhat differently as not all transactions could be fulfilled using Rs 2000 currency note exclusively but would ,require a sufficient combination of Rs 2,000 and the new Rs 500 notes to keep the wheels of commerce flowing smoothly. So one Rs 2000 note cannot be an effective replacement for two Rs 1000 notes. Similarly two Rs 2000 notes cannot be an effective replacement for four Rs 1000 notes because of fractional values having to be accommodated. But six Rs 1000 notes can be replaced with a combination of two Rs 2000 notes and four Rs 500 notes (same number of currency notes 2+4). But eight Rs 1000 notes can be replaced with a combination of three Rs 2000 notes and four Rs 500 notes (seven notes 3+4). From the point of view of the printing load the last option seems slightly more burdensome more but more preferable from the point of view of better balance although there is no scientific rigour to this ratio in the absence of information on the actual commerce that is being transacted in cash.
So essentially we are looking at replacing 1,581 million pieces of with 1845 million pieces of Rs 2000 and Rs 500 denomination currency notes. We are looking at injection of 5,772 million pieces between now and December 31st, which is the time limit that the PM had sought.
If one looks at the total number of notes printed by the RBI in 2015-16 we get a figure of 21,195 million pieces (RBI Annual Report 2015-16, Chapter

. This is of course made up of all denominations from Rs 10 to Rs 1000. Even if the Government suspends printing of every other denomination and print only the new notes in denominations Rs 500 and Rs 2000 we are looking at a window of anything between three and a half to four months. Mind you, this also means that there wouldn't even be printing currency notes in other denominations as replacement for old and soiled notes.

Shaktimaan · Post by **Shaktimaan** » 15 Nov 2016 17:49

Nandakumar saar, have you considered the possibility that the Government was printing notes in bulk for the past few months?

LokeshC · Post by **LokeshC** » 15 Nov 2016 17:51

A large part of those billions of old notes is black money. Which won't come back. A small part of it is with the aam aadmi. The scale of the problem is much lower when looked at from that angle.

pankajs · Post by **pankajs** » 15 Nov 2016 17:55

^
Some reports state that the printing has been on for the past six months. Lets discount that by 50% as preparation time we still have about 3 months of currency printed mostly for Rs 2000, 100, 50 and 20 variety.

The bottleneck seems to be in distribution to Banks, exchange at the counters, ATM re-configuration and ATM restocking when the banks had no prior notification.

We should be in the ballpark of meeting the demand if the bottlenecks are taken care of, especially at the ATM.

uddu · Post by **uddu** » 15 Nov 2016 17:58

Things are improving in my area. With Two ATM's functioning. 30 people in queue.

Singha · Post by **Singha** » 15 Nov 2016 17:58

housebolo.com
Delhi’s property market is a secondary market built around property owners reselling homes that they have obtained from the primary market (i.e. developers). And there is no hiding the fact that almost all transactions that take place here see a part of the property value being paid in cash, which is not reported to the tax authorities. A practice that has come crashing down thanks to demonetisation and which experts claim will bring down property rates here.

“There is a lot of panic and shock among investors and builders. I see that in next 6-7 months, rates are going to go down. The transactions will be now more close to the circle rates. As of today, the rates have come down by 25% to 30%,” says Tarun Bhatia, vice-president of the National Association of Realtors of India.

This is seen on the ground, with real estate brokers talking about property deals being cancelled or altered due to the government’s decision. For example, a property in South Delhi that was listed at Rs 3.25 Crore is now being offered at Rs 2.25 Crore, a drastic fall that indicates how over-inflated prices were in this market.

In a recent report, rating agency Fitch stated that homebuilders in the NCR will continue to face the heat as most sales of the higher-end properties were to high-net worth individuals and investors, two categories of buyers that have been hit badly by the government’s crackdown on black money.

“Homebuilders with greater exposure to large-ticket premium property projects are likely to be the most affected. Furthermore, we expect homebuilders more exposed to projects in the National Capital Region (NCR) to be hit more than in other regions, because NCR is known to have a greater reliance on cash-based transactions” says the Fitch report.

Amit Oberoi, national director of Colliers International claims that the Delhi-NCR property markets are already reeling under low transaction volumes due to circle rates being higher than the market rate. Demonetization will only see demand for real estate here reduce even further

JayS · Post by **JayS** » 15 Nov 2016 17:59

Murugan wrote:Kapil Sibal Argued in SC
"Under what right can you restrict my right to withdrawal?" he asked.
I intended a pun, but, jaane do
*****
SC refuses to stay Govs Demonetisation Notification

http://www.thehindu.com/news/national/d ... e?w=alauto

He should be asked under what right his party restricted Right to anything and everything during emergency.

Sicanta · Post by **Sicanta** » 15 Nov 2016 18:00

pankajs wrote:^
Some reports state that the printing has been on for the past six months. Lets discount that by 50% as preparation time we still have about 3 months of currency printed mostly for Rs 2000, 100, 50 and 20 variety.

The bottleneck seems to be in distribution to Banks, exchange at the counters, ATM re-configuration and ATM restocking when the banks had no prior notification.

According to reports in BS and FE, RBI did notify banks to reconfigure atm's to distribute 100 rs notes on Nov 2.

In its circular DCM(CC)No 1170/03.41.01/2016-17 issued on November 2, the apex bank said that “in keeping with the objectives of Clean Note Policy and to ensure that genuine requirement of members of public for Rs 100 denomination bank notes are met, the banks should increase dispensation of Rs 100 bank notes through ATMs.”

Stating that as a pilot project, 10 per cent of the ATMs in the country would be recalibrated, the RBI said that “as the process involved in configuring the requisite number of machines is not complex, the banks are required to complete the exercise within 15 days” and report compliance.

The RBI had also moved as early as May this year to provide incentive for setting up ATMs which dispensed only Rs 100 notes. In a circular on May 5, The central bank promised to pay 50 per cent of the cost of such ATMs up to Rs 2 lakh.

Bart S · Post by **Bart S** » 15 Nov 2016 18:04

Sicanta wrote:
According to reports in BS and FE, RBI did notify banks to reconfigure atm's to distribute 100 rs notes on Nov 2.

Arundhati Bhattacharya (head of SBI) explained that point on a news channel - the instruction was apparently for one ATM per district to be configured that way, which was too small to make an actual dent in the issues.

vina · Post by **vina** » 15 Nov 2016 18:05

nandakumar wrote: If one looks at the total number of notes printed by the RBI in 2015-16 we get a figure of 21,195 million pieces (RBI Annual Report 2015-16, Chapter . This is of course made up of all denominations from Rs 10 to Rs 1000. Even if the Government suspends printing of every other denomination and print only the new notes in denominations Rs 500 and Rs 2000 we are looking at a window of anything between three and a half to four months. Mind you, this also means that there wouldn't even be printing currency notes in other denominations as replacement for old and soiled notes.

Couple of points.
1. It is NOT going to be a like to like replacement. The currency is used for two reasons.
a. Transactions --> Which will be replaced fractionally (a large part will now move online, including wages paid to labor in SME and other places)
b. Store of value --> Need to be replaced. You would rather leave the money with the bank than keep it in the pillow if white. The hitherto non users
of bank will store it there. The poor (genuinely and very small traders ) will need all the cash they can have . Their capital is in cash. They will
withdraw, the others will leave it there

For e.g., even I (otherwise all electronic) am going to pay the cook/maid her salary into her bank account only despite her objections (I helped her open one to get the DBT for the gas, she doesn't touch it even then. The DBT money goes there, now she will be forced to use it). The driver is already paid electronically only. So that is Rs 20,000 (yes the maid is paid that in Bangalore, she is a (governess cum cook) less cash demand from me per month! Expect similar stuff for every household going forward. The maids etc, will go electronic.

Even anyone paying cash for salary will be forced to pay salary electronically (even if it is an SME) as the limit of Rs 50,000 per week wont pay more than 2 or 3 workers at most and it is a hassle to withdraw cash and pay. They might as well pay it electronically. Same with paying for suppliers, receiving from customers etc. No one has cash anymore. If you want to do business, you have to do it electronically. I expect the restrictions on withdrawals to continue going forward. By Dec, the we would have got used to it and settled down. The demand for cash would have crashed totally on a systemic basis. The Govt sure as hell is not going to get the printing presses to replensish on a 1:1 value basis and recreate the cash economy it took great pains to destroy.

Only sundry very small expenses will be cash going forward.

If I were to think like Modi and to follow through, on this, expect a HUUUGE Jayalalitha /Karunanidhi like TN govt free TV program for smart phones (one a Make in India contract for a few million and rolled out in 3 months) to be announced soon, with a basic mobile based business, payment and wallet (tied to a local bank) feature. This would be handed out to all sorts of vendors and auto rickshaw wallahs etc. This would be tied with a demonetisation of Rs 100 and Rs 50 notes in turn. If I were PayTm I wouldn't be jumping with joy. That GOI issued wallet will be free and will use the UPI gateway and will potentially kill it. This will kill multiple birds with one stone, including resurrecting BSNL (it will be a locked to BSNL phone), get a huge dose of populism for Modi, make a huge advertisement for MII /electronics manufacturing, and more importantly move you to cashless and destroy the cash /suitcase corruption.

JayS · Post by **JayS** » 15 Nov 2016 18:07

pankajs wrote:^
Some reports state that the printing has been on for the past six months. Lets discount that by 50% as preparation time we still have about 3 months of currency printed mostly for Rs 2000, 100, 50 and 20 variety.

The bottleneck seems to be in distribution to Banks, exchange at the counters, ATM re-configuration and ATM restocking when the banks had no prior notification.

We should be in the ballpark of meeting the demand if the bottlenecks are taken care of, especially at the ATM.

GOI has plan to replace all the notes to new design. Probably that's why no large stock for new currency with existing design of lower denomination was printed. It costs a big deal to print those notes. Of coarse, one could argue what's the big deal in spending 2000Cr and print new 100 rs notes worth 1lakh Cr for use for next 2yrs or so.

vina · Post by **vina** » 15 Nov 2016 18:10

nandakumar wrote: If one looks at the total number of notes printed by the RBI in 2015-16 we get a figure of 21,195 million pieces (RBI Annual Report 2015-16, Chapter . This is of course made up of all denominations from Rs 10 to Rs 1000. Even if the Government suspends printing of every other denomination and print only the new notes in denominations Rs 500 and Rs 2000 we are looking at a window of anything between three and a half to four months. Mind you, this also means that there wouldn't even be printing currency notes in other denominations as replacement for old and soiled notes.

Couple of points.
1. It is NOT going to be a like to like replacement. The currency is used for two reasons.
a. Transactions --> Which will be replaced fractionally (a large part will now move online, including wages paid to labor in SME and other places)
b. Store of value --> Need to be replaced. You would rather leave the money with the bank than keep it in the pillow if white. The hitherto non users
of bank will store it there. The poor (genuinely and very small traders ) will need all the cash they can have . Their capital is in cash. They will
withdraw, the others will leave it there

For e.g., even I (otherwise all electronic) am going to pay the cook/maid her salary into her bank account only despite her objections (I helped her open one to get the DBT for the gas, she doesn't touch it even then. The DBT money goes there, now she will be forced to use it). The driver is already paid electronically only. So that is Rs 20,000 (yes the maid is paid that in Bangalore, she is a (governess cum cook) less cash demand from me per month! Expect similar stuff for every household going forward. The maids etc, will go electronic.

Even anyone paying cash for salary will be forced to pay salary electronically (even if it is an SME) as the limit of Rs 50,000 per week wont pay more than 2 or 3 workers at most and it is a hassle to withdraw cash and pay. They might as well pay it electronically. Same with paying for suppliers, receiving from customers etc. No one has cash anymore. If you want to do business, you have to do it electronically. I expect the restrictions on withdrawals to continue going forward. By Dec, the we would have got used to it and settled down. The demand for cash would have crashed totally on a systemic basis. The Govt sure as hell is not going to get the printing presses to replensish on a 1:1 value basis and recreate the cash economy it took great pains to destroy.

Only sundry very small expenses will be cash going forward.

If I were to think like Modi and to follow through, on this, expect a HUUUGE Jayalalitha /Karunanidhi like TN govt free TV program for smart phones (one a Make in India contract for a few million and rolled out in 3 months) to be announced soon, with a basic mobile based business, payment and wallet (tied to a local bank) feature. This would be handed out to all sorts of vendors and auto rickshaw wallahs etc. This would be tied with a demonetisation of Rs 100 and Rs 50 notes in turn. If I were PayTm I wouldn't be jumping with joy. That GOI issued wallet will be free and will use the UPI gateway and will potentially kill it. This will kill multiple birds with one stone, including resurrecting BSNL (it will be a locked to BSNL phone), get a huge dose of populism for Modi, make a huge advertisement for MII /electronics manufacturing, and more importantly move you to cashless and destroy the cash /suitcase corruption.
And best of all, financing the cell phone giveaway will be a breeze! It will be financed with this demonetisation drive of course, which will be enough to wipe out the entire fiscal deficit for a year or thereabouts. The govt theoretically need not borrow at ALL for the next fiscal.

Rishi Verma · Post by **Rishi Verma** » 15 Nov 2016 18:11

Bhatija Uvacha: BM is Good

Meanwhile Didi+CPM+Shiv Sena plan to March in Delhi and meet the president, I am sure Kejri will cough along with them.

Bart S · Post by **Bart S** » 15 Nov 2016 18:35

vina wrote: If I were PayTm I wouldn't be jumping with joy. That GOI issued wallet will be free and will use the UPI gateway and will potentially kill it. This will kill multiple birds with one stone, including resurrecting BSNL (it will be a locked to BSNL phone), get a huge dose of populism for Modi, make a huge advertisement for MII /electronics manufacturing, and more importantly move you to cashless and destroy the cash /suitcase corruption.

PayTM is overrated and has no unique or special functionality. It is also not fully liquid or standardized like a regular account with UPI. It just has first mover advantage and a lot of hype due to it's foreign funding. Check out ICICI Pockets, it supports UPI, does all the wallet stuff that PayTM does and also supports having a physical card for it if someone wants. Beats PayTM hands down. Even the regular ICICI app has most of these features.

Essentially, with UPI the government has put out it's own 'wallet' functionality. The GOI should not be in the business of writing apps, just defining standards, and with the NCPIL etc they are on the right track. Each bank or anybody else can build their own app and they all work with each other just fine.

Locking anything down to BSNL though would be stepping on a landmine and should be avoided at all costs. No need to handicap such an important project by tying it down to one of the most inefficient organizations in history. Saving the dinosaurs shouldn't really be an aim in the first place, and certainly not at the risk of critical projects.

vinod · Post by **vinod** » 15 Nov 2016 18:43

Akhilesh Yadav has said that for land registration his state govt will accept old currency till nov 24th.

Many inflated deals will happen if this is made to go through. May be do multiple transactions...

chandrasekaran · Post by **chandrasekaran** » 15 Nov 2016 19:01

UP govt. can accept the stamp duty and registration fees in these notes, typically 8% of the transaction value, but the IT department can easily correlate the guideline value to the transaction value ?

ragupta · Post by **ragupta** » 15 Nov 2016 19:04

The use of voter ink to make sure the same person is not visiting again and again is a good idea, the opposition is using it as a tool to create negative image.

Slowly things are going to return to normal. most people have patience, and they will surely ride the crisis, it is short lived, the govt is determined to bring things to normal.

Kudos to all those who are supporting this move by Govt.

ragupta · Post by **ragupta** » 15 Nov 2016 19:09

vinod wrote:Akhilesh Yadav has said that for land registration his state govt will accept old currency till nov 24th.

Many inflated deals will happen if this is made to go through. May be do multiple transactions...

None of the party SP, BSP and Congress will want to be seen against the demonitisation because of immense public support to it. So they are going to try very hard to devise ways to convert there ill gotten wealth to white. But they will be only partly successfull. These are all scemes to save black Money. Regardless the money will be in the banking system now and it can be questioned.

It will be hard to use this money for fighting election, the power of opposition has been considerably weekend by this move. that is why all these noises.

Even if they force an election, they will be sore loser, and may lose even what they converted to white in the process. UP election will be major indicator the strength of opposition, what they will do. If they lose no more noises, if they win they will try to get rid of Modi.

ragupta · Post by **ragupta** » 15 Nov 2016 19:12

Rishi Verma wrote:Bhatija Uvacha: BM is Good

Meanwhile Didi+CPM+Shiv Sena plan to March in Delhi and meet the president, I am sure Kejri will cough along with them.

The opposition is split, as those going for election in UP, Punjab will not want to be against the demonitization. So only Didi-CPM and Sena will be shouting, may be requesting for president rule to save their BM.

Common man suffering is not going to work, as things are going to get normal pretty soon. people are alert to and realise the noises why political parties are making, the question is will it translate into vote for Modi. I hope it does.

manjgu · Post by **manjgu** » 15 Nov 2016 19:14

they can paint one finger per day..so a man can come for 10 days to withdraw 2500*10 =25000 over a 10 day period.

vinod · Post by **vinod** » 15 Nov 2016 19:17

manjgu wrote:they can paint one finger per day..so a man can come for 10 days to withdraw 2500*10 =25000 over a 10 day period.

Or he can go to bank and withdraw 10K from his account same day

ragupta · Post by **ragupta** » 15 Nov 2016 19:17

India merchants are used to counting notes and showing off. This fetish for cash has to stop. Prepaid cards, debit and credit card use must be increased. No need to carry too much cash. It is easier. It works very well in S Korea and Japan.

I like the Canada type transparent plastic currency. I think 100 note should be replace with this type. I think it is hard to fake. May be in a years time, once all these brawhaha is over.

Sachin · Post by **Sachin** » 15 Nov 2016 19:22

SHQ back from a rural branch near Bengaluru, after a hectic day of work. Had a word with her manager as well. They have not got any formal instruction on using the voter's indelible ink. The ink bottles have not been issued. As per SHQ the biggest problem is that same people are coming again and again to exchange old notes. Which means that there is some money laundering happening. Her branch ATM received the first load of Rs.100 notes today. In the evening branch ATM had around 40 people in line.

SHQ (and family) were no way fans of NaMo, and she was also saying that lot many bank employees may start taking "loss of pay leaves" if the work load continues this way. The manager had a gut feeling that things should get back into normalcy by this week end.

shiv · Post by **shiv** » 15 Nov 2016 19:27

https://twitter.com/bennedose/status/797817925994356736
Wet corner of Rs 2000 note rubbed by me - see water glistening. Definitely NOT SMUDGING

nandakumar · Post by **nandakumar** » 15 Nov 2016 19:38

I would like to add a few more points to my analysis in the light of posts of some of the members.
Yes, the Govt could have have started the printing process earlier. But having said that one additional data point. The new Rs 2000 note is signed by Urjit Patel. He took over on Sep 11th, if my memory serves me right. So the printing could not have started earlier than mid September.
Secondly, I have already assumed a 75% black money hoard in the high denomination notes. So the figure of 5000 odd million pieces of new currency notes is actually a conservative estimate.
I have based my calculations on the stock of money that s needed to finance a volume of transactions. Obviously the actual volume of transactions that can be financed with a given volume of cash money is many multiples of the the GDP. Even the GDP is many multiples of the gross volume of financial transactions that happens in both cash and through cheques or other digital means. There is some estimate is possible with the available public data. But I feel that is not germane to the present discussion on the logistics of replacing the demonetised currency. Fresh comments are welcome if I have missed something.

srinebula · Post by **srinebula** » 15 Nov 2016 19:44

Thanks for responding sir.
Great to know of these historical memories. I do hope Indians have it in them to follow Modi's call this time around to reach the end of this tunnel for a bright future.
Yes, I too pray for Modi's long healthy, energetic life. May he lead this nation into greater light and greater heights.

Primus wrote:
srinebula wrote:/snip...............

Someone was mentioning about Lal Bahdur Shastri's call to Indians to fast for one time a day to ride out the food crisis during that time. He said his parents adhered to LB's call. He said this situation is similar, let's strengthen Modi's hand.
I don't know who else did but my parents and I sure answered that call. I also remember putting 3 paise per day into my piggy bank for the National Fund as requested by LBS. I have always felt Modi Ji to be the modern avatar of LBS. I just pray he lives longer.

vijayk · Post by **vijayk** » 15 Nov 2016 20:13

vina wrote:
nandakumar wrote: If one looks at the total number of notes printed by the RBI in 2015-16 we get a figure of 21,195 million pieces (RBI Annual Report 2015-16, Chapter . This is of course made up of all denominations from Rs 10 to Rs 1000. Even if the Government suspends printing of every other denomination and print only the new notes in denominations Rs 500 and Rs 2000 we are looking at a window of anything between three and a half to four months. Mind you, this also means that there wouldn't even be printing currency notes in other denominations as replacement for old and soiled notes.
Couple of points.
1. It is NOT going to be a like to like replacement. The currency is used for two reasons.
a. Transactions --> Which will be replaced fractionally (a large part will now move online, including wages paid to labor in SME and other places)
b. Store of value --> Need to be replaced. You would rather leave the money with the bank than keep it in the pillow if white. The hitherto non users
of bank will store it there. The poor (genuinely and very small traders ) will need all the cash they can have . Their capital is in cash. They will
withdraw, the others will leave it there

For e.g., even I (otherwise all electronic) am going to pay the cook/maid her salary into her bank account only despite her objections (I helped her open one to get the DBT for the gas, she doesn't touch it even then. The DBT money goes there, now she will be forced to use it). The driver is already paid electronically only. So that is Rs 20,000 (yes the maid is paid that in Bangalore, she is a (governess cum cook) less cash demand from me per month! Expect similar stuff for every household going forward. The maids etc, will go electronic.

Even anyone paying cash for salary will be forced to pay salary electronically (even if it is an SME) as the limit of Rs 50,000 per week wont pay more than 2 or 3 workers at most and it is a hassle to withdraw cash and pay. They might as well pay it electronically. Same with paying for suppliers, receiving from customers etc. No one has cash anymore. If you want to do business, you have to do it electronically. I expect the restrictions on withdrawals to continue going forward. By Dec, the we would have got used to it and settled down. The demand for cash would have crashed totally on a systemic basis. The Govt sure as hell is not going to get the printing presses to replensish on a 1:1 value basis and recreate the cash economy it took great pains to destroy.

Only sundry very small expenses will be cash going forward.

If I were to think like Modi and to follow through, on this, expect a HUUUGE Jayalalitha /Karunanidhi like TN govt free TV program for smart phones (one a Make in India contract for a few million and rolled out in 3 months) to be announced soon, with a basic mobile based business, payment and wallet (tied to a local bank) feature. This would be handed out to all sorts of vendors and auto rickshaw wallahs etc. This would be tied with a demonetisation of Rs 100 and Rs 50 notes in turn. If I were PayTm I wouldn't be jumping with joy. That GOI issued wallet will be free and will use the UPI gateway and will potentially kill it. This will kill multiple birds with one stone, including resurrecting BSNL (it will be a locked to BSNL phone), get a huge dose of populism for Modi, make a huge advertisement for MII /electronics manufacturing, and more importantly move you to cashless and destroy the cash /suitcase corruption.

Are you endorsing this move or not? Trying to understand.

From what I reading here, this is in a good direction.

shiv · Post by **shiv** » 15 Nov 2016 20:21

Suraj's brilliant post a few pages back in response to a long winded question from me has opened up new areas in my mind.

Black money is not just hoarded notes and ISI printed counterfeits - but it was Suraj's reference to the the "velocity" of money - the transactions that are conducted that add to the black economy.

That means that if I earn Rs 1000 and do not declare it as income - the government "loses" money in tax - let me put this at a nominal 10%. If I use this Rs 1000 note to pay someone else and he does not declare it either - the government loses another 10% on that 1000. This can go on through thousands of black transactions so that in the end the government has not got what it should have got for services, salaries, infrastructure, education etc - but that damn note is still in circulation merrily exchanging hands and notching up a little satisfying "cheat" where each person gets 1000 and does not lose 10% in tax.

What this amounts to is that among the notes that are in circulation (they all look the) some go through phases when they are in black but may become white again. I earn Rs 1000, fail to declare - and use it at a restaurant where it goes back into circulation as white money. The same Rs 1000 note could have earned the government thousands if everyone paid tax, but that is not happening. Eventually, the government, short of money prints new notes inflating the currency "volume".

But this brings me to some unanswered questions about demonetization

Because there is so much cash floating about and an unknown proportion of it is black, at least some thriving businesses must be benefiting by recirculating that black money. Let me explain that. Suppose I have a shop that sells bulbs. People who come and buy bulbs from me by paying cash may be paying me either white money (withdrawn from bank perhaps) or black money (unaccounted for cash) .

But now, suddenly because of demonetization - some percentage of my customers who had loose black cash and were giving me business no longer have that cash. As a result my business turnover comes down.

Most of us have cheered that fact that an unknown number of people have become poor or middle class, or have lost their "net worth" because of demonetization. And because people are poorer it reflects on my business and I become poorer - even if I am a regular taxpayer. I agree that if I am running an "essential service" like food, clothing, healthcare etc - my business will pick up again because people cannot avoid it - but if I am running a luxury service like a niche restaurant or branded phoren items by business will take a hit.

People are saying that prices will fall? Why will prices fall? Is it because my business is failing and I am desperate to see and therefore I reduce my profit margin and sell cheaper?

Can any finance gurus enlighten me?

durairaaj · Post by **durairaaj** » 15 Nov 2016 20:37

I'm not a finance guy, from what I understand based on reading several books, yes! your guess is right. Many business will loose their shirt and in BR parlance will be exposed as "notenude". Some may take the extreme step of ending their life/biz. these things happened during previous economic crisis in other countries. Why this is good is many of these people dont really contribute much to the trade and manufacturing but mere gate keepers collecting their hafta without any effort. These people will loose the most. This also disrupts the commerce transactions most. Movement of goods get affeced.
To avoid the extreme chaos, the government must do immediate steps before november. Some of the steps can be,
1) Tax holiday for business
2) Waiving interest payments for business atleast until december
3) Automatic Reduction in interest for previous loans

Without alleviation this shock will disrupt many businesses significantly.

Rishi Verma · Post by **Rishi Verma** » 15 Nov 2016 20:55

I just visited a Canara Bank ATM, 5-6 people in line. Life seemed naarmal, everyone got cash. One guy mentioned that a popular jeweller across the street was open till 2AM on the night of SS2 but was raided the next day and hasn't opened since, others were nodding so must be true. (Raja Jewellers). Great going in this corrupt state. I did my bit to spread the rumours that Rs2000 bill is temporary and people should not hoard it.

Atmavik · Post by **Atmavik** » 15 Nov 2016 21:04

Finance Guru's whats your opinion on this ? arguments run counter to what we have been discussing. on the surface it looks like a typical DDM article with shifting goal posts but i am not qualified to comment.

http://linkis.com/www.bloomberg.com/ga/nWEKr

No $45 Billion Behind India's Dry ATMs
By Andy Mukherjee

India's radical move to outlaw 86 percent of its currency in circulation is one of those bold economic experiments that thankfully don't occur too often. But because they're rare, the chaos that follows such events becomes a breeding ground for urban legends.

The demonetization of India's existing stock of 500 and 1,000 rupee notes has spawned a number of such apocryphal tales, one of which is a $45 billion bonanza for the government that can be used to recapitalize the country's broken banking system, which needs roughly $90 billion to become whole again.

It goes a little something like this. Not everybody will be able to surrender their banknotes before they become useless so the Reserve Bank of India, which counts currency in circulation as its obligation, will strike off a part of its liability. With no change in the central bank's assets, its net worth would increase. The Indian government, as the ultimate owner, could demand a special dividend.

The myth is backed up by math. Start with a simple representation of the RBI's balance sheet on June 30:
Before Demonetization
Roughly half of the Indian central bank's liabilities were on account of notes in circulation*
Sources: RBI annual report
*Balance sheet as of June 30, 2016.

Since then, notes in circulation have expanded to $264 billion, and deposits at the RBI by commercial banks and the government have increased to $85 billion. The monetary authority's assets have grown in tandem.

Let's assume a fifth of the current stock of 500 and 1,000 rupee notes is "lost," in the sense that their owners, who have either avoided taxes or earned the money illegally, fail to return them to the banking system after exhausting all laundering options. That's 17.2 percent of $264 billion the RBI can presumably forget about.

If nothing else changes by the time the central bank draws up its balance sheet for next year, here's what it might look like:
After Demonetization
What might happen if the RBI can legally repudiate a part of its currency liability*
Source: RBI, economists' estimates
*Hypothetical balance sheet as of June 30, 2017.

So much for accounting.

But there are at least three reasons why there won't be any such $45 billion kitty and the central bank will continue to count those outstanding notes as a liability.

For one, while it's unusual but legitimate for a sovereign to declare what is (and isn't) legal tender, investors would perceive a central bank repudiating a liability under state pressure as an assault on its independence, and credibility.
Banking On Banks

Two, given that India aspires to emulate China and promote greater international use of its currency, it would be suicidal to generate resources for a bank recap by such a desperate measure.

For now, the world's attention is focused on the hardships of a billion people, and whether the move will make a dent in endemic corruption. But if it becomes a profitable experiment, demonetization will lose its justification as a graft-buster. Foreigners will fear expropriation, and that could ruin the prospects of rupee-denominated bank deposits and masala bonds in London or Singapore.

Finally, this isn't the time for silliness. With the dollar surging, and Donald Trump's presidential win adding ballast to expectations of higher U.S. bond yields, emerging markets need to give a compelling reason for foreigners to stay invested.

Amount Indian banks received in deposits in first four days

$44.4 billion

In India, the $44 billion of low-cost deposits financial institutions have won in four days provides just that. The greater the rush among people to get their money to safety, the more leeway lenders will have to buy risk-free government notes, keeping a lid on yields, even as global bond markets tumble.

With property transactions coming to a halt, and big-ticket purchases getting postponed, credit growth is unlikely to revive soon. If it looks like a cash shortage is stalling the economy, however, there could be a rate cut or two. Mark-to-market profit on banks' portfolios would go some way to mending their balance sheets, so long as there isn't a fresh wave of nonperforming loans.

For the bad debt-laden state-run banks, a gradual repair may not have the same appeal as a big one-time recapitalization. But the latter is just a fantasy. Behind those ATMs that have run dry, there's hope that corruption will ebb, and anger about the inconvenience it's caused ordinary people.

One thing not lurking there is a $45 billion check.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Or 20 percent of 86 percent.

Or, for that matter, a special dividend to shrink the RBI's balance sheet by the same amount.

ps:edited typos

Suraj · Post by **Suraj** » 15 Nov 2016 21:07

Nsmith wrote:3. There's an argument being made that even if the cash is deposited with banks it will still represent only 5% of the total black money stock as the majority is locked as real estate and gold. But that's a facetious argument. As soon as the liquidity disappears, *ALL* of these moneylenders, cash handlers, middlemen, dalals, brokers, market makers, cash-only-bankers go bust. That's actually crippling the entire black economy that I estimate to be approx. 10x the underlying cash stock. So for 2 lakh crore (hypothetically speaking, could be more or less) black money in circulation - It is financing 20 lakh crore worth of economic transactions in the business hubs across India.

4. What happens when the cash burns away overnight? There is nobody in the entire market who can arrange the cash for any high value transaction. How will any businessman convert his gold or real estate into cash when no counterparty can produce more than a couple of lakhs in cash?

That's correct! You don't have to hold cash to be scrooed . Even if you lend it out among your 'network' you're still browning shalwar onlee. And if you hold property, who you gonna sell it to when there's no black money liquidity to encash into ? When you report sale, IT wala asks for purchase information for capital gains. You could show some underinvoiced white purchase record, in which case you get socked with a huge tax & penalty bill and probably back taxes on property tax.

JayS wrote:Majority of Middle class folks buy with little or no black money component. And RE is not gonna fall by 50%, not the apartments atleast. Land will see more depreciation but I don't think it will be anywhere near 50%. Say there is 20% reduction of 1Cr apartment, due to this drive, interest rates are expected to go down - means less EMI for home loan folks which means their effective investment in the apartment is less now. Also deflationary effect in the general life means more saving. So the saving from these two components, if invested properly they could compensate majority of the loss in long term. This move is only good in long term for lower/middle class folks.

Yes I agree that once the short term shock dissipates, RE really won't fall much due to the underlying support of white demand. And that just scroos the seller who bought using BM further ? Why ? Because he gets away with less penalty if price really collapsed. If the white money demand driven by cheaper loans keeps it up, his capital gains are even higher and his tax liability up as well

shiv wrote:Black money is not just hoarded notes and ISI printed counterfeits - but it was Suraj's reference to the the "velocity" of money - the transactions that are conducted that add to the black economy.

That means that if I earn Rs 1000 and do not declare it as income - the government "loses" money in tax - let me put this at a nominal 10%. If I use this Rs 1000 note to pay someone else and he does not declare it either - the government loses another 10% on that 1000. This can go on through thousands of black transactions so that in the end the government has not got what it should have got for services, salaries, infrastructure, education etc - but that damn note is still in circulation merrily exchanging hands and notching up a little satisfying "cheat" where each person gets 1000 and does not lose 10% in tax.

Yes all correct. This is fractional deposit lending without any taxation at any step on the gains. Nsmith's post in the previous page (partially quoted above) is pertinent to this. You don't need to be sitting on piles of cash to be screwed. You can lend it out and it's the same. Because what you lent out suddenly became toilet paper.

"Somebody" is currently holding that cash. He has to go forth and deposit it. Let's assume we're talking about reasonable size lending, so there's not enough cash in one persons hand to 'return up the chain'. He has to deposit it. Which means he can only return it to the lender by check or other white means (because GoI now mandates large transactions that way), and that lender returns it to whoever he borrowed from, until 'lender zero'. All of these transactions now become white, and all of them reportable since they go through the bank and IT asks 'what's this deposit ?' . Therefore the network persists, and IT just plugs itself in at each step and enforces taxation / penalization. What's more, the entire network suddenly becomes visible all on its own, like some movie scene where a clean screen changes into patterns of interconnects. Each person paying back up the chain reveals the view up, because the further up the chain, the more definite the requirement that bank transfer be used (because the lent amounts increases).

Now, theoretically "some" people can accomplish the liquidity to repay up the chain in cash. That's fine. But this is zero sum, because nowhere near the same valuation of cash is being printed, ever again. So this is zero sum. Any subset of people who did manage to get hold of enough cash to recapitalize their lending network, will have necessarily screwed everyone else scrambling for cash. So really a few will succeed to a limited extent by revealing everyone else anyway. That's a good enough tradeoff for me.

shyamal · Post by **shyamal** » 15 Nov 2016 21:16

I had no plans of withdrawing money.
I had a stock of 100s in my wallet and had reduced my cash expense to minimum. I was doing everything with credit cards.
This evening I went to the market to buy some sports goods for my son. Paid with cash. While shopping I noticed that the SBI ATM opposite the shop had a queue of 3-4 excited people infornt of it. I asked and came to know that the cash guy was filling it up.
I thought for a moment and then stood in queue behind them.
The guy took another 15 mins to fill cash and then left. By that time there was a queue of about 30 people. All in very good humour. Lots of jokes going around. No tension.
My turn came and I withdrew 2000. I promptly went to a local sweet shop and cake shop to spend Rs 400. Helps the small scale local economy

While coming home I saw another SBI ATM working and a cash Van approaching a HDFC ATM(which had about 100 people queued already).
So things seem to be looking up.

Nsmith · Post by **Nsmith** » 15 Nov 2016 21:38

But now, suddenly because of demonetization - some percentage of my customers who had loose black cash and were giving me business no longer have that cash. As a result my business turnover comes down.

Most of us have cheered that fact that an unknown number of people have become poor or middle class, or have lost their "net worth" because of demonetization. And because people are poorer it reflects on my business and I become poorer - even if I am a regular taxpayer. I agree that if I am running an "essential service" like food, clothing, healthcare etc - my business will pick up again because people cannot avoid it - but if I am running a luxury service like a niche restaurant or branded phoren items by business will take a hit.

People are saying that prices will fall? Why will prices fall? Is it because my business is failing and I am desperate to see and therefore I reduce my profit margin and sell cheaper?

Can any finance gurus enlighten me?

Shiv ji, here's my two paisa:

(1) All businesses that are able to operate due to the easy availability of unaccounted cash will crash. Viz. Hawala operators, Big time drug traffickers, Smugglers/mafia of all kinds, Human trafficking, Counterfeiters, Dabba traders, Satta (betting) operators... To the extent these guys were supporting their local economies via consumption and investments in hard assets, this quanta of economic activity has been contracted to a trickle.

(2) A lot of the BM cash is running in the parallel banking system. There's a bunch of gujju/marwadi traders who control this trade. There's a couple of levels where these guys operate.

At the retail trade level: Typically your local fruit or vegetable vendor or the guys you see selling fresh flowers at the traffic signal borrow 1000 bucks in cash at the beginning of the day, use that capital to purchase raw material and return the capital + 10% interest EoD. Here's a good article that explains the modus operandi: http://www.subramoney.com/2015/09/meeti ... ng-people/. I'm guessing (hoping?) these guys are not hurt too bad. Will be politically difficult for the BJP to digest. After a couple of weeks of disruption I'm thinking the cash supply used by these retail level money lenders (in the 10~100 lakh rupees) shall be soon replenished and this part of the black economy will rebound.
At the local market/city level: Almost all the traders and businessmen have two sets of books. One for the IT department and the other for themselves. It varies from business to business, but the black or 'kachcha' part of their trade volume varies between 30-90% of their total earnings. Now these guys are badly badly hit. There's no cash available to honour ongoing trades that need to be settled. They already are struggling to launder the existing stash of 500/1000 notes. This move, plus GST from April '17 plus any other NaMo moves in the future essentially means that these guys are now forced to come clean on their *real* business volumes and whitelist their cashflows. OR Take a chance and hope they're able to warm the palms of the assessing officers. Now at this level where guys are making serious money, they'd rather do their business in white instead of not doing any business at all. There will be certain individuals who will go bankrupt/ go to jail/ commit suicide.... But that's just the nature of big disruptions. A family friend is a big-ish steel trader in Rourkela and he's worried. The trader baniya community has suddenly turned anti Modi.
The big fish: There's a network of cash-nodes in this country. The jewellers, wholesale traders, defence brokers, builders, moneylenders, hawala operators etc. These are guys who hold, at any point in time, excess of 100 Cr. in cash on behalf of their clients (the bureaucrats, politicians, doctors, lawyers...). This network acts as a parallel banking system. Transactions are settled in cash, without the cash ever physically moving around. This cash base also acts as the liquidity that holds up the edifice of the parallel economy. People are able to buy and sell assets worth tens and hundreds of crores as either party has access to a 'trusted cash node' which is handling their cash for a 'convenience fee'. The real impact of demonetization is on this network. With all the cash drained out like you drain pus from an infected wound, there will be no underlying currency to settle trades, or initiate new transactions. Ever with all laundering via zombie accounts it'll take months, if not years, to replenish the coffers. More importantly, the kingpins are all f*cked. Many of them will have to fold their business and move to some other form of trade. Generally speaking, the families that were involved in some form of physical trade will have their pants on, albeit with hugely contracted prosperity. But the guys who were exclusively in the cash handling/ money management business are FUBAR. Hope none in your family are affected.

(3) There will be real contraction in the economy due to the factors listed above. The scope and depth of the contraction depends on the extent to which that trade was being settled in cash and compliance levels in general. So for example, real estate sector will be forced to re-price assets to more realistic levels and will witness significant value destruction. The ripple effects will also hit cement, sand, sanitary fittings, paints etc.

shiv · Post by **shiv** » 15 Nov 2016 21:54

Nsmith wrote:
(3) There will be real contraction in the economy due to the factors listed above. The scope and depth of the contraction depends on the extent to which that trade was being settled in cash and compliance levels in general. So for example, real estate sector will be forced to re-price assets to more realistic levels and will witness significant value destruction. The ripple effects will also hit cement, sand, sanitary fittings, paints etc.

Thanks. This is what I thought. There will be a contraction of the economy - BUT. But the government now has money. Is that correct?

nandakumar · Post by **nandakumar** » 15 Nov 2016 21:57

shiv wrote:Suraj's brilliant post a few pages back in response to a long winded question from me has opened up new areas in my mind.

Black money is not just hoarded notes and ISI printed counterfeits - but it was Suraj's reference to the the "velocity" of money - the transactions that are conducted that add to the black economy.

That means that if I earn Rs 1000 and do not declare it as income - the government "loses" money in tax - let me put this at a nominal 10%. If I use this Rs 1000 note to pay someone else and he does not declare it either - the government loses another 10% on that 1000. This can go on through thousands of black transactions so that in the end the government has not got what it should have got for services, salaries, infrastructure, education etc - but that damn note is still in circulation merrily exchanging hands and notching up a little satisfying "cheat" where each person gets 1000 and does not lose 10% in tax.

What this amounts to is that among the notes that are in circulation (they all look the) some go through phases when they are in black but may become white again. I earn Rs 1000, fail to declare - and use it at a restaurant where it goes back into circulation as white money. The same Rs 1000 note could have earned the government thousands if everyone paid tax, but that is not happening. Eventually, the government, short of money prints new notes inflating the currency "volume".

But this brings me to some unanswered questions about demonetization

Because there is so much cash floating about and an unknown proportion of it is black, at least some thriving businesses must be benefiting by recirculating that black money. Let me explain that. Suppose I have a shop that sells bulbs. People who come and buy bulbs from me by paying cash may be paying me either white money (withdrawn from bank perhaps) or black money (unaccounted for cash) .

But now, suddenly because of demonetization - some percentage of my customers who had loose black cash and were giving me business no longer have that cash. As a result my business turnover comes down.

Most of us have cheered that fact that an unknown number of people have become poor or middle class, or have lost their "net worth" because of demonetization. And because people are poorer it reflects on my business and I become poorer - even if I am a regular taxpayer. I agree that if I am running an "essential service" like food, clothing, healthcare etc - my business will pick up again because people cannot avoid it - but if I am running a luxury service like a niche restaurant or branded phoren items by business will take a hit.

People are saying that prices will fall? Why will prices fall? Is it because my business is failing and I am desperate to see and therefore I reduce my profit margin and sell cheaper?

Can any finance gurus enlighten me?

Let me answer this with an anecdotal example. You remember the news item involving Rahul Mahajan, the son of Pramod Mahajan, many years ago? I dont recall the exact circumstances. The thing I recall is that he was caught rolling a 'joint', in a 500 rupee note and smoking it. Now if he didn't have a surfeit of 500 rupee notes, he would have, like most of us in such a situation, would have emptied a Charminar cigarette of its tobacco held the 'goli' to the fame of a match heated it up nicely crushed it into a powder mixed it with tobacco and stuffed it back into the same Charminar cigarette paper and smoked it. Within the framework of an economy that has basket of consumption goods and an enduring base of income that we possess (you could be a doctor with a 10 to 5 hospital routine and I could be pushing papers as an accountant and both of us having a steady monthly income and a steady habit of rolling a 'joint' in the evenings) and in short we would have contributed to a sustainable economy. But a black economy of the kind that Rahul Mahajan was keeping it going was not sustainable in the long run. That happens with every economic activity that is not based on sustainable economic transactions involving individuals.

Suraj · Post by **Suraj** » 15 Nov 2016 22:07

There will be temporary contraction of actual economic activity . But not official economy because it's a process off addition to the official economy . The duration of short term shock is within the hands of the businessman to fix - the faster he fesses up and cleans his books the more advantageous is his position . Like GST this is self regulating - fess up early and you have an advantage over others running around trying to conceal .

shiv · Post by **shiv** » 15 Nov 2016 22:15

nandakumar wrote: But a black economy of the kind that Rahul Mahajan was keeping it going was not sustainable in the long run. That happens with every economic activity that is not based on sustainable economic transactions involving individuals.

OK thanks.

Now here's a related question:

I look at ~~Shitistan~~ I mean Pakistan, and I speak of Pakistan with new found awareness of how money works thanks to the discussions on here

I used to say "Pakistan has multiple power centers" - and by that I meant multiple armed groups with coercive power. But my recent reading tells me that Pakistan "multiple militant centers" are actually multiple financial power centers. It is the money power that creates the coercive power. So Pakistan has multiple religious groups with their own sources of funding (often crime, extortion, drugs).

The point I am getting at is that black money ultimately cannot have any "central/federal" control and is bound to lead to multiple power centers. I begin to wonder if multiple regional parties in India are an exact parallel of Pakistan multiple religious parties - each with its own base of black money and a population of people who live and thrive on that parallel economy. Naxals are only a small subset - but the major part are many regional parties or regional satraps who owe their allegiance to regional parties.

If this is true then pulling the rug from under the feet of thee multiple power centers that compete with the federal finances is a step that can only benefit the nation in the long term. But in the short term there will be some sever convulsions as some formerly very rich and very powerful people become poor. Dangerous times ahead if not well managed.

Satya_anveshi · Post by **Satya_anveshi** » 15 Nov 2016 22:24

shiv wrote: Dangerous times ahead if not well managed.

Shiv ji,

Don't want to create panic nor choti mou badi baat.

We will find out at the end of this exercise that for 1/10th of the financial and power impact, countries have gone and will go to WAR.

So, folks should not be under illusion that it will be smooth. Modi ji correctly said "vo mujhe jinda nahin chodenge, mujhe barbaad kar denge..."

In Levant thread, I used to say that such chaos will come to India. This step will mostly like prevent it but if unmanaged will prove to be a catalyst.

Modi ji must take every precaution and our forces must protect him even at great cost. I made a post in political dhaga to that effect. Please do all in your capacity to spread this awareness preemptively without causing panic.

yensoy · Post by **yensoy** » 15 Nov 2016 22:24

Bart S wrote:Arundhati Bhattacharya (head of SBI) explained that point on a news channel - the instruction was apparently for one ATM per district to be configured that way, which was too small to make an actual dent in the issues.

IMHO it was to get the juices flowing, or prep the operations guys for what was to come. No way 10% or 1 ATM/district would be enough; but what would be required is for the engineers to know how to get this done so folks don't go into head scratching RTFM mode when the time comes.