Currency Demonetisation and Future course of Indian Economy

[nirav]

I'm not surprised.
Some just don't leave any scope for the fact that we don't live in a perfect world.

Execution of such a huge scheme on a national basis will certainly have chinks and will cause hardships and inconvenience to a lot.

But that shouldn't mean that one ought to focus just on the inconveniences and draw out weird political conclusions. We do have a bolitics dhagaa, such discussion is better suited there.

While discussing the topic with a group of friends, I did hear some cribbing, Modi aisa liya, waisa kiya..

Told them, I didn't go the the border's to fight for my country. This "inconvenience" ain't sh1t compared to that.

If my country benefits from my inconvenience, I'd happily oblige every single time my Govt requires me to.

This is the least a person can do.

[JayS]

they could not have printed 500 and 1000 notes as the word would have got out that old notes are going kaput.. everyone knew about new 2000 note

Thats why 2000 note was such a masterstroke. Noone suspected anything about scrapping of 1000/500 notes. Even the printing press employees would not have guessed. They must have been told only that 2000Rs notes will be introduced. Same for all, except a handful at the very top in GOI/RBI.

BUt I do not understand why GOI is reintroducing 1000notes again. This was a good chance to abolish 1000 note. They could have taken out 2000 note slowly or suddenly sometime down the line. For now could have kept max denomination of 500 and pushed for e-payment for all large transactions - say bigger than 3lakh which was the recommendation from BM SIT. An since GOI would have been accepting SIT recommendation no one could have blamed them.

[kvraghav]

The abolishment will come in a phased manner. Looking at the new 2000 rs note, this is just a temproary note.

[sooraj]

Deposited about 10000rs in cash and withdrawn 2000rs in 50rs note in a federal bank branch in kerala. Did not take any id proof, only 50 rs note available in that bank. No 100rs note available.

[manjgu]

sure it was a masterstroke.. i think they should keep 100 rupee note or maybe 250 note ( hahahaha ..a new note) and abolish 500,1000 and 2000. encourage people to do electronic transactions more and more. ( i think someone already mooted this idea).

[Suraj]

shiv,

"The amount by which it is LESS should indicate the total value of the black economy. Is this correct?"

Not quite. The amount of currency float and size of economy are not the same. In other words, you don't need Rs.1000 circulating for a GDP of Rs.1000 . Economic activity occurs when money changes hands. You don't need as much currency, just the frequency of changing hands (velocity of money) will do. You need as much cash as the GDP if only one transaction totaling the value of cash occurs in a year... Of course, it's true that some of the black money lies idle, but most of it is frequently deployed into all manner of things, ranging from political electioneering, diverting wholesale commodities by hoarders seeking to leech out more white money into black (e.g. the extra you paid for dal/onion because of their hoarding is your white money turning black).

In general, because black money is not capable of being deployed in productive interest bearing activity (can't be deposited in bank), it actively seeks ways to leach more white into black money, which is its 'return on investment'. There is no central bank supporting a black economy - its RoI is the rate at which it can convert white into more black. This is necessary, because conversion of white money into black causes more cash floating in the economy. This means there's more Rupees out there chasing goods and services. In other words, inflation. Inflation erodes the value of every Rupee note, including black money. They have to make up for it by leeching even more white into black, and GoI then has to deal with currency outside of its control by printing even more.

So now you can see, inflation is a vicious cycle here, with the black economy being a tapeworm of sorts having to eat more white money to retain the value being destroyed by the inflation it creates itself. Arbitraging prices of real estate, commodities, gold etc are the typical options. So basically, the actual float of currency backing black economy is a lot smaller than the size of the black economy. Every time cash changes hands for some form of economic transaction, it adds to the size of economy. The black economy is simply unaccounted for in official data because it is invisible to those data collectors.

What GoI did is to deploy the brahmastra - since it creates the currency underlining the black economy, it invalidated it. This is not without political costs. But it basically resets everything. There will be some frantic and successful efforts to retain the value of black money held by converting it into something else, but there's just too much black money out there. There's about $300 billion worth of currency notes circulating. The official economy is ~$2400 billion. Approx 30-40% of the currency is estimated to be the base of black economy. My guess is it is more than that. About 85% of this 300 billion is in Rs.500 and Rs.1000 notes. The rest is in smaller notes.

The government has invalidated all of these notes, i.e currency equivalent to $255 billion. SOME of it will be replaced with new notes, but GoI has NO plans to replace the full float, i.e. there won't be $255 billion of new notes in circulation. Not even close. Barely ~$10 bllion is planned in the short term. Maybe $25-50 billion in the medium term. So it's impossible, or extremely difficult, to restore black economy from here. For one, there's simply not enough money going to be floating to sustain transactions outside banking system. For another, GoI is shutting down all high value transactions from being in cash.

Is this all very disruptive ? Yes very much. It'll hurt the poor to an extent since they're the least into cashless transactions. On the other hand, they also predominantly transact in Rs.100 or lower notes . The cash based lower/middle class folks are likely to be the most disrupted, as several bitter commentators here suggest. There are even claims that GoI should compensate people for the losses from the black economy bubble bursting. But this is pretty bizarre. For years we all suffered from the inflation caused by the black economy. On the other hand, those who hold assets whose price was held up by black money benefited. What we see here is, on one hand people who lived with chronic inflation being happy at this event, and ones who held assets that will deflate in price demanding a bailout.

Secondly, if by chance the total value of new notes issues is equal to or greater than the value of the demonetized cash, would it not mean that the economy has been fluffed up an unexpectedly great deal by fake currency?

The government has no plans to print anywhere as many new notes. A cash economy is impossible to modulate using central bank action. Interest rate changes do nothing. Inflation essentially grows uncontrolled because the black money needs white money to keep retaining its value due to the inflation caused by its own effort to generate a RoI . Printing as much new notes invalidates the entire action of demonetization; the term demonetization is accurate because money is being sucked out with no plan for replacement.

There will be a collapse in prices of goods, services and assets like land due to the underlying black economy disappearing or shrinking drastically. BUT, the value of white money rises. There's no longer black money competing with your white money for the same item. In other words your money increases in value for purchasing some item, by the extent to which the black economy shrinks in that item. e.g. very roughly a 20% drop in RE prices means your money goes that much further. This also translates into size of economy because it causes the Rupee to strengthen vs other currencies.

The government doesn't care if the black money is burned or returned. Both work in its favor. Destroyed money is a liability off the RBI's books, giving it authority to increase its own balance sheet by that much. Returned money gives GoI a cut in the form of taxes and penalties, plus an addition to the deposit base, which means banks have more cash to lend , so lower interest rates. Orphaned deposits are like destroyed money in the sense that there is no liability on RBI's books since no one desires to withdraw it. They too get shredded and add to RBI's balance sheet as new money creation (which may or may not result in note printing)

[Suraj]

How do you distinguish between demonetisation and politics?

You use the politics thread when talking politics. You were complaining about your situation there. Please continue there or better yet in the whines thread, rather than here.

[sooraj]

Deposited about 10000rs in cash and withdrawn 2000rs in 50rs note in a federal bank branch in kerala. Did not take any id proof, only 50 rs note available in that bank. No 100rs note available.

Due to huge rush inside the bank, Bank manager was standing outside the bank giving tokens, as each person exits from the bank new ones were let in with a token number.

[rahulm]

Why does the govt not exclusively target the bribe takers for a year and flush out most of the fleecers and then turn its gaze on the public.

This is the unfinished but necessary part of business and far more challenging to accomplish. It needs a combination of technology, streamlining of process and most significantly uptake of state governments. Centrally administered services are far more efficiently delivrered.

Electoral funding reform is the single biggest bullet that will make a difference.

As I have said before, removing the gap,between market and government rates of property will in one single move remove a key component of BM. But it requires the states to come on board. The government, squandered a great window of opportunty in the RE bill.

Similar to passport applications, property registration requests can be made online and processed by back office teams. Same for other government services including at the village panchayat level.

Such reform takes away the powers of state Cheap ministers and that's the reason for reluctance. Otherwise, a small state like Goa with a BJP majority givernment should,have been a model state by now. But it's a mess.

Looking at the new 2000 rs note, this is just a temproary note.

I feel the same. Otherwise, it's a pretty lousy piece of work.

[jamwal]

http://www.livemint.com/Politics/cCTwiQ ... utiny.html
Is NDA bringing the income of farmers under tax scrutiny?
The income tax department will scrutinize all high value cash deposits and cross check if it is in line with the land holdings of the farmer and the corresponding yields

Will the partial demonetisation and consequent scrutiny of high value bank deposits bring the Indian farmer under the tax net?

Yes, if the farmer is making large cash deposits derived from non-farm sources but masked as farm income, the income tax department said.

But this could potentially trigger a political backlash against the Bharatiya Janata Party (BJP)-led National Democratic Alliance.

So far, successive governments have resisted any move to tax farmer’s income. But all this may be about to change.

The income tax department will scrutinize all high value cash deposits and cross check if it is in line with the land holdings of the farmer and the corresponding yields. In case there is a large discrepancy, the farmer will be asked to explain this difference.

“Since farmers’ genuine income is not taxable, the farmers should not worry at all in depositing the old currency notes in their account. However, the farmer’s income should not be disproportionately high compared to yield expected from the land owned by him,” revenue secretary Hasmukh Adhia tweeted late on Wednesday night.

[jamwal]

the anvil falls on senior citizens and old and infirm who are single and lonely. How in the world will these people exchange their notes after standing in queue.

no business is taking place in shops as only bangalore has card transaction for groceries. The rest of India is in deep doodoo and shops are empty because you can only get goods worth 2000 or 100. Nobody has change to dispense change for 2000 notes.

I had no idea that currency notes have been permanently taken out out of circulation and that there are no e-wallets, cards, bank transfers, checks and other modes of payment in existence.

Good heavens. What has Mudi done !

I guess it is too hard to tolerate a few days of inconvenience as the sky is falling on our heads.

[Suraj]

There are two issues with ABCC's scenario.

1. The business that thinks it will not be able to operate as white will disappear but the demand will NOT disappear. Someone else will get that demand or perhaps open a new business to meet that demand. E.g Think of a jeweler or builder who doesn't think he can operate under the new regime but will the demand of jewelery or house disappear? It will go to the next guy. However there will be some disruption while both business men and mangos make adjustment under the new regime. In some business the adjustment will be near instantaneous (Chaiwalla/Panwalla/etc) while in some it will be a bit stretched out (RE).

2. BM Wealth as opposed to BM income is usually dead money as far as economy is concerned e.g. what is parked outside the country. Every years BM income adds to that dead money. Forget about the accumulated dead money for now but going forward less money will be added to that dead money pool and more will keep circulating within the economy doing more in the economy. That is a net positive for the economy and will add to growth going forward.

There is going to be disruption in the near-term but will add *real* growth to the economy in the longer-term.

That's correct. The ones complaining 'OMFG! My property has fallen in value because GoI killed black money! They have to bail me out!' or just passive aggressively claiming that this will cause the economy to shrink don't quite get it.
a) The economy won't shrink in any official terms because none of the black economy was official in the first place.
b) Only the price of assets already purchased falls. Their value doesn't . The value of any cash on hand rises because it's capable of now buying more for the same rupee.
c) Rise in value of the rupee generates rapid demand. The dream house that was out of reach by 20-25% is now within reach.
d) More cash back in the system pushes down interest rates, which means one can more easily obtain a loan for the same property, pushing its prices back up, since lower cost of money causes prices to go back up, in white money. This is black->white conversion.

As to those who sit on assets with diminished prices, there is a moral hazard you have to confront. Black money hurts you when you buy daily essentials. For decades, it hurt you when you bought rice, dal, milk, veggies, fruit, everything. Same black money benefited you when you bought an asset and it kept rising in price. Now you sit on an asset whose price fell . You complain. Yet, this action also benefits you simultaneously by removing the impetus for inflation in essentials, and giving you cheaper access to loans. Why complain about just one side of it ? People like rohitvats here are ecstatic that they can buy property now. If you demand GoI bail out real estate and artificially keep up prices, what do you have to say to people like them when they're told that they're still screwed ?

[Kati]

[Let me try to address the long question Shiv-saar asked about demonetisation. may be too trivial, but seems like some BRFites are having trivial questions.]

1. Suppose there is Rs. 1000 in the economy out of which rs. 100 in small denominations, and remaining Rs. 900 in large denominations.

2. Out of the latter Rs. 900, Rs. 400 has been stashed somewhere as BM. it doesn't get circulated in the economy, and hence it cripples the economy. Mid-level micro-economics courses teach this, which gives rise to the "growth theory". The more money circulates, the more the economy grows. it can be proved mathematically; very fancy math, uses heavy dose of integral calculus. We did all these at ISI-student days.

3. One fine morning naMo gets us, and decides to declare all those large notes invalid. So suddenly, the
people holding Rs. 900 (Rs. 500 white and Rs. 400 black) find them worthless, unless they exchange for the new currency.

4. GoI orders new currency to be printed to replace the old currency. Since all the old currencies' serial numbers are with the Goi, it knows exactly how many new currency to print. So GoI prints new sets of currencies, and waits for common people to bring back the old ones for exchange.

5. The whites ones get exchanged in a few weeks with due PAN/Aadhar card numbers. The black ones come out only partially. The BM-holders are fearful that the GoI is going to take note of the source, etc etc. So only Rs. 200 BM coes out through self declaration with extra tax, through peons/maids' JDY accounts, etc. the remaining Rs. 200 gets lost. but GoI is still holding the replacement new currency for those Rs. 200 still hidden, which never comes out, and junk anyway. GoI gets to keep that Rs. 200 as its own, and uses it for developmental work.

Don't understand why it is so difficult to understand.

[abhijitm]

why in cities and towns banks are not issuing money in branches to people carrying credit/debit cards? They can use POS machines to authenticate, no? Just emulate ATMs at branches. What is the problem I don't understand.
1. keep couple of counters at branch with pos machines
2. customer walks in put card, enter pin, enter amount not more than 2000
3. the money is paid to bank
4. in return bank will pay the customer in cash on the spot

This transaction can end in 1/1.5 minute. Serve 1000 customers at one branch this way all day long.

what is wrong with this? Why this rule of carrying ID proof even if you have a valid debit/credit card?

[JayS]

"The amount by which it is LESS should indicate the total value of the black economy. Is this correct?"

^ To add to the fantastic post by Suraj saar,

The amount of Black assets - those which are unaccounted for or those which have not paid taxes on - are far more than the BM in cash. A huge chunk is locked in commodities like Gold, in Share Market and in Real Estate and on books of a lot of businesses with some accountancy jugglery done. This part will surely erode over time, especially the one in RE, but it will be a slow process. The prices of lands are not gonna fall by 50%. The demand for RE will cushion the fall of prices. But the removal of Medium which was facilitating the BM transaction itself, as Suraj put it in succinctly, will help curb the Black economy in coming future.

To really reduce the dirt in RE sector, GOI should digitize entire RE sector with every single thing in the system, right from land records to monetary transaction digital.

There are rumours that there will be action against Gold, but I don't think that will happen, it will be suicidal for BJP. Since this will affect almost all households. Many people have gold since long time and have no records to show it belongs to them. They will have to use a top-down approach in gold where only the transactions over certain limit will have to be monitors and slowly filtering Black Economy content from that.

Hope GOI deploys digital economy on large scale, with enough security in the system and full desi control on the system.

Also I hope those in pain because of this decision for reasons such as bribes they have to pay, will transfer that pain to babus in due time curbing the BM and corruption.

PS: Many posts appeared while i was typing. rahulm covered some points on RE.

[Chandragupta]

When all the BM comes to banks, whatever % of it does, I hope the interest rates are lowered for SMEs. Loans/ODs can be made available via Mudra Bank if need be. Need not be large but 20-25 Lakh loans go a long way.

All those seths with massive white money, may not now block it in RE & Gold, that money may find its way as investments in startups & new businesses. Bodes well for me. If it happens i.e. Once all this is over, I have decided to try luck with HNIs & VC clubs.

[abhischekcc]

How do you distinguish between demonetisation and politics?

You use the politics thread when talking politics. You were complaining about your situation there. Please continue there or better yet in the whines thread, rather than here.

Ok, I'll talk about politics in the politics thread.

FYI, my post talks about the economy and not mys situation. But I guess as an economist you are trained to miss the wood for the trees.

[JayS]

why in cities and towns banks are not issuing money in branches to people carrying credit/debit cards? They can use POS machines to authenticate, no? Just emulate ATMs at branches. What is the problem I don't understand.
1. keep couple of counters at branch with pos machines
2. customer walks in put card, enter pin, enter amount not more than 2000
3. the money is paid to bank
4. in return bank will pay the customer in cash on the spot

This transaction can end in 1/1.5 minute. Serve 1000 customers at one branch this way all day long.

what is wrong with this? Why this rule of carrying ID proof even if you have a valid debit/credit card?

SBI has such facility but only for their own customers. But dunno if they have deployed it for this purpose. Anyways this looks like a plan to me.

[Suraj]

The amount of incoming black money is massive, with the total volume (assuming all the rupee float returns) being close to SBI's entire deposit base, and probably 3x the deposit base of ICICI or HDFC (I dont' recall their most recent deposit base figures). GoI will have plenty of capital to deploy via MUDRA and other formal banking channels to entrepreneurs as white transactions. It's well worth posting on PMOs feed asking for it as a priority.

[Suraj]

You use the politics thread when talking politics. You were complaining about your situation there. Please continue there or better yet in the whines thread, rather than here.

Ok, I'll talk about politics in the politics thread.

FYI, my post talks about the economy and not mys situation. But I guess as an economist you are trained to miss the wood for the trees.

Please don't waste time insulting others' intelligence, and me directly. I'd ban you with very good reason, but I won't, because I sympathize with people who have to deal with their assets falling in value, and I think it's worthwhile to just let someone vent about it a bit, and I just care about directing them to the right thread. But never mistake that again as a license to insult anyone, because your next wisecrack will get you banned. Thanks.

[Akshay Kapoor]

shiv,

"The amount by which it is LESS should indicate the total value of the black economy. Is this correct?"

Not quite. The amount of currency float and size of economy are not the same. In other words, you don't need Rs.1000 circulating for a GDP of Rs.1000 . Economic activity occurs when money changes hands. You don't need as much currency, just the frequency of changing hands (velocity of money) will do. You need as much cash as the GDP if only one transaction totaling the value of cash occurs in a year... Of course, it's true that some of the black money lies idle, but most of it is frequently deployed into all manner of things, ranging from political electioneering, diverting wholesale commodities by hoarders seeking to leech out more white money into black (e.g. the extra you paid for dal/onion because of their hoarding is your white money turning black).

In general, because black money is not capable of being deployed in productive interest bearing activity (can't be deposited in bank), it actively seeks ways to leach more white into black money, which is its 'return on investment'. There is no central bank supporting a black economy - its RoI is the rate at which it can convert white into more black. This is necessary, because conversion of white money into black causes more cash floating in the economy. This means there's more Rupees out there chasing goods and services. In other words, inflation. Inflation erodes the value of every Rupee note, including black money. They have to make up for it by leeching even more white into black, and GoI then has to deal with currency outside of its control by printing even more.

So now you can see, inflation is a vicious cycle here, with the black economy being a tapeworm of sorts having to eat more white money to retain the value being destroyed by the inflation it creates itself. Arbitraging prices of real estate, commodities, gold etc are the typical options. So basically, the actual float of currency backing black economy is a lot smaller than the size of the black economy. Every time cash changes hands for some form of economic transaction, it adds to the size of economy. The black economy is simply unaccounted for in official data because it is invisible to those data collectors.

What GoI did is to deploy the brahmastra - since it creates the currency underlining the black economy, it invalidated it. This is not without political costs. But it basically resets everything. There will be some frantic and successful efforts to retain the value of black money held by converting it into something else, but there's just too much black money out there. There's about $300 billion worth of currency notes circulating. The official economy is ~$2400 billion. Approx 30-40% of the currency is estimated to be the base of black economy. My guess is it is more than that. About 85% of this 300 billion is in Rs.500 and Rs.1000 notes. The rest is in smaller notes.

The government has invalidated all of these notes, i.e currency equivalent to $255 billion. SOME of it will be replaced with new notes, but GoI has NO plans to replace the full float, i.e. there won't be $255 billion of new notes in circulation. Not even close. Barely ~$10 bllion is planned in the short term. Maybe $25-50 billion in the medium term. So it's impossible, or extremely difficult, to restore black economy from here. For one, there's simply not enough money going to be floating to sustain transactions outside banking system. For another, GoI is shutting down all high value transactions from being in cash.

Is this all very disruptive ? Yes very much. It'll hurt the poor to an extent since they're the least into cashless transactions. On the other hand, they also predominantly transact in Rs.100 or lower notes . The cash based lower/middle class folks are likely to be the most disrupted, as several bitter commentators here suggest. There are even claims that GoI should compensate people for the losses from the black economy bubble bursting. But this is pretty bizarre. For years we all suffered from the inflation caused by the black economy. On the other hand, those who hold assets whose price was held up by black money benefited. What we see here is, on one hand people who lived with chronic inflation being happy at this event, and ones who held assets that will deflate in price demanding a bailout.

Secondly, if by chance the total value of new notes issues is equal to or greater than the value of the demonetized cash, would it not mean that the economy has been fluffed up an unexpectedly great deal by fake currency?

The government has no plans to print anywhere as many new notes. A cash economy is impossible to modulate using central bank action. Interest rate changes do nothing. Inflation essentially grows uncontrolled because the black money needs white money to keep retaining its value due to the inflation caused by its own effort to generate a RoI . Printing as much new notes invalidates the entire action of demonetization; the term demonetization is accurate because money is being sucked out with no plan for replacement.

There will be a collapse in prices of goods, services and assets like land due to the underlying black economy disappearing or shrinking drastically. BUT, the value of white money rises. There's no longer black money competing with your white money for the same item. In other words your money increases in value for purchasing some item, by the extent to which the black economy shrinks in that item. e.g. very roughly a 20% drop in RE prices means your money goes that much further. This also translates into size of economy because it causes the Rupee to strengthen vs other currencies.

The government doesn't care if the black money is burned or returned. Both work in its favor. Destroyed money is a liability off the RBI's books, giving it authority to increase its own balance sheet by that much. Returned money gives GoI a cut in the form of taxes and penalties, plus an addition to the deposit base, which means banks have more cash to lend , so lower interest rates. Orphaned deposits are like destroyed money in the sense that there is no liability on RBI's books since no one desires to withdraw it. They too get shredded and add to RBI's balance sheet as new money creation (which may or may not result in note printing)

Some really excellent explanations by you. Many thanks.

[pankajs]

I havent been to a Bank or ATM so my inference based on a few reports may be inaccurate.

That said, the RBI/Banks should have stuffed the ATMs first and take the pressure off the bank branch. Most in middle/upper class could manage with *new* cash withdraw till the banking queues dissipated. Would have worked better for both the lower-Middle/poor and middle/upper classes.

I will probably venture to deposit my cash cache after November.

[Supratik]

Those who bought gold after the surgical strike and those jewellers and bullion who sold them are both looking at KLPD. Right now no one has money to buy that gold and by the time they do prices would have come down. So they will take a haircut on their BM. Now the rule is Pan card for more than 2.5 lakhs. If the govt is serious these can be detected. The jewellers have to exchange that money and if the govt is serious it can be detected.

Going forward no more demonetisation maybe needed in near term. All you need to do is to announce a IDS and people will be rushing in with their BM as they don't know if it is coming or not. Keep them guessing.

[Suraj]

Andy Mukherjee writes about this in Bloomberg. Pretty graphs and everything:
India's bold risk to usher in a cashless future

[shiv]

Suraj thank you for that lucid response. You could be a teacher. Nandakumar thanks for your response.

Gus - I have no reply because clearly I'm out of my depth..

[JayS]

The amount of incoming black money is massive, with the total volume (assuming all the rupee float returns) being close to SBI's entire deposit base, and probably 3x the deposit base of ICICI or HDFC (I dont' recall their most recent deposit base figures). GoI will have plenty of capital to deploy via MUDRA and other formal banking channels to entrepreneurs as white transactions. It's well worth posting on PMOs feed asking for it as a priority.

Suraj, will this deposites help in recapitalisation targets for our banks for Basal III..?? The banks will have more lending power, is a fairly straightforward thing to understand for nanha mujahidin like me.

[rahulm]

@Suraj, stellar explanation. It's uncharted waters for all and will be topical for the next 6 odd months at least. May I suggest a few posts be made sticky for evey body's benefit ?

Thanks

[shiv]

I really think the next step should be to limit the transport of undeclared cash more than 5 lakhs. Anything more gets confiscated (if caught of course)

Shiv ji: What next? Go into people's houses to check how much cash sitting there? Why does the govt not exclusively target the bribe takers for a year and flush out most of the fleecers and then turn its gaze on the public.

LOL "What next" is like asking a woman if I can shake her hand and being told "What next? Fondle my boobs?"

If you did not understand what i was saying you could have asked rather than go off on a tangent with a pointless rhetorcial question

[Rahul M]

back in my hometown, the one currently ruled by MB and her tommies. my impressions from aam admi while running around the city on various errands.

OVERWHELMING support for the move from every person I met (one notable exception, more on that later), people's faith in Modi has gone up by a distinct notch . people are all praise for his courage to take such a decision in spite of risks to his votebank. jewelers were heard discussing "enough is enough, we will even survive on daal-bhaat (daal & rice) but not going black anymore."
all in all the schadenfreude imagining the discomfort of the BM hoarders was the dominant sentiment.

the exception was my ola driver of the peaceful persuasion, who told me modi had 'fled' India to japan fearing reactions, that he was going to lose 2019 and the next govt. will overturn this decision and make old 500/1000 notes legal again. also, people will no longer pay taxes after this. when I asked him how would govt then pay for things like roads, infra & police etc, he told me in foreign lands people do not pay any taxes and those are the lands of milk and honey where everything is cheap and everybody is rich. these foreign lands are all in ME viz. saudi & dubai.
I mentioned to him that they will face problems once oil is finished, he claimed they have huge reserves of gold !

[Suraj]

Suraj, will this deposites help in recapitalisation targets for our banks for Basal III..?? The banks will have more lending power, is a fairly straightforward thing to understand for nanha mujahidin like me.

Deposits without liabilities and destroyed cash can be used to increase the RBI balance sheet by removing the earlier liabilties. GoI can decide what to do with them, including recapitalizing banks . Deposits with liabilities, i.e. the normal kind, are the bank's own and do not constitute recapitalization as such. I don't think there's yet any forward clarity regarding what GoI intends to do. As mentioned elsewhere, they've basic operational issues to deal with right now, i.e. get the cash into the ATMs quickly and keep citizens from getting really angry despite them all being overwhelmingly in support of this move.

[Rishi Verma]

Modi has permanently installed a fear of the unknown in the minds of the black money guys. Is my gold safe? Is my Audi safe? Is my land safe? Is my wife safe? can I hoard in 2000notes? Whacchu gonna do whacchu gonna do when they come for ju

More MayCome, Keep Guessing, Keep fearing

When a car pulls up near a villa, the owner may think "is that a tax-man"?

Guys this fear was missing, the corrupt were acting with impunity.

Recently when chacha Shivpal was asked Why Was he still using a helicopter after being removed as a minister by the bhatija CM, Shivpal yelled back at him "helicopter kya tere baap ka hai?"

Now he is missing from public view...

[pankajs]

Those looking up to ME are in for a shock in the next 5 years. Barbaria, the pinnacle of their dreams, is going to run out of cash in the next 5 years. Oil is going to stay within S30-$60 for the next 10 years at least. Now the question being debated is Not *peak oil demand* but when 2035/45/50!!!. *peak oil supply* is a distant memory ....

[Supratik]

They should cancel the holiday on Monday.

[shiv]

the anvil falls on senior citizens and old and infirm who are single and lonely. How in the world will these people exchange their notes after standing in queue.

no business is taking place in shops as only bangalore has card transaction for groceries. The rest of India is in deep doodoo and shops are empty because you can only get goods worth 2000 or 100. Nobody has change to dispense change for 2000 notes.

Go to any bank or atm. Senior citizens are being given privileged positions in the queue, while others wait for their turn, they are happy discussing the pros and cons of the move.

As far as I can make out there are at least 4 separate queues in banks - at least locally where my SHQ and others went. I haven't stepped near a bank after my urgent cash withdrawal during Modi's speech. I have Rs 200 left of that But I am going total plastic/e-money

• The shortest queues are for account holders simply wanting to deposit cash within the stipulated limit
• Another quickie is exchange of old notes if you are already an account holder - i.e up to Rs 4000
• Longer queues are non account holders in that branch looking for exchange
• The longest queues are those who have no bank account and have cash to be put into the bank

[shiv]

the exception was my ola driver of the peaceful persuasion, who told me modi had 'fled' India to japan fearing reactions, that he was going to lose 2019 and the next govt. will overturn this decision and make old 500/1000 notes legal again. also, people will no longer pay taxes after this. when I asked him how would govt then pay for things like roads, infra & police etc, he told me in foreign lands people do not pay any taxes and those are the lands of milk and honey where everything is cheap and everybody is rich. these foreign lands are all in ME viz. saudi & dubai.
I mentioned to him that they will face problems once oil is finished, he claimed they have huge reserves of gold !

That guy must be a Rhodes scholar..

[kvraghav]

Went to bank to deposit money. Manager was compalining that they had to work for 15 days continuous under pressure and told atleast Sunday should have been free. Found it valid statement. He also said the deposit time should be shortened since people are hoarding 100 rs notes to sell it on commission till December 30.

[JayS]

Suraj, will this deposites help in recapitalisation targets for our banks for Basal III..?? The banks will have more lending power, is a fairly straightforward thing to understand for nanha mujahidin like me.

Deposits without liabilities and destroyed cash can be used to increase the RBI balance sheet by removing the earlier liabilties. GoI can decide what to do with them, including recapitalizing banks . Deposits with liabilities, i.e. the normal kind, are the bank's own and do not constitute recapitalization as such. I don't think there's yet any forward clarity regarding what GoI intends to do. As mentioned elsewhere, they've basic operational issues to deal with right now, i.e. get the cash into the ATMs quickly and keep citizens from getting really angry despite them all being overwhelmingly in support of this move.

My chain of thought was - Since BM has vanished many will run to bank for loans now for capital, interest rate should ease. And since banks have new deposite their lending capacity would go up. In short, new lending cycle will pick up. Means more earning for banks and then they can keep some of the earnings as retained earnings to wipe out NPA, as well as to increase capital - both should be helping in increasing Tier1 capital - help towards the massive requirement of some $180Billion or so that was required for Indian banks to comply with Basal-III.

Effect will be in medium term and won't be dramatic but certainly significant. Of coarse GOI can separately recapitalise PSBs but this way PSBs can help themselves as well somewhat and also Pvt bank promoters will have easier time finding capital for their banks.

Does than make sense??

[shiv]

Why does the govt not exclusively target the bribe takers for a year and flush out most of the fleecers and then turn its gaze on the public.

This is the unfinished but necessary part of business and far more challenging to accomplish. It needs a combination of technology, streamlining of process and most significantly uptake of state governments. Centrally administered services are far more efficiently delivrered.

This is a double edged sword. A political party spends 5 crores in giving Rs 500 each to 1 lakh voters is paying bribes and the voters are bribe takers. How does one target these bribe takers?

[Suraj]

All that is possible. It's just that GoI has not published policy statements on what they intend to do with the new capital base they're gaining . I don't blame them; it's only been half a week and they've more important immediate matters to deal with like ensuring there's enough cash available at banks to withdraw or swap. You'll have to wait a while for greater policy clarity on what the intend. There's a significant wild card in the form of not knowing how much they'll get as deposits with liability, penalty/tax earnings, and how much is destroyed cash whose liability is written off. Hard to make policy decisions with very preliminary data.

[shiv]

The reasons why ATMs have not come online could be
1. ATMs not yet reconfigured for new Rs 2000 notes
2. Not enough Rs 100 notes