Currency Demonetisation and Future course of Indian Economy

[UlanBatori]

UlanBatori-bin-dung-patty., there is no fly in your dung plan., accept that if you have a Jan-dhan account., ...you need some 10000 pucca accounts.

Reminds me of my dear friend Stumpkopf, the recent Head of Wells Fargo who ordered every employee to ensure that every customer had 8 accounts.

Why 8? Because 8 is Great!

Now relaxing, counting his $250M golden parachute while the 10,000 employees whom he fired for dishonesty try to sue W-F. But I am sure he feels a burr up his musharraf where Senator Elizabeth Warren Mohterma reamed him out in public.

I actually don't see any problem with doing the dung-patty business (well.. the essential parts of it, not the extra-curricular Special Service parts) using my PAN card, after all I am 400% Honest as HarishChandra (not the guy who scammed SBI out of 600 crores a while back).

But you are leading me into Evil Ways with that hint about the Nano. So if I suddenly feel the urge to buy a Nano, which is 100% Make In India with only 95% imported parts, won't the kind National-Iced Bank lend me, say, Rs. 2 lac, in the spirit of helping a Small Bijnej-Mango? PM NaMo would praise them for doing that, hain?

Then I have to pay back Rs. 2 Lac, hain? If I have only old notes, won't said Bank accept that, I ask u? Do they interrogate customers to ask why & how they are actually repaying loans, hain? I bet SBI has at least 35% NPA like any respectable National Iced Bank?

And remember that there are 5 friendly banks in my nbd...

So my point from all this, is that myself and my 50 competitors, and a million like us, have already solved the demon-eat-ice problem. Our customers can launder their BM anytime.

[shiv]

A report from the poverty stricken villages of India
http://www.business-standard.com/articl ... 099_1.html

Dressed in a white dhoti or loin cloth, with a bright pink tilak or mark on his forehead, Chandu Kokre shepherded about 60 sheep along national highway 60, 30 km southeast of Mumbai, India’s financial capital. “It doesn’t matter to us,” the thin 28-year-old told IndiaSpend when asked about the Indian government’s delegitimising of Rs 500 and Rs 1,000 notes–86% of currency in circulation by value. “We don’t have bills that exceed Rs 50 and Rs 100,” he explained.

On November 9, 2016, the Indian government scrapped Rs 500 and Rs 1,000 notes, resulting in long queues to exchange these notes or withdraw money in lower denominations and reduced short-term income for many small-scale businessmen. But the poorest labourers, farmers, small business owners and shepherds like Kokre appear to have been affected less by the move because they either earn too little to save, or survive on what they themselves grow, found IndiaSpend reporters in rural areas of Pune, Ahmednagar and Palghar districts, and urban areas in Mumbai and Navi Mumbai.

As many as 269.3 million Indians–equivalent to the population of Indonesia–live below the poverty line of Rs 27 a day in rural areas and Rs 32 in urban areas. About 216.5 million of the poor live in rural areas, as IndiaSpend reported in October 2015. In Maharashtra–India’s richest state, by gross state domestic product, and the second most populous–19.7 million (17.35%) of 112 million are poor.
Several farming households told IndiaSpend they were not affected by the government’s move because they depended on their own produce for sustenance. That did not appear to be the situation in urban areas, where various media reports–such as this in the Indian Express, and this in the Hindustan Times–reported survival struggles.

As farming recedes across India, poor labourers proliferate

Narayan Deo Rinjad stood in the doorway of his brick house, in the village of Pandre Pade in Palghar district, about 120 km north of Mumbai, as a hen and its chicks explored the surroundings. “It hasn’t affected us much because we eat what we grow,” said the 43-year-old farmer, who lives below the poverty line, and grows rice, lentils, chillies and cucumbers.

Rinjad said the family buys oil, sugar and spices from the market but stocks up for 15 days to a month as the closest market is 5 km away. When the government announced that old notes would no longer be valid, the family had Rs 5,000 that they deposited in a bank, and withdrew Rs 2,000 . Rinjad added he didn’t plan to go the bank anytime soon, because he didn’t have an urgent need or time to spare from the sowing season; the last trip to the bank to deposit and withdraw money took four hours.

[atamjeetsingh]

My friend who is native of Himanchal Pardesh has apple orchards, he now lives in Delhi, while his extended family still lives in a village in Himalayas 150km north of Shimla. Before his migration to Delhi, his family used to pluck the apples pack them in wooden petis bring to Azadpur mandi(Delhi) collect money and go back to their village and hibernate for winters.
Now he stores the apple at cold storage( HP govt owned) in Delhi at nominal rates. He is supplying apples to 16 retialers(neighbourhood fruit & veg corners) every week from cold store. As per him veg retialers are still accepting old 500/1000 notes from customers and he is accepting the same from retialers. His weekly avg sales per retialer earlier was around rs 5000-6000 per week. But since demonitization business is brisk, he is now averaging around rs10000 per week per retialer . He was quite happy with the turn of events, he is not worried about depositing the old currency.He is farmer and there is no income tax for farming income. Every time he takes stock out off storage receipts are printed with the no of petis gone out from his stock.So he has solid proof of his income. Secondly he said with 6 adult persons in his family he can deposit 15lakhs, 2.5laks/person each no questions asked. He is waiting for maximum cash to be collected and will heads toward bank in the last week of Dec.
Added later: Retialer will accept your old currency but wont give you change back. Suppose you bought veg & fruit worth rs350 and wants to pay using old currency he will take your 500 rupees note but wont give you change back.

[ShauryaT]

There is no constitutional basis for opposition to demonetization. Which is why even Supreme Court is fiddling with flimsy arguments like 'inconvenience'. As if the public is not inconvenienced by the huge backlog of court cases.

I was not saying demonetization can be challenged. I am saying, withdrawal limits on legal tender will likely be challenged, if the limits are sought to be sustained.

[rahulm]

If withdraw limits are challenged successfully, then GOI must gradually replace all notes with only 10 rupee notes or even better coins only.

[yensoy]

You ignore the other person's point at your own peril. I think David has been very respectful of forum rules (from the few posts I read), so please keep your xenophobia to yourself. People can have their opinion even if it doesn't agree with yours; even some hard core BRFites are ambivalent about demonetization.

I know that you are standing up for somebody's 'rights' since the line that "I will disagree with you but will defend your right to free speech" is nice warm and fuzzy feeling of global citizen. <inane nonsense deleted>

Disha, just throwing together some random words doesn't make an argument. Please reply to David's point if you can. If he is offensive, report him. But don't start insinuating things which you can't back up, especially with a discussion that doesn't involve you.

2) Again, not very well addressed is the question of why to conduct demonetization this way? Why not a gradual phase-out? I've heard that it is to catch the corrupt black money hoarders, but it seems to me like the big fish is being let go since most of their assets is probably not in INR paper notes, while it's the petty merchants with minor tax evasion as well as the poorer folks who know only cash that would suffer the most.

David, "gradual phase out" makes no sense at all, it's like a pre-announced "surgical strike". Demonetization is effective because of the surprise element. If you don't understand that basic fact, I think your understanding of demonetization is completely off the mark.

Do you think this fellow http://www.reuters.com/article/us-china ... SKBN12H0BB would still be sitting on his warehouse of 100 RMB notes if the government gave any hint of demonetization?

And yes it's true that demonetization is not going to affect those who have converted their assets to gold or US$, just as demonetization is not a cure for cancer or a source of unlimited clean energy. It will, however, affect the valuation of land severely so those who have converted ill-gotten wealth to land will be affected (and also those who purchased property in legitimate funds will be affected to a lesser extent, this has been discussed widely in this thread, do read).

[Rishi Verma]

Inox (movie theatre) and Big Bazaar will allow withdrawals of upto Rs 2000. If more come into play then rush at ATMs in cities can be reduced.

[Sachin]

I was not saying demonetization can be challenged. I am saying, withdrawal limits on legal tender will likely be challenged, if the limits are sought to be sustained.

Then how come even today banks can set a minimum balance to be retained in the accounts?? So I guess there is some provision out there to decide on the minimum balance. And even before Nov 8th there were restrictions on how much a person could with draw from ATMs, or transfer through NEFT & IMPS. But off course the limits are above what we see today.

[chetak]

I know that you are standing up for somebody's 'rights' since the line that "I will disagree with you but will defend your right to free speech" is nice warm and fuzzy feeling of global citizen. <inane nonsense deleted>

Disha, just throwing together some random words doesn't make an argument. Please reply to David's point if you can. If he is offensive, report him. But don't start insinuating things which you can't back up, especially with a discussion that doesn't involve you.

2) Again, not very well addressed is the question of why to conduct demonetization this way? Why not a gradual phase-out? I've heard that it is to catch the corrupt black money hoarders, but it seems to me like the big fish is being let go since most of their assets is probably not in INR paper notes, while it's the petty merchants with minor tax evasion as well as the poorer folks who know only cash that would suffer the most.

David, "gradual phase out" makes no sense at all, it's like a pre-announced "surgical strike". Demonetization is effective because of the surprise element. If you don't understand that basic fact, I think your understanding of demonetization is completely off the mark.

Do you think this fellow http://www.reuters.com/article/us-china ... SKBN12H0BB would still be sitting on his warehouse of 100 RMB notes if the government gave any hint of demonetization?

And yes it's true that demonetization is not going to affect those who have converted their assets to gold or US$, just as demonetization is not a cure for cancer or a source of unlimited clean energy. It will, however, affect the valuation of land severely so those who have converted ill-gotten wealth to land will be affected (and also those who purchased property in legitimate funds will be affected to a lesser extent, this has been discussed widely in this thread, do read).

per Modi, demonetization is just the first step.

Why then, this constant wailing about cash black money?? Agreed that it's only a small part of the total but it's still a very significant part.

Many thousands of crores of high denomination notes will simply be left out of the system because there is no way to exchange it and will turn into trash for the holder and an unexpected gift for the govt.

Wait for the other kala dhan measures to kick in first, no point in needless speculation when no one can forecast the future.

The total float of the old 500 and 1000 Rs notes need not and will not be fully replaced as there were far too many of these in the market, very much more than was needed. Unrestrained printing of these high denomination notes by the congis simply encouraged hoarding.

Individuals will start to commit suicide when Modi goes after benami RE and gold. It's these very folks who cannot exchange their hoards of BM cash because it will tip off the govt to their identities.

http://www.thehindu.com/news/national/N ... epage=true

Prime Minister promises BJP MPs a “new nation in the new year”.

Prime Minister Narendra Modi on Tuesday told BJP MPs that his move to demonetise currency of Rs 500 and Rs 1000 denominations, announced on November 8, was just “the beginning and not the end” of a “long, deep and sustained” battle against black money and corruption.

“In the new year, there will be a new nation,” Mr. Modi declared in an emotional speech that lasted 10 minutes, at the closed door meeting.

He was addressing the BJP’s parliamentary party even as Parliament adjourned for a second day after the Opposition’s demand that the Prime Minister make a statement in the House on demonetisation was rejected.

Unanimous praise

The BJP MPs’ meet also saw a significant speech by Union Finance Minister Arun Jaitley on demonetisation, or what he termed “remonetisation” of certain currency, as well as a unanimous resolution by the parliamentary party (proposed by Home Minister Rajnath Singh) endorsing the move as “historic, revolutionary and pro-poor.”

Prime Minister Modi, sources said, paused at least twice to collect himself emotionally, according to those present. He went on to declare that he had not entered public life for himself, or for his relatives, but for the poor and their welfare. “Main na apne liye aaya hoon, na apnon ke liye; main garibon ke liye aaya hoon aur unka kalyan karke rahoonga,” he said.

“In the last 70 years (since independence) there has been an accumulation of corruption and black money. I’m here to change that systemic accumulation and changing systems has its difficulties. But the support of the people has been beyond my expectations and the whole nation is with me,” he is reported to have told the MPs.

He added that had not “hidden” his intentions to fight black money and corruption. He said that his every move had been a declaration of his intentions.

From his first speech at the BJP’s parliamentary party forum in May 2014 he had articulated his intentions to do something that would set in motion systemic changes to combat black money, he is reported to have said. “I had spoken in September about cashless economy, at that time few paid attention,” he said according to those present.

Without naming the opposition parties he said that it was their job to criticise but that BJP MPs must go among the people and counter the “propaganda” and “take forward the fight against black money, corruption and terror funding.”

Later, speaking at a public function where he released a compilation of the works of late Jan Sangh leader Kidarnath Sahni, he was sharper in his attack on the opposition. “Earlier, there used to be a moral pressure for ensuring good behaviour, now acts of corruption are done with impunity. There are those who, today, speak publicly in favour of allowing systems of corruption and black money to continue. Our future generations will not forgive us if we allow this decline in values,” he said. “There are those who can be feeble in the fight against corruption, who may not have the strength to do it, but that is different from the sheer impunity of marching carrying the banner of corruption,” he added.

The resolution passed by BJP MPs who also accorded Prime Minister Modi a standing ovation at the meeting was scathing in its reference to opposition parties, while hailing the government’s decision as “pro-poor and historic”.

“The BJP condemns the efforts by some political parties who are desperate to provoke violence and chaos and having been rattled, by the wide spread support of the people for the government’s initiative, and bent upon disrupting the proceedings of Parliament on one pretext or the other,” stated the resolution. “Political parties have to choose whether they would stand by the government and the people or protect the interests of black money hoarders,” the resolution further stated.

The debate on demonetisation is yet to conclude in the Rajya Sabha and in fact take place in the Lok Sabha.

Opposition is in favour of graft

Prime Minister Narendra Modi on Tuesday sharply attacked the opposition for criticism of the demonetisation exercise. Speaking at a public function where he released a compilation of the works of late Jan Sangh leader Kidarnath Sahni, Mr Modi said, “Earlier, there used to be a moral pressure for ensuring good behaviour; now acts of corruption are done with impunity. There are those who today speak publicly in favour of allowing systems of corruption and black money to continue. Our future generations will not forgive us if we allow this decline in values,” he said.

“There are those who can be feeble in the fight against corruption, who may not have the strength to do it, but that is different from the sheer impunity of marching carrying the banner of corruption,” Mr Modi added.

Earlier addressing party MPs at a closed door meeting, Mr Modi said his every move had been a declaration of his intent to fight corruption. From his first speech at the BJP’s parliamentary party forum in May 2014, he had articulated his intentions to do something that would set in motion systemic changes to combat black money, he is reported to have said. Without naming the opposition parties, he said that it was their job to criticise but that BJP MPs must go among the people and counter the “propaganda” and “take forward the fight against black money, corruption and terror funding.”

[DavidD]

David, "gradual phase out" makes no sense at all, it's like a pre-announced "surgical strike". Demonetization is effective because of the surprise element. If you don't understand that basic fact, I think your understanding of demonetization is completely off the mark.

Do you think this fellow http://www.reuters.com/article/us-china ... SKBN12H0BB would still be sitting on his warehouse of 100 RMB notes if the government gave any hint of demonetization?

And yes it's true that demonetization is not going to affect those who have converted their assets to gold or US$, just as demonetization is not a cure for cancer or a source of unlimited clean energy. It will, however, affect the valuation of land severely so those who have converted ill-gotten wealth to land will be affected (and also those who purchased property in legitimate funds will be affected to a lesser extent, this has been discussed widely in this thread, do read).

What's the primary goal of demonetization? Is it to punish/tax the black money holders? Or is it to change the way business is done in India to a better regulated and more transparent manner? A sudden withdrawal of circulating currency only affects the former, which has negligible effect on the big fish in the ocean of corruption but can be devastating to the petty merchants committing petty tax evasions and contributing otherwise to the real economy. Sure, you might be able to catch the odd, really stupid, big fish like that one Chinese guy, but most will not be keeping their ill gotten gains in the local currency.

Both methods I think can achieve the greater goal of demonetization, which is the latter goal I stated above. In the end, I think things will work out for the better if Modi follows it up with the proper reforms, I just think the execution of it causes some unnecessary problems.

[RajeshG]

http://m.ndtv.com/india-news/unaccounte ... in-1630421

Amendments look very reasonable and practical. Altho details will need to be looked at.

GoI should aim to advertise and assure people that no harassments would follow people who opt for this. If done properly this could be a win win for everybody.

A lot would depend on the tone of the msg. An adversarial tone wont succeed but a pragmatic tone will be good

[Suraj]

What's the primary goal of demonetization? Is it to punish/tax the black money holders? Or is it to change the way business is done in India to a better regulated and more transparent manner? A sudden withdrawal of circulating currency only affects the former, which has negligible effect on the big fish in the ocean of corruption but can be devastating to the petty merchants committing petty tax evasions and contributing otherwise to the real economy.

Wrong. It's the big fish who are most affected by the sudden and immediate move. They hold the most illiquid assets. As has been repeatedly argued, the big fish hold most of their wealth not in piles of cash but in property and other assets acquired using black money, none of which can be transacted in a liquid manner, for the simply reason that there's no cash underlining a black market anymore. Not property, not forex, not gold. Everything now needs a paper trail and they have none to offer. Petty merchants on the other hand, deal in cash. They simply declare the cash, pay a penalty and are free and clear. Significant illiquid assets on the other hand are extremely hard to transact when the liquidity is yanked. A guy holding petty cash earnings risks nothing by way of fall in value of assets held; only the tax+penalty is due from him.

Both methods I think can achieve the greater goal of demonetization, which is the latter goal I stated above. In the end, I think things will work out for the better if Modi follows it up with the proper reforms, I just think the execution of it causes some unnecessary problems

You're wrong. It couldn't have been executed effectively in any other manner but by surprise. The efficiency of the process is borne out by the rate at which deposits are being made. If it were 'chaotic' and 'mismanaged', they'd be a long way behind schedule, not well ahead of it. You don't just efficiency by random pictures of lines. Efficiency is judged by rate of accumulation or exchange of the 500/1000s that previously circulated.

[hanumadu]

What are the scenarios post Dec 30. Lets say people have deposited their cash and they want to use it post Dec 30 or even before it, say, to make a big purchase for a plot or house or stock. If there is no sufficient cash available, people are willing to deal with check or other means. The banks cannot deny those transactions as long as there is money in the account. People who have deposited black money will try to take in out as soon as possible and in any means possible. Once the money is gone, it has to traced by determining for what it was used, whether to buy property, gold, forex, stocks etc. This will add to the difficulty of getting the govts legitimate share of the money.

1. Will the govt identify and flag accounts/people suspected of black money by Dec 30 so that it could not be used for further transactions?
2. How lenient or how strict it will be?
3. In flagging Jan Dhan accounts and other accounts that are used to launder black money, can technology be used to identify genuine accounts and leave them alone? How much collateral will be there?
4. How long does it take for someone to prove their money is legitimate? Will it be a quick process? What steps will be taken to prevent corruption or harassment in this process?

The next step in the process - identifying benami properties - can be used to track black money deposited due to demonetization that was later used in the purchase of such property.
5. Will Modi allow such transactions to take place and go after those properties or prefers to stop such purchases by flagging such accounts before Dec 30?

The warning against benami properties should be seen in this light, so as to prevent attempts at laundering the deposited money. People will do well to heed Modi's word, because the losses in case their benami properties are discovered will be more than what they can retain by simply paying the tax + fine on their black money.

At this point of time my real concern is BM holders using JDY or organization/party people to launder it because of the potential for damage to genuine people in tracing it.

And the big question that can be used as a measure of success and bragging right by the govt - How much of the money wont even be turned in? A good amount can be used to convince people to bear with the inconvenience caused by further measures.

[Gus]

I just don't get the argument that "oh black money is not held in wads of cash".."oh this will do nothing much about BM".."oh the big fish will escape"

Only a portion of BM is exchanged into gold and land. The rest is still in cash. besides

0. Whatever BM is held in cash is now worthless - except the small percentage salvaged by JDY account deposits and mules doing cash transfer. Whatever was deposited is not in the clear yet. The govt holds all the cards there.
1. That land bought by BM is now dropping in value. If govt goes for re-registration and digitization - that becomes a liability to be explained, not an asset
2. No more land buying with black money - due to less circulation of new money
3. No more gold buying without trail - this is done already
4. That gold will also drop in value - as this settles down.

All these target the big fish the most.

Just the past election in TN - both parties spent upwards of 10,000 crores each. Cash. Do you really think this was not held in wads of cash?

[parashara]

So yesterday I talked to a friend who is apparently knowledgeable about banking laws and practices.

He says that the claim - that RBI will be able to write off about 3L Cr of BM that doesn't surface by March 31 and transfer that as dividend to the govt - is plain rubbish.

His argument is that any cash printed and in circulation can be withdrawn as legal tender but cannot be written off. Ever.
Cash in circulation shows up in the RBI's balance sheet as a liability. And while assets can be written off - liabilities can never be written off.

Any finance gurus here care to comment on this?

Obviously everyone's hope is that this is indeed possible. Imagine what that would do to the govt's balance sheet.

[Rishi Verma]

Request to mods:
Much gyan has been generated and spread on this thread after the demonetisation announcement. Somebody had made a list of direct and indirect benefits and there may be some potential minor fallouts. Is it possible to compile and keep the list on the first page? If so then I can go through the pages and create one. Mods can of course refine/edit it.

[Suraj]

So yesterday I talked to a friend who is apparently knowledgeable about banking laws and practices.

He says that the claim - that RBI will be able to write off about 3L Cr of BM that doesn't surface by March 31 and transfer that as dividend to the govt - is plain rubbish.

His argument is that any cash printed and in circulation can be withdrawn as legal tender but cannot be written off. Ever.
Cash in circulation shows up in the RBI's balance sheet as a liability. And while assets can be written off - liabilities can never be written off.

Any finance gurus here care to comment on this?

Sure liabilities can't be written off. So what liability exists on cash that was never deposited again, exactly ?

[Sachin]

His argument is that any cash printed and in circulation can be withdrawn as legal tender but cannot be written off. Ever.
Cash in circulation shows up in the RBI's balance sheet as a liability. And while assets can be written off - liabilities can never be written off.

I am lay man, and not an expert in this at all. But think about this scenario. The government has an official record on how much money it has printed and and in what denominations (Rs. 500 & Rs. 10 etc.). The government when it withdraws the Rs.500 & Rs.1000 would just re-issue the currency worth the "official value". So if say Rs. 10,000 was out there in the market as Rs. 500 & Rs. 1000. The government would still reissue currency worth Rs.10,000 into the market. But the problem is that people who had unaccounted money (i.e for the one which taxes etc. were not paid) will find it tough to get their share of this Rs.10,000. When they try to get the money in new currency they would be questioned. Now if they decide to still keep quiet, the old denomination notes which they had would all become invalid on Dec 31st. They become paupers over night.

[sanjayc]

His argument is that any cash printed and in circulation can be withdrawn as legal tender but cannot be written off. Ever.

Your friend doesn't seem very intelligent. The old notes are not being "written off" but only being exchanged with fresh notes of equal value. (Only the paper form of legal tender is changing, not the liability it carries.) So, who is stopping people from depositing old notes into their banks and withdrawing fresh notes? Some black sheep will not be depositing old notes willfully as they have no explanation for the source. Once the deadline for depositing old notes expires, they are as good as waste paper.

[kmkraoind]

I has a big collection of coins and notes. I have Rs. 500 old notes in 2 different color schemes, and some with different security features. Ditto with Rs. 1000 notes. We have 3 sets of such. So, at least 20-30K worth of notes are not going back to RBI from my family.

[rohiths]

So yesterday I talked to a friend who is apparently knowledgeable about banking laws and practices.

He says that the claim - that RBI will be able to write off about 3L Cr of BM that doesn't surface by March 31 and transfer that as dividend to the govt - is plain rubbish.

His argument is that any cash printed and in circulation can be withdrawn as legal tender but cannot be written off. Ever.
Cash in circulation shows up in the RBI's balance sheet as a liability. And while assets can be written off - liabilities can never be written off.

Any finance gurus here care to comment on this?

Sure liabilities can't be written off. So what liability exists on cash that was never deposited again, exactly ?

The govt can amend the RBI act in the budget and can take away value of all bank notes not deposited by Mar 31 2017. Nobody can stop it as it will be a money bill. Modi would not have gone through the demonetization exercise without the ability to extract the benefit into the public purse.

[parashara]

Sure liabilities can't be written off. So what liability exists on cash that was never deposited again, exactly ?

According to this guy - a genuine currency note with an undertaking from any current/past governors of the RBI is a liability even if it never comes back to the RBI. This, according to him, is primarily because a currency note has no expiry date and is hence legally a contract (to pay) in force forever.

An example to illustrate this is: Assume a guy was in a coma from 1 Jan 2016 to 31 Dec 2017. He wakes up to find that his stash of old notes is no longer legal tender and not acceptable at any bank in the land. He can, however, show up at an RBI office, present his notes and ask to be compensated via deposit, exchange or in gold. The RBI cannot turn around and say that while he was in a coma, the value equivalent of his stash was transferred as dividend to the GoI and as such has evaporated.

This is the rub.

[Lisa]

So yesterday I talked to a friend who is apparently knowledgeable about banking laws and practices.

He says that the claim - that RBI will be able to write off about 3L Cr of BM that doesn't surface by March 31 and transfer that as dividend to the govt - is plain rubbish.

His argument is that any cash printed and in circulation can be withdrawn as legal tender but cannot be written off. Ever.
Cash in circulation shows up in the RBI's balance sheet as a liability. And while assets can be written off - liabilities can never be written off.

Any finance gurus here care to comment on this?

Obviously everyone's hope is that this is indeed possible. Imagine what that would do to the govt's balance sheet.

The liability persists as long as the tender is legal. On the 31-12-2016, its legality expires and thus its attested liability. (related but unrelated, every year Israel issues bonds in the US to finance itself. Millions of dollars worth of these bonds are never redeemed by the buyers on their due dates. In effect they become donations to the state of Israel. By your friends logic none of the value accrued by the lack of these redemptions can ever be used as their liability still exist thus nullifying the intent of the non-redemption.) Your friend might be wrong.

[nandakumar]

So yesterday I talked to a friend who is apparently knowledgeable about banking laws and practices.

He says that the claim - that RBI will be able to write off about 3L Cr of BM that doesn't surface by March 31 and transfer that as dividend to the govt - is plain rubbish.

His argument is that any cash printed and in circulation can be withdrawn as legal tender but cannot be written off. Ever.
Cash in circulation shows up in the RBI's balance sheet as a liability. And while assets can be written off - liabilities can never be written off.

Any finance gurus here care to comment on this?

Obviously everyone's hope is that this is indeed possible. Imagine what that would do to the govt's balance sheet.

The function of accounting is to record all transactions that have a monetary implication. If on March 31st March, a certain sum of currency is no longer in circulation (it is so, because those wads of currency can no longer be used to extinguish your debts) surely there is a monetary implication and the craft of 'accounting' must provide a framework for recording it? Look at it from another angle. When the RBI says it promises to pay the bearer the sum of rupees mentioned on a currency note and post March 31st, the RBI is no longer bound by that promise and the Central Government no longer guarantees its payment surely there is an event having a monetary implication that must be recorded in the books of RBI?
Once we concede this, the next question is how must 'accounting' record this? Accounting theory says all transactions must be recorded in terms of the 'dual aspects' that these transactions possess. That is known as the 'Double Entry System of Book-Keeping'. Think of a company raising cash from its shareholders. There is cash flowing into its bank account. But equally, the company owes exactly the same amount to its shareholder than it did earlier. Intuitively, one can see that these dual aspects are opposite in nature- in the instant case an incremental addition to the value of assets (cash) is matched by an addition to the value of what the company now owes to its shareholders. If the cash is used to buy plant and machinery there is a transaction whose monetary implication consists of an increase in the value of machinery that the company owns that is matched by a reduction in another type of asset (cash). To generalise, a reduction in an asset must be matched by a reduction in an obligation or augmentation of equivalent value in some other asset. Similarly an increase in liability on one count must be matched by an increase in the value of an asset or a reduction in the obligation on some other account. It is useful to understand this rule with an added proposition that when company no longer owes a certain sum of money (liability) to an outsider for whatever reason, the resultant gain must be reflected as a benefit to the owner shareholder. This is in accord with the notion that a reduction in liability of one kind must be matched by augmentation of liability of another kind as double entry book keeping demands that it be so. Since a company is recognised as an entity distinct from its shareholders for accounting purposes, any reduction in obligations to third parties has the effect of augmenting the monies due to shareholder owners. The RBI and the Government stand in the position of a company and its shareholders respectively. If some portion of currency obligations od the RBI do not surface post March 31st, there is a reduction in RBI's obligations to the general public which cannot but be seen as an extra amount the RBI now owes the shareholder-government. Sure it is a windfall. But there is no doubting its character as surplus accruing to the government. The actual mechanics such as crediting the profit and loss account of the RBI and transferring the resultant excess surplus as dividends etc. are matters of detail that accountants and auditors will no doubt know how to handle.

[manjgu]

nandakumar..thanks for the lucid explanation. i finally understood Double entry book keeping.

[pankajs]

http://www.thehindubusinessline.com/eco ... 382711.ece
Demonetisation will lead to long-term gains: Moody’s

“The move will weigh on GDP growth for a few quarters, dampening government revenues,” it said, adding that in the medium term, higher income declarations will boost tax revenues, and the government could receive a one-off transfer of the central bank’s gain.[While Moodys is not an authority on Indian law this is the view of most informed commentators. There are many ways to skin a cat. E.g. Whatever is not claimed in exchange can be transferred to the GOI for its use till a claimant comes forward. This is assuming that the notes never get extinguished. I don't buy that given that GOI has created a window for exchange. Barring a Rip-van-Winkles everyone will have had a 6 months exchange period till March 2017.]

This, in turn, would enable higher capital expenditure by the government and fiscal consolidation, which would be credit-positive for the sovereign, it said in a report.

<snip>

But in the medium to longer term, it would be more beneficial. “Greater formalisation of economic and financial activity would ultimately help broaden the tax base and expand usage of the financial system, which would be credit-positive,” it said.

It also noted that the move towards non-cash transactions and digital payments would enhance the ease of doing business. Similarly, S&P said that while demonetisation is “a long-term positive”, it will have a transitory impact on growth in the short term and could hurt asset quality. “Bank deposits would benefit due to demonetisation, though not all inflows will remain in the banking system on a permanent basis,” it said in a report.

S&P further said that though India’s low-income economy constrains its economic resilience, improvements in policy-making continue to boost the medium-term prospects for India’s economic and fiscal performance.

[chetak]

I has a big collection of coins and notes. I have Rs. 500 old notes in 2 different color schemes, and some with different security features. Ditto with Rs. 1000 notes. We have 3 sets of such. So, at least 20-30K worth of notes are not going back to RBI from my family.

do they all have serial numbers?? If they do, it may be worth a try.

Check first with some shop which has a currency checking contraption, usually some UV light thingee.

[pankajs]

The best is to approach the nearest RBI office for exchange. They have the expertise as well as the mandate to exchange currencies.

[chetak]

The best is to approach the nearest RBI office for exchange. They have the expertise as well as the mandate to exchange currencies.

you will immediately forfeit any fake note(s) which the bank or RBI is empowered to confiscate and keep without any explanation. I have personally seen this happen to a fellow customer in my bank some months ago.

Additionally, they may also call the cops.

best to first check it out with some sympathetic entity.

[prashanth]

No time to add fresh security features in new notes, says official-The Hindu

An official explained that changing the security features is a huge exercise and takes anywhere between five to six years. The last time such an exercise was undertaken was in 2005 when currency notes of all denominations with new security features were introduced. Water marks, security threads, fibre, latent image etc. comprise security features and these require several representations, evaluations and finally a Cabinet nod.

Is this true? How can FICN be tackled if no new security features are introduced?

[RajeshG]

http://m.economictimes.com/news/economy ... 529482.cms

On how bm shows up in balance sheets

[yensoy]

What's the primary goal of demonetization? Is it to punish/tax the black money holders? Or is it to change the way business is done in India to a better regulated and more transparent manner? A sudden withdrawal of circulating currency only affects the former, which has negligible effect on the big fish in the ocean of corruption but can be devastating to the petty merchants committing petty tax evasions and contributing otherwise to the real economy.

Wrong. <trimmed>

Both methods I think can achieve the greater goal of demonetization, which is the latter goal I stated above. In the end, I think things will work out for the better if Modi follows it up with the proper reforms, I just think the execution of it causes some unnecessary problems

You're wrong. <trimmed>

David, please do your zuo ye. We are into the 76th page of this thread. Start reading from page 1. Watch the fantastic interview with Shri Gurumurthy https://www.youtube.com/watch?v=0eaCr21PB6I. Neither pre-conceived notions nor lack of effort will be dealt with patiently on this forum. Otherwise you are just wasting our time. As they say "RTFM".

[yensoy]

Sure liabilities can't be written off. So what liability exists on cash that was never deposited again, exactly ?

According to this guy - a genuine currency note with an undertaking from any current/past governors of the RBI is a liability even if it never comes back to the RBI. This, according to him, is primarily because a currency note has no expiry date and is hence legally a contract (to pay) in force forever.

Ah but the currency in this case does expire by mid 2017, with no further recourse. All bets are off during demonetization. Otherwise I have like a trillion deutsch mark sitting somewhere in the attic.

[yensoy]

No time to add fresh security features in new notes, says official-The Hindu
Is this true? How can FICN be tackled if no new security features are introduced?

New notes will be introduced with requisite security features and old notes will be gradually pulled out of circulation; at some point advisories will go around saying "avoid using old notes, and please take them to the bank to get them replaced". At some point people will assume that the only old notes still in circulation are fake and they will no longer be accepted publicly. Pakis will see no point printing old notes because they won't be able to pump them into the system without raising suspicion.

His argument is that any cash printed and in circulation can be withdrawn as legal tender but cannot be written off. Ever.

Your friend doesn't seem very intelligent.

And Sanjayc please don't jump on the poster or call his friend unintelligent when it is evident you don't understand what he is saying. The reference is to the notes which are not deposited or exchanged, and how they should be treated in RBI's books.

[darshhan]

2) Again, not very well addressed is the question of why to conduct demonetization this way? Why not a gradual phase-out? I've heard that it is to catch the corrupt black money hoarders, but it seems to me like the big fish is being let go since most of their assets is probably not in INR paper notes, while it's the petty merchants with minor tax evasion as well as the poorer folks who know only cash that would suffer the most.

It is one thing to quickly convert black money into real estate or gold, but this simply removes the transaction power that banknotes have

People who have property and gold may have become wealthy from black money, but without cash they have little power

Black money in cash provided power to move things. You pay cash to ease one more property deal in black; you pay cash to get your son a medical college seat when his academic record would not get him anywhere close; you use cash to buy voters so that you then have access to more taxpayer cash; you use cash to bribe and treat officials who will allow you to get off tax free or smuggle illegal stuff. So there is a huge cash economy in black which is simply being ignored by the hollow claim that black money gets quickly converted to something other than notes.

Right on spot Shiv ji. Our friend DavidD being a chinese has very less if any knowledge of the workings of a democracy and politicians. After all which politician is going to sell his land or gold in times of elections? Is it even practical? Cash is power. Cash is king. Rest everything is sideshow.

[habal]

China has exported it's way out of the black money problem. Why do you think Chinese businessmen export so many little trinkets, bells & whistles. Exporting their black money allows them far more leverage than keeping black money in totalitarian China. India will now see a similar 'export boom'.

[yensoy]

China has exported it's way out of the black money problem. Why do you think Chinese businessmen export so many little trinkets, bells & whistles. Exporting their black money allows them far more leverage than keeping black money in totalitarian China. India will now see a similar 'export boom'.

Habal sir, if black money will make us an export power house, then I'm all for black money, bring it on!!

Unfortunately holders of black money are not setting up little factories to make buttons and ribbons when they can get fatter returns speculating on land. If they had to start a business, they would operate water tankers (a true mafia), or a tourist taxi service, or land a petrol/LPG agency. Why take risks with manufacturing when the returns are just not there? We are not willing to provide uninterrupted power, or security, or favourable labour laws, or the 15% kickback provided to boost the bottom line of exporters, so black money is not being used to boost exports, sorry.

[SaiK]

The best is to approach the nearest RBI office for exchange. They have the expertise as well as the mandate to exchange currencies.

you will immediately forfeit any fake note(s) which the bank or RBI is empowered to confiscate and keep without any explanation. I have personally seen this happen to a fellow customer in my bank some months ago.

Additionally, they may also call the cops.

best to first check it out with some sympathetic entity.

A honest citizen might be fooled and calling cops etc is all fine. Few fake notes being with you doesn't mean you are culpable of crime that you have no idea happened. This would become banana country if they are going to call cops and put everyone in jail for having fake currency.

It depends is the answer. How much fakes you have? where did you get it from? etc.

bottom: a police system is to prevent or handle criminals. Not heckle citizens who are getting fooled and been victimized. We have to make clear distinction and that is where our justice system and courts needs to change as well, even including electing judges rather selecting them. I am not saying other countries are any better. But, we can be better and that is all we have to care about. If we can learn from other's mistakes, it would be wise.

---

Largely speaking, we have to cut off all big ticket transactions being on cash. No other option, then it has to be done via a banking system, fully documenting the transaction without any fraud. So, it is better to ban large volume cash transactions. 10K per day per item. Suspect any repeat transaction more than thrice and deny.

[nandakumar]

nandakumar..thanks for the lucid explanation. i finally understood Double entry book keeping.

I am happy you found it useful. Believe me, I am genuinely happy. I have been a teacher for a part of my professional life. As a teacher nothing gave me greater happiness than seeing that I was able to illuminate a mind with what I had to offer.

[Suraj]

Sure liabilities can't be written off. So what liability exists on cash that was never deposited again, exactly ?

According to this guy - a genuine currency note with an undertaking from any current/past governors of the RBI is a liability even if it never comes back to the RBI. This, according to him, is primarily because a currency note has no expiry date and is hence legally a contract (to pay) in force forever

That's almost like a habeas corpus argument. GoI's simply asking to 'show me the money'. Cash can be destroyed any number of ways, and at that moment, the RBI obtains the authority to expand its balance sheet. It will be attached to a liability if a deposit holder has presented damaged notes, or his notes are destroyed, but unreported cash is as good as liability free.