Currency Demonetisation and Future course of Indian Economy

Marten · Post by **Marten** » 07 Dec 2016 10:45

If they did manage to push in even a tenth of that in lower denominations, they would be closer to winning the perception battle. Right now, there is some hurt going around and it will be a factor during the polls. Not sure what else the PM can do to make this situation better. Some popular act like a giveaway will become a necessity soon.

Suraj · Post by **Suraj** » 07 Dec 2016 11:02

Yeah, and who's to stop black money hoarders from hoarding most of that new cash ? It's already happening after all.

Here's the crux of the whole thing - GoI on one hand has to limit the liquidity to ensure hoarders don't simply grab most of the newly printed cash, and on the other hand, generate enough of it so the mango man isn't inconvenienced for very long.

Gus · Post by **Gus** » 07 Dec 2016 11:04

Yes Suraj and I think nobody knows what exactly that figure and the GoI is doing adjustments everyday to find that balance.

Suraj · Post by **Suraj** » 07 Dec 2016 11:09

Yep. It's a balancing act between suffocating the black money holdouts until December 30 AND keeping the mango man populace happy enough until then. It's a difficult balance to strike, since the mango man is inconvenienced now, but if the black money people are suitably 'recapitalized' then the whole effort gets diluted in the long term leaving the population feeling betrayed that the trouble they undertook wasn't useful, something GoI wants to prevent as far as possible.

Gus · Post by **Gus** » 07 Dec 2016 11:32

yes, better to err on the side of 'liquidity crunch' and pacify people later with sops on the budget (slab increase and tax rate reductions would be a GREAT start, as I've started making rupee income just in time for that

)

than letting BM laundered and nothing to show for, for all the pain endured by people, and thus losing credibility and political capital entirely and being unable to take any big measures after this.

Murugan · Post by **Murugan** » 07 Dec 2016 11:33

Breaking - Nearly 13 Lakh Crore back in system

http://www.moneycontrol.com/news/cnbc-t ... ef_article

rohiths · Post by **rohiths** » 07 Dec 2016 11:41

Murugan wrote:Breaking - Nearly 13 Lakh Crore back in system

http://www.moneycontrol.com/news/cnbc-t ... ef_article

Fake article quoting sources. There is no RBI data or banks on the same.
The amount of misinformation is staggering

Murugan · Post by **Murugan** » 07 Dec 2016 11:49

India's economy to rebound next year as cash crunch impact ebbs, Goldman and Deutsche Bank say

http://www.cnbc.com/2016/12/05/india-de ... bound.html

Suraj · Post by **Suraj** » 07 Dec 2016 11:52

Anything official from RBI will be listed here. If it's not there, it's not official.
RBI Press Releases
The official release looks like this (the last one from Nov 28):
Withdrawal of Legal Tender status of banknotes of ₹ 500 and ₹ 1000: Activity at Banks during November 10-27, 2016

Murugan · Post by **Murugan** » 07 Dec 2016 11:54

The development comes close on the heels of Reserve Bank of India earlier in the week saying that deposits to the tune of Rs 8.4 lakh crore were made till 27 November, the report said.

It is 10th Day from 27th November. 4.5 Lakh crore in 10 days makes it 45,000 crore per day average. 13 Lakh crore does not look to be an abnormal figure though not quoted by RBI so far.

Sachin · Post by **Sachin** » 07 Dec 2016 11:58

Mean while, Bengaluru sees yet another case of police men becoming thieves. This time it is a Sub Inspector who has been trapped. Again demonetization was the move, which gave the gang new ideas.
Five cops held for robbery
A sub-inspector and four constables were arrested on Monday for robbing a businessman of Rs 35.5 lakh near Peenya on November 22. They colluded with two welders to threaten and rob Gangadhar, a mobile shop owner from Tumukuru district, police said. All those involved in the crime — Sub-inspector Mallikarjun, constables Manjunath, Girish, Chandrashekar and Anantharaju, police informant Jaffer and his friend Bhaskar — are now in custody, a senior police officer told DH.

Philip · Post by **Philip** » 07 Dec 2016 12:27

As Dec 30th approaches,we'll probably see a huge rush of old moolah that couldn't be slipped into dormant/new/ empty/benami bank accts. using the 50-50 amnesty scheme.Some estimate that about 16K Lakh crores will eventually find its way back.

However,if the babus and politicos resort to the usual practice of demanding bribes,then the entire exercise is pointless and fruitless. WHat is sorely needed is a vastly reduced bureaucracy,simplified rules for business,etc.,and strict timeframes for govt. approvals.Heightened vigilance and anti-corruption agencies and a reformed tax policy.NO personal income tax.Make everyone file a return for the sake of collecting data for the planning commission/financial policies,charge a small processing fee and have only GST and small BTT auto collections.

yensoy · Post by **yensoy** » 07 Dec 2016 12:29

Murugan wrote:It is 10th Day from 27th November. 4.5 Lakh crore in 10 days makes it 45,000 crore per day average. 13 Lakh crore does not look to be an abnormal figure though not quoted by RBI so far.

That's right, and we can project that by December 30 we will recover 25 lakh crores out of the 15.5 lakh crore notes printed. Thank you statistics

Murugan · Post by **Murugan** » 07 Dec 2016 12:31

25 lakh crores out of the 15.5 lakh crore notes printed

Rahul Gandhi Logic - ek main se do bache bimar

Prasad · Post by **Prasad** » 07 Dec 2016 12:37

Suraj wrote:Anything official from RBI will be listed here. If it's not there, it's not official.
RBI Press Releases
The official release looks like this (the last one from Nov 28):
Withdrawal of Legal Tender status of banknotes of ₹ 500 and ₹ 1000: Activity at Banks during November 10-27, 2016

We haven't seen new numbers since. Wonder why.

Murugan · Post by **Murugan** » 07 Dec 2016 12:42

Expect all demonetised money to come back to system: Revenue Secretary Hasmukh Adhia

http://indianexpress.com/article/busine ... a-4414447/

Rammpal · Post by **Rammpal** » 07 Dec 2016 12:48

http://economictimes.indiatimes.com/new ... 843930.cms

Ohlala !
DeMo Can do some serious damage to some folks !!

Marten · Post by **Marten** » 07 Dec 2016 13:18

Suraj wrote:Yeah, and who's to stop black money hoarders from hoarding most of that new cash ? It's already happening after all.

Here's the crux of the whole thing - GoI on one hand has to limit the liquidity to ensure hoarders don't simply grab most of the newly printed cash, and on the other hand, generate enough of it so the mango man isn't inconvenienced for very long.

Please consider this: How much of Rs 20 and Rs 50 notes can such folks hoard? It is logistically impossible!
If the lower denoms had been in circulation a month before this move had been done, not a single person would have suspected demo, and there would simply be no way for hoarders to mop up everything that enters the market. Where and how will they store so many notes?

Plain and simple fact, and bear in mind this comes from a NaMo supporter, is that the Govt tried to economize on the cost of printing notes (it is still Rs 3 for a note regardless of the denomination!), and that they grossly overestimated their own ability to manage the logistics. A mea culpa from Modi would be better at this point than a Gotcha by others. Of course, this is all conjecture and can be (dis)regarded as such.

Kashi · Post by **Kashi** » 07 Dec 2016 13:33

ShauryaT wrote:It will take some time for change to penetrate. Voluntary participation through incentives is better than forced compliance. A simple rule of thumb is if 90%+ are not going to comply voluntarily then it is the law that has to change not the people.

"Voluntary participation" is not necessarily voluntary. Take HakeemJi's example.

70-100 years and more ago all Indian girls were getting married at age 16 or below.

Do you really think all of it was "voluntary"? Is it not possible that many of them were getting married at early ages because those were the ways of the times and the societal pressures forced parents and girls into marriages that they would have liked to wait for? It was only after the law was drafted that underage marriages came down drastically.

Now you speak of "forced compliance". Does that not apply to many folks in the present farmer-consumer chain which as you said is 100% cash? If this was about "voluntary participation" and "free will", we would have seen a mix of payment set ups- cash, credit, digital etc. But it's 100% cash.why? Because the existing players WILL NOT permit anything else. So if someone wants to be part of the system, they have no choice but to take the cash route, because the existing set up WILL NOT permit digital transactions. Hence, people end up compromising and perpetuating the system. Does this look like voluntary to you?

Let's look at another example? I need to buy groceries and I stroll down to my neighbouring kirana store. I wish to pay by debit/credit card, he/she refuses. I ask for a receipt and almost always they refuse. Now either I can choose to go from shop to shop looking for one that will provide a legitimate receipt or go to one of the big bazars or I can choose to suck it up and continue to buy from the kirana, without receipt.

It's my choice (or "voluntary participation" if you will), but it's a forced one and compromises my free will. Is this not "forced compliance"?

pankajs · Post by **pankajs** » 07 Dec 2016 13:34

This is third hand info so need to be cautious.

I was recently speaking to a fellow and the conversation moved to DeMo. He said that he had a relative at the local RBI at a fairly senior level.

Per this RBI source they knew that the Rs 2000 note was in pipeline for end of December (1st Jan 2017). The *assumption* amongst the bankers in the know, beyond the core group on DeMo, was that given price inflation it was logical to introduce a higher denomination currency and no one in the local RBI office thought much of it or guessed beyond that.

So when the move was announced it came as a complete surprise to all. The reason, per this source, why DeMo had to be moved forward was that the news of the new note was leaked on whatsapp. Fearing all preparation going to waste and also talking with it the surprise the GOI was forced to act ASAP.

Now, if the sources news/assumptions are true, the logistics shortcoming makes sense and also the Modi's asking for time till Dec 31 2016. Of course this is hearsay.

Philip · Post by **Philip** » 07 Dec 2016 13:44

It will be hilarious if more moolah is "recovered" than the estimate of what was in circulation.That could mean one of two things.That some of the fake moolah is so perfect passes RBI/banks scrutiny,as the Germans did with the Pound during WW2. The other reason could be that a lot of the moolah supposed to be destroyed er...wasn't! This is how the Israelis got hold of the Mirage-3 production plans from Switzerland,bribing the man supposed to destroy them. They then built the "Lavi",its clone. Who really knows how much old moolah has actually been destroyed given the number of bankers getting caught for money-laundering activities.

Sachin · Post by **Sachin** » 07 Dec 2016 13:49

Murugan wrote:Expect all demonetised money to come back to system: Revenue Secretary Hasmukh Adhia

Did not see this in any news paper (yet!!); even the ones which has been anti-Modi for the last two years. And so we also don't know if this is what the Revenue Secretary meant. But taking this at face value; if this is indeed true the black money hoarders have called the bluff off GoI. If GoI expected them to burn their wealth, and immolate themselves in the fire, nothing of that sort happened. They all deposited their hoarded wealth, knowing that they can rely on their moles in the IT department to help them out. Now then for the scheme to succeed, the onus would be very heavy on the IT department and other agencies like DRI, FIU etc. (to fish out people who have laundered the money).

Murugan · Post by **Murugan** » 07 Dec 2016 13:57

Just depositing black money doesn't make it white: Hasmukh Adhia

http://economictimes.indiatimes.com/new ... 836113.cms

Revenue Secretary Hasmukh Adhia today said it is wrong to assume that black money that has come into the banking system following the demonetisation will become white and unless tax is paid on such amount it will continue to be remain black.

pankajs · Post by **pankajs** » 07 Dec 2016 13:58

Incentives don't work in *most* cases.

1. For those who hid income did so to escape taxes. So what kind of incentive short ZERO tax will make them change their mind.
1a. Why would a gentle person, separate from hardened criminal/bribe taker, who has not seen any downside *till date* hiding income, suddenly pay even 10% tax? What kind of verbal gymnastics will make him change his position? Only getting butt hurt is going to make them pay attention.
1b. Even with ZERO tax rate many, even amongst gentle folks, will not come forward simply because they will be on the hook for the future once the extent of their income is known.
2. Those who have income from bribe/crime/illegal activities will not come forward with ANY incentive.

There is always a small bunch on the borderline. They hide income when everyone around them is doing the same and there is no price to pay but are not good at handling pressure in a crunch and would prefer to pay tax and be done with it.

The problem is even amongst these folks majority will not move for any incentive without a clear *demonstration* of intent from GOI and that comes only with drastic action.

Net-net, the danda up the $hit creek was the only option even with the gentle folks what talk of the hardened criminals. Those with whom the incentive would work mostly took the IDS way.

Suraj · Post by **Suraj** » 07 Dec 2016 14:05

Marten wrote:Please consider this: How much of Rs 20 and Rs 50 notes can such folks hoard? It is logistically impossible!
If the lower denoms had been in circulation a month before this move had been done, not a single person would have suspected demo, and there would simply be no way for hoarders to mop up everything that enters the market. Where and how will they store so many notes?

If you've been following the news, it's apparent that such logic does not work in real world. Hoarding of cash has been reported widely, even here with people talking of cases where ATMs were being emptied by folks with 6-7 debit cards. When you have a bunch of panicstricken black money owners, who cares if they have to hoard sackfuls of 20s and 50s ? They're literally beggars since Nov 8, and don't get to be choosers. Every extra small denomination note is an extra note of wealth they retain from sarkaar's nazar.

Yes 'logically' large notes are best to hold black money wealth in. But there's very little of the new notes out. What was in open circulation was Rs.100 and lower. What do you think Seth Kaladhan-bhai will do ? He'll take every note he can get his hands on, logistics be damned. The zero sum nature of screwing anyone else be damned. So what if he needs ten 50s notes per 500 ? For those who do not desire to declare, anything they can get hold of is better than Rs.0 they'd have otherwise, even if thats in the form of thousands of 20/50/100 notes.

The mathematics of it all makes even some hoarding of small notes disruptive. A full 86% of all cash in circulation was 500s and 1000s. In other words, Rs.100 and lower only accounted for 14% of value . The entire economy functioned on that little small currency by value, with ~50% of all 500/1000s by value backing the black economy. A few percent reduction in lower denominations, while hopelessly incapable of making up the losses on the 500s/1000s, is still enough to devastate cash liquidity.

IMHO, Modi should do nothing like a mea culpa, specifically because I don't see any mistake he has to own up. He's already stated multiple times that he needs 50 days, and during the last few weeks a whole lot of actions have been taken beyond demonetization: the IT Act has been amended to explicitly define penalties, the Benami Act is next in like to be enforced. Payments are going to be credited to accounts rather than paid in cash. The corrupt APMCs and entire food supply chain black market is gutted. His political opponents are dead in the water. Not a situation where you admit fault unnecessarily. Instead you maximize the number of hard reforms that can be done.

Gus · Post by **Gus** » 07 Dec 2016 14:14

Marten wrote: Please consider this: How much of Rs 20 and Rs 50 notes can such folks hoard? It is logistically impossible!
If the lower denoms had been in circulation a month before this move had been done, not a single person would have suspected demo,

No Marten. It is not that they would suspect DeMo.

But they would suspect something is going on. Then they would ask their contacts and push for more info. And then info would leak on orders placed for new paper and ink, work schedules planned for printing, who goes into what meetings and how often etc. Then they would piece together all this half and quarter info and figure something is going on...and arrive at DeMo.

Marten · Post by **Marten** » 07 Dec 2016 14:24

Very simply put, they could have blamed inflation and attempted to address the introduction of new notes as change in the % of smaller denoms. I disagree that all of the currency can be successfully hoarded. They showed 2k notes worth Rs 5 cr in a Bolero - it would take literally a tempo to carry that in 20/50s. Volumetrically, it appears Seth Kaladhan would open his rear end to much closer inspection! As you rightly said, currently, his ilk have sucked out everything they could. But it would be far far more difficult to hide.

Of course, hindsight is the smartest teacher, but the balance between managing secrecy and ensuring cash flow for small denoms could have been better managed. I am happy to wait 50 days (given that my cash transactions are limited) and I am motivated to support the PM. A larger section of the population might not be in agreement any more. That is my limited point.
PS: In fact, the exercise would have been a great smokescreen under which they could have continued printing the larger denoms!

Suraj · Post by **Suraj** » 07 Dec 2016 14:37

The claim is not that 'all' the smaller notes are being hoarded. The claim is that there were so many larger denominations and so much fewer smaller denominations by value (and number) that a small effort to make up for the demonetization of the large notes is enough to cause significant ripples, at least locally. A 1% delta in small note circulation nationwide may seem to be not much, but that translates to entire neighborhoods in some cities lacking significant cash liquidity in small notes.

We make the mistake of sitting here and thinking logically. Seth Kaladhan has no time for logic. The guys sitting on toilet paper he needs to make up somehow. So what if its 20s and 50s ? Or the need to hire a tempo ? By the very nature of such actions, hoarding results in significant shortages in one part of town while things may be fine elsewhere. That's already been seen here - two people were posting about how in one part of Kolkata ATMs were running dry, yet some kms away it was fine. Same for Bluru and elsewhere.

I'm not disagreeing that the population may grumble. But that's the nature of political calculus. That does not translate to a mistake having been made. Modi stated he understands pain is being caused, but that work has to be done. The goal here has two diametrically opposite parts - choke off access to the new cash AND make as much new cash available as possible. Seth Kaladhan sitting on his piles of toilet paper is NOT going to pass on 20s/50s/100s waiting for 500s and 2000s to come to him. He's in active competition with all the mango men out there, and unlike them he does NOT intend to circulate anything he gets his hands on . If it were only so simple that all the black marketers were patiently waiting for 500s and 2000s like polite and well adjusted crooks, then GoI could just fix this by printing 100s and below. Unfortunately it's not so simple.

RajeshG · Post by **RajeshG** » 07 Dec 2016 14:57

Has anybody read this book ? is it any good ?

http://press.princeton.edu/titles/10798.html

He has written this blog

http://blog.press.princeton.edu/2016/11 ... e-of-cash/

In an interview here

https://www.bloomberg.com/news/articles ... -kill-cash

Rogoff doesn't view totalitarianism as much of a threat. He does worry just a bit that getting rid of cash could make it harder for central banks to control prices because of an "extremely interesting and provocative conjecture" of economist Neil Wallace, who taught at the University of Minnesota and is now at Penn State. The details are complicated, but the concept is that monetary policy only works if bonds are different from cash, and if cash became electronic it would act just like bonds.

In his research, Rogoff decided that central banks can probably avoid the problem Wallace raised, but he admits to uncertainty on this point. He imagines someone telling him, "Oops! The Fed can't control prices anymore. That was a theory. Didn't you think about it?"

Can some gyaani shed some light on the bolded part ?

Murugan · Post by **Murugan** » 07 Dec 2016 15:24

Finally it is official

#DeMonetisation | Rs. 11.55 lakh crore in invalidated currency notes have been returned, says @RBI
#RBIPolicy

Rishi Verma · Post by **Rishi Verma** » 07 Dec 2016 15:29

Field report from UP. Corporation bank ATM remains shuttered since DeMo, Big crowd in the bank right now, some ladies grumbling about marriage season etc, people arguing with bank tellers about withdrawal limits. I talked to the manager about the ATM. she said "we are recalibrating it should be operational by fridin", again expertise is lacking to re-do the ATM, Canara Bank, Indus Bank etc ATMs working fine with no crowds.

If Corporation Bank service before the DeMo was pathetic, now it's even worse.

Murugan · Post by **Murugan** » 07 Dec 2016 15:37

The Reserve Bank of India (RBI) has announced the decision of its fifth bi-monthly monetary policy review of financial year 2016-17.

http://www.moneycontrol.com/news/econom ... 78561.html

shyamal · Post by **shyamal** » 07 Dec 2016 15:47

Introducing the 2000 instead of 500 and 100 was a big blunder.
2000 is being cursed by everyone who cannot afford to club purchases. 2000 just cannot be used. Where one would use 2000 notes one can anyway use credit cards or bank transfer.
People are starting to lose patience(and I am still a supporter and have faced no inconvenience myself).
Any more loss of income will make the process irreversible.
I seriously hope the 500s and the 100s hit the system in large numbers within next 4-5 days. In that case situation will start to normalize by new year. Is that possible?

habal · Post by **habal** » 07 Dec 2016 15:54

I had reports that new ₹1000 were available at RBI to be released. Yet I haven't seen a single ₹1000 yet. Neither is it available at banks.

RBI is releasing more ₹10 & ₹50 new notes now.

RBI is dispatching cash to banks now almost on a daily basis, earlier it was bi-weekly at most.

Even trying all permutations and combinations, I do not see how RBI had prepared for this change beforehand. They just got an executive order and landed running. All problems you see are associated with that phenomenon.

Pratyush · Post by **Pratyush** » 07 Dec 2016 15:55

The problem is lack of willingness to adapt to the new situation.

When night come turn on the lights. But in this case instead of adapting, people are cursing the night.

uddu · Post by **uddu** » 07 Dec 2016 15:55

2000 was introduced for two reasons. First to keep the secrecy that even if it gets leaked the suspicion of demonetization is not created. And that's what happened. Second even with 2000 there is a cash crunch today. So introduction of 2000 was the right step. Yes we can argue on many things like the govt did not print many 20, 50, 100's of the old denomination over a long period of time leading to the demonetization day.

habal · Post by **habal** » 07 Dec 2016 15:55

All that the banks are doing nowadays is to distribute cash.

There is no other banking activity going on.

there are no new deposits, no new advances, and neither is the new cash distributed coming back into banks.

can somebody explain the economic consequences of this phenomenon.

pankajs · Post by **pankajs** » 07 Dec 2016 15:58

This is just a thought experiment.

There is this possibility that GOI is *deliberately* holding off much currency supply till the bank window closes. After having closed the bank route by 31st Dec 2016, GOI will flood the market with new notes.

Expect some erosion of support till then, most of which will be recovered by getting adequate liquidity in Janurary 2017. What ever deficit remains will be made up in the Budget with sops to the middle class, in the form of tax/slab rationalization. Expect sops for the poor and village dwellers in the form of subsidies and infra projects.

uddu · Post by **uddu** » 07 Dec 2016 15:58

shyamal wrote:Introducing the 2000 instead of 500 and 100 was a big blunder.
2000 is being cursed by everyone who cannot afford to club purchases. 2000 just cannot be used. Where one would use 2000 notes one can anyway use credit cards or bank transfer.
People are starting to lose patience(and I am still a supporter and have faced no inconvenience myself).
Any more loss of income will make the process irreversible.
I seriously hope the 500s and the 100s hit the system in large numbers within next 4-5 days. In that case situation will start to normalize by new year. Is that possible?

Not always. I had one 2000 which i exchanged at the milk booth. Second one at the petrol bunk after filling petrol for 300 rupees. So change is available, you have to ask at the place where only 100s are in abundance.

pankajs · Post by **pankajs** » 07 Dec 2016 16:01

On Monday, I went to my local corner shop with a Rs 2000 note. Asked if will get change back. Was asked what was I planning to spend. My reply was about Rs 500. The person agreed to accept my Rs 2000 note.

My shopping came to about Rs 800+ and got back Rs 1100+ in 100's. rolled up my purchase for the next week too. Not an issue.