Currency Demonetisation and Future course of Indian Economy

[ashbhee]

Govt. decides to print plastic currency: http://economictimes.indiatimes.com/new ... 892009.cms

I do not understand why they did not do it after demonetisation and print new plastic 500 and 2000 rupee notes.

[Singha]

Axis bank - me too. its easier to steal fish from a large lake with 100 chowkidars than a pond with 3, owner cannot trace easily which watchman stole it.

CBI needs to take this down.

[Marten]

i think axis bank cash is directly subverted from their currency chests, branches will have auditing etc at their level and it is not safe to pilfer from that level, here axis bank branches are mere accomplice, more like a courier, corruption is happening at GM/director/SVP level. my feeling.

Spot on! The reason that some of the chaps involved in feeding ATMs were caught is because this is probably not branch specific, and they can overall siphon away the notes.

[manjgu]

shiv..if u scroll back a few pages ..this is what i had written as told to me by a CA..about extra money. RBI has printed money and its not accounted for properly. a particular Political party usually dealt in new currency notes for election expenses. this is a very very distinct possibility...

[Yayavar]

Nothing is by itself. My point was that restricting the discussion to BM or short-term contraction of economy is limiting. The banks have got an influx of cash, the GOI will get more in taxes - those two by itself are big impetus for long-term upsurge. BM to white is part of above even if some escape and some devise new methods in future.

The cash influx you are talking about does not belong to the banks, it belongs to the people (well most of it) who can withdraw it anytime. RBI is expecting to get almost all of the floating Rs 14-15 lakhs crores old notes in 500, 1000 denom. back so there is no anticipated windfall of 3 - 4 lakhs crores either which presumably could have been used for monetizing the banks to tide over the massive write off of NPA's worth several lakhs crores.

Yes, the govt. tax base will definitely expand because of digitization and GOI has been working in this direction for last 5 - 6 years, adhar card and all. IMO the govt. could have achieved its goal in a more organized way than the current Shock and Awe approach which according to some estimates can cost the economy up to several lakhs cores in terms of direct and indirect cost and can take number of years to recover even with the expanded tax base.

I know or understand very little of economics. The money certainly belongs to the depositors but it is in banks now. The bank now turns around and loans it out as part of standard business. That should be some boost. Not referencing the windfall that RBI might get or got.

[chola]

Expanding the tax base will help the GOI but it will not improve the enonomy. Now the GOI can use its new found wealth to build infrastructure, etc. that will improve the economy in the future. But no, pushing economic activity from black to white will not improve the economy by itself.

Nothing is by itself. My point was that restricting the discussion to BM or short-term contraction of economy is limiting. The banks have got an influx of cash, the GOI will get more in taxes - those two by itself are big impetus for long-term upsurge. BM to white is part of above even if some escape and some devise new methods in future.

A government getting more cash is no guarantee of better economic performance, in fact it could have the opposite affect.

Look, the economy is the economy whether it is black or white. It employs people whether it is black or white. When we force the black part to white then the white part grows and the black part shrinks. The economy as a whole does not grow as a result of demonetization.

Now the economy can definitely SHRINK as a whole during this process because during the transition from black to white, real money can be lost. We are seeing that with cell phone sales falling by as much as 80-90 PERCENT. And this is the same for many other cash heavy transactions.

Now suppose we get through this swimmingly and everything is turned to white. Things that in the past were not taxed when they were in the black but are now since they are in the white. Why do you expect more economic activity when people because they are taxed have less to spend compared to before when they were not taxed?

Again, government can use its newfound wealth to build infrastructure, etc. to increase economic activity. Again, they could use the same money to hire more babus to strangle the poor bharati businessman even more. There is no guarantee.

What is guaranteed is the crooks will eventually solve this system just as they did in past demonetizations (people forget that this is not our first!)

[svinayak]

http://indianexpress.com/article/opinio ... ion-chaos/

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What makes India stand behind PM Modi, despite the demonetisation chaos?
Despite the severe ramifications of demonetisation, Modi remains popular. He continues to be revered. In fact, his image seems bigger than ever before.


PM Modi Demonetisation, Narendra Modi One Month Demonetisation Modi’s image is built on hyperbole – the “Vikaas Purush” (Development Man) with a “56-inch chest” – commands respect, authority and trust. Source: PTI
We just completed a month of demonetisation. Weeks back, one would have argued that Naren
dra Modi’s move would leave behind deep, irreversible fissures not only in the Indian economy, but also in the public’s perception of the Prime Minister. But even as he and the rest of the country gauge full ramifications of the move, Modi remains popular. In fact, he continues to be revered. His image seems bigger than ever before.
Recently, my domestic help, candidly informed me how demonetisation has plummeted her further into poverty. She was scrounging for money and was taking leave to return to her village, where marriages had been broken, jobs had been lost and people had died. When I asked her whether this will stop her from voting for Modi, she said it would not. “This move of his is a strong step which will really remove black money,” she told me with uncanny confidence. She really believed in Modi. It’s this faith in the man, this strong belief that Modi is here to uplift the underprivileged, that makes her want to vote for the Lotus again. “It’s a bold step,” she told me.


Words like ‘bold’ and ‘radical’, with the occasional ‘surgical strike’, have begun dominating the lexicon of the central government. This is in addition to the overwhelming sense of nationalism, a binding sentiment that’s concurrent with strong antipathy for anyone who opposes demonetisation.
While demonetisation has had repercussions of catastrophic proportions, Modi has not faced intense, angered protests – yet. Of course, the Opposition has been attacking him from Day 1, but Modi seems to be unaffected. Weeks after the note ban announcement, the opposition staged a nationwide protest. But that too failed to make much of an impact. Crowds across the country gathered on the streets, but led by independent parties they lacked a unified voice and spirit. Despite the heightened chaos, Modi remained unscathed.

What is it about Narendra Modi then, that comfortably places him in favour of the public? A man who was once embroiled in the 2002 Gujarat riots and paired with words like “mass-murderer” and “fascist” has been able to rebrand himself as the messiah who would take India forward.
Modi resurrected himself, presenting himself as a charismatic, flamboyant orator with impressive business expertise. During the elections in 2014, he posed himself as a beacon of hope who’d pull a collapsing economy back on its feet. That was a strong narrative he had built throughout the election campaign, punctuated with promises of economic progress and obliteration of corruption. His party provided Gujarat as a case study of the magnified development Modi had made in that state as a chief minister. The people believed, and Modi won.
Two years into office, with the Opposition repeatedly questioning his inability to mitigate unemployment or eradicate corruption, Modi seems to have decided to take on all accusations with one sweeping move that would leave the opposition, and the country, speechless. Despite the chaos of the note ban announced on November 8, Modi asked for a 50-day window, conveying confidently that things would be better after that.
*
En route to work today, I broke into a conversation with my cab driver, Pawan Kumar, on demonetisation. “How are you dealing with this?” I asked. He narrated the difficulties he was facing and how his family was suffering. “If there is no cash in my hands, how will a poor person like me work or buy vegetables? The banks have no money to give, no matter what time of the day you stand in the queue. People cannot access their own money. A man may take a genuine wedding card to show that his daughter is getting married, but there are numerous formalities – eventually he is denied the amount he wants.” Immediately I interjected, “Would you still vote for Modi in the next elections then?” Kumar responded with a vociferous, “Yes”.
While Kumar claimed to be a Congress supporter all his life, of late he’s begun developing trust in Modi. “If people are suffering, why would you vote for him?” I asked. “Madam,” he began, “I feel that in a few days, Rs 2 lakh will be credited to my account. It will be given by the government. When there is so much black money returning to them, where do you think all that money would go? Modi is bound to give it to people like us. He is going to be the next Jayalalithaa. What Amma did for her people, Modi will do for us.”

There is a strong belief that Modi, a “transparent Prime Minister” of impeccable integrity, is going to expunge black money. Interestingly, this belief is predominantly deep-seated in the minds of those who are affected by domonetisation the most – the lower economic class. They are guided by the belief that finally, the elite (the inexplicably rich and therefore, corrupt) will suffer and in return, the lower class will gain.
It’s not just the belief nurtured by the poor that their bank accounts will see an unexpected hike. What also governs their mood is their unwavering faith in their Prime Minister. Kumar’s comparison of Modi to the late J Jayalalithaa, the Chief Minister of Tamil Nadu who despite having countless corruption accusations sustained a god-like authority over her people, shows Modi’s propensity to rise to that stature. Maybe he already has.

It’s that intelligently crafted image projected by Modi that makes him tick. His image built on hyperbole – the “Vikaas Purush” (Development Man) with a “56-inch chest” – commands respect, authority and trust. He projects himself as a stern, no-nonsense leader with a sharp business/development acumen who has a firm hold over his country. But when the going gets tough, that image conveniently melts to reveal a sacrificing, vulnerable side of the Prime Minister. “I know that forces are up against me,” he said days after the note ban announcement. “They may not let me live, they may ruin me, because their loot of 70 years is in trouble, but I am prepared!” That day, he struck the strongest chord he could with the janta – an emotional one. In response, the crowd broke into a resounding applause.
Modi has worked hard on building this glorified image. He works even harder to maintain it. He skillfully maneuvers the narrative that revolves around him and revels in it. He is in control. He chooses his battles and he chooses his interviews. In comparison to his predecessor Manmohan Singh, who gave many interviews while holding office, Modi has given only three public interviews to the Indian media as he crosses the halfway mark in office. Interestingly, throughout the 2014 elections, Modi had attacked Manmohan Singh as a quiet leader, calling him a “Maunmohan Singh”. However, Modi himself has often taken the safe route, by choosing to remain silent or rarely saying much, when certain severe issues have plagued the country. Seeing this as a grave shortcoming, even Manmohan Singh commented: “The public in our country expects the prime minister to take the lead in managing public opinion. But he has never spoken; whether it is on the beef problem or whether it is what happened in Muzaffarnagar or elsewhere, he has kept quiet… He is the prime minister of all the people of India and he must give every Indian the confidence that in him we have a prime minister who cares for our well-being.”
Modi is a masterful orator, not a discussant. He often steers clear of interviews that have national broadcasts – interviews that would pick his brain and put him in a spot. Addressing the masses in Mann ki Baat, speaking to a young crowd gathered to attend a Coldplay concert via live-streaming, however, all ensure a one-way narrative. It’s where he highlights his achievements, draws out a blueprint of what he intends to do, or pleads for support. It’s a one-way streaming of information given to the public, where there is no one to question him or ask him to explain things further. And that helps him to retain control of his narrative. It’s the same narrative that has been pushed and extended to the realm of demonetisation. In India today, the popular perception is that those who are for demonetisation are “honest”, while the naysayers are “anti-national”. The dissenters are potential hoarders of black money, a coterie of people he intends to dismantle.

However, regardless of the debilitating circumstances demonetisation has birthed: the lack of circulation of new notes, the snaking bank lines, the ensuing unemployment, the losses faced by small-sectors and the agricultural sector, families being unable to afford weddings, the deaths – despite all this, the move seems exceptionally popular. And Modi knew its popularity all along. If there was one thing that united people, particularly the lower class, was their disgust for corruption. Their disgust for the wealthy with their fat bank accounts, the corrupt government officials who demanded extra money to get a job done, the sly cops who’d ask for underhanded bribes. Modi had seen it himself when the Aam Aadmi Party (that poses itself as an anti-corruption machinery), won the Delhi elections in 2015. Taking cue from the pulse of the crowd, Modi decided to pluck the chord of national resonance, by plucking out 86 per cent of the Indian currency. It was a risk he took, but it was one bound to win support. That’s his foresight.
Perhaps it is because of this anti-corruption drive that many, despite the inconvenience, are standing behind Modi by standing in lines. It will bring a better future, they think. Kumar said that for a better future, “bali dena zaroori hai” (The sacrifice is important). And that’s another chord Modi has managed to strike – the chord of sacrifice. By ‘sacrificing’, many Indians feel they are a part of this great, ‘historic’ movement. Their sacrifice will be a contribution to India’s advancement, which in their ordinary, uneventful lives, makes them feel important, entitled.

[prahaar]

My only issue with the above article is that most of the criticism is based on anecdotal evidence (broken marriages, job loss, etc.). The article lacks rational presentation of data but rather full of beliefs/larger-than-life-opinions while accusing the masses of doing the same.

[Suraj]

i think axis bank cash is directly subverted from their currency chests, branches will have auditing etc at their level and it is not safe to pilfer from that level, here axis bank branches are mere accomplice, more like a courier, corruption is happening at GM/director/SVP level. my feeling.

Habal: this will be the last rumor mongering post by you. The next one will earn a summary ban. Thanks.

[pankajs]

^ ^
Lot of other issues with the article but theek hai.

http://www.hindustantimes.com/india-new ... HMt7N.html
No links with Indian notes printing: British firm De La Rue refutes AAP claims

UK-based banknotes printer De La Rue on Friday clarified that it is in no way associated with printing of currency in India and does not supply currency paper to Pakistan.

On Thursday, Aam Aadmi Party (AAP) had alleged that the company, which finds mention in the Panama papers leaks, has been given contract for printing new currency.

Refuting reports that it has been contracted for printing of new Rs 500 and Rs 2,000 notes, the London-listed company in a statement said, “De La Rue is not supplying paper for printing of Indian currency and we are not associated with printing of currency in India at present in any form.”

“De La Rue categorically refutes the defamatory and malicious allegations about its business.”

The company also said it does not supply currency paper and is not printing currency for Pakistan, and “would never supply currency paper manufactured for one country to another”.

“De La Rue has received no notice nor are we aware that we are blacklisted in India,” it added.

The company warned that it will take appropriate steps to protect its reputation as the trusted currency printer around the world.

It supplies commercial banknote printers to 140 countries.

Finance minister Arun Jaitley had also rejected AAP’s charges, saying his ministry has no dealing with the British company named in the “false” social media campaign.]

[JohnTitor]

Look, the economy is the economy whether it is black or white. It employs people whether it is black or white. When we force the black part to white then the white part grows and the black part shrinks. The economy as a whole does not grow as a result of demonetization.

Except it will grow because although what you said is true, GDP is calculated on the white part. So officially the economy will grow. At the ground level the change will not be to the same degree

[Suraj]

Look, the economy is the economy whether it is black or white. It employs people whether it is black or white. When we force the black part to white then the white part grows and the black part shrinks. The economy as a whole does not grow as a result of demonetization.

Except it will grow because although what you said is true, GDP is calculated on the white part. So officially the economy will grow. At the ground level the change will not be to the same degree

What's more, the black economy intrinsically not a productive one but a parasitical creature. Remember it does not back any of its economic gains with an expanded currency base. It steals that currency base from the white economy and debases *both*, because both black and white economy are affected by the resulting inflation in money supply. All gains in black money and economic activity are explicit theft from white economy. Every public good and service utilized by the black+white economy is supported by the tax revenue generated only by the white economy.

[chola]

Look, the economy is the economy whether it is black or white. It employs people whether it is black or white. When we force the black part to white then the white part grows and the black part shrinks. The economy as a whole does not grow as a result of demonetization.

Except it will grow because although what you said is true, GDP is calculated on the white part. So officially the economy will grow. At the ground level the change will not be to the same degree

GDP will not grow because it counts production and produce are counted for the economy as a whole irregardless of black or white parts. This is why every major economist and investment firm is predicting an impact on growth.

If the impact of the lack of cash in the white goods and farming sector is large then GDP will be impacted severely. A vast majority of the nation's farmers, small businesses and groceries depend entirely on cash.

Remember how Walmart's entry and expansion was greeted as a threat to the mom and pop stores in every village? We knew instinctively that their inefficiencies (lack of credit, lack of distribution, lack of technology, etc) would leave of people without jobs in the face of Walmart. Demonetization does a far more efficient sweep of every deficiencies they had against Walmart.

Now think of the impact of all those small inefficient stores being clobbered at the same time. And on those who supplied them.

[nachiket]

What's more, the black economy intrinsically not a productive one but a parasitical creature. Remember it does not back any of its economic gains with an expanded currency base. It steals that currency base from the white economy and debases *both*, because both black and white economy are affected by the resulting inflation in money supply. All gains in black money and economic activity are explicit theft from white economy.

Suraj, wouldn't this go the other way too in some cases. For example, a person with BM using it to buy a car or a cell-phone or any other consumer goods from large retailers who accept cash, would contribute to the white economy as well. The large retailer or car dealer is likely to report the income even in cash since it is more difficult for them to avoid the taxman's eye. All sales taxes, excise etc. on the value of the car, phone etc. is also coming out of the BM. Plus, the corporate income tax paid by the retailer.

Moreover, a sudden reduction in demand of FMCG and cars etc. because of a loss of nearly all BM in the system will not lead to a reduction in prices of those items, because there really is no inflation there because of a demand-supply gap. The prices of these goods will not fall below a certain level because the retailers need a minimum profit margin to stay in business. In fact they might have to increase prices to balance their books on the back of significantly reduced demand. Car companies would be less likely to set up manufacturing/assembly plants in India due to the reduced demand.

On the other hand, prices of food items, real estate etc. will see a drop since those sectors already see heavy inflation on the back of BM.

Am I wrong in drawing these conclusions?

[Suraj]

Of course, yes there's a black to white conversion too. FMCGs/high value goods are such an example. However I'll point out that a lot of consumer goods transactions made in cash are black economy transactions. For example, you go to buy a pressure cooker and the shop offers you a cash discount; we all know why the discount is there.

Recalibration of prices is a complex thing, for sure. It depends on the nature of the item, i.e. whether its a very liquid bulk sale item, e.g. vegetables, whether it's a very illiquid high value item like land, or something in between with a large supply chain involved in its creation, e.g. cars. The first two recalibrate much quicker than the third. Prices of basic foods have fallen, as has real estate. Cars ? That depends. This article actually demonstrates the duality you mention:
Demonetisation effect: While offering discounts, car makers also raise prices

Due to the lack of supplier - producer tax linkages via something like GST, the opaque mess of tax laws makes it easy even for high value CG sales to evade taxes. GST is critical in that regard because it generates self compliance - someone's tax liability is your tax credit and vice versa. Therefore the zero sum nature of it ensure compliance from both.

So yeah, I think your post is perfectly valid and adds very useful additional points to the discussion, thanks

[chola]

Except it will grow because although what you said is true, GDP is calculated on the white part. So officially the economy will grow. At the ground level the change will not be to the same degree

What's more, the black economy intrinsically not a productive one but a parasitical creature. Remember it does not back any of its economic gains with an expanded currency base. It steals that currency base from the white economy and debases *both*, because both black and white economy are affected by the resulting inflation in money supply. All gains in black money and economic activity are explicit theft from white economy. Every public good and service utilized by the black+white economy is supported by the tax revenue generated only by the white economy.

No parts of the economy is more "parasitic" than the rest. The economy is the economy. It grows when transactions, whether black or white, are done.

What is parasitic are taxes. But we know that they are necessary for a functioning government and a functioning is necessary for many other things.

Without government and taxes you would have more money to spend. But without a government you would not have a livable society to earn and spend money. The key is a proper balance.

[Suraj]

IMHO, 'taxes are evil' is an entirely different discussion that will sidetrack this thread. It's within the realm of economic philosophy, whereas the lack of tax contribution from the black economy that uses all public goods and service, is a practical real world example of theft from the taxpayer, regardless of what one thinks of the evilness of taxes.

[disha]

Govt. decides to print plastic currency: http://economictimes.indiatimes.com/new ... 892009.cms

I do not understand why they did not do it after demonetisation and print new plastic 500 and 2000 rupee notes.

Possibly that the current new Rs. 500 & Rs. 2000 can be demonetized.

[nachiket]

No parts of the economy is more "parasitic" than the rest. The economy is the economy. It grows when transactions, whether black or white, are done.

What is parasitic are taxes. But we know that they are necessary for a functioning government and a functioning is necessary for many other things.

If no one was paying taxes, then you might say that the black economy was not parasitic. Because there would be no white economy in that case - no "host" for the parasite. But the salaried class in India does pay taxes. As do large corporations and even some honest small business owners. The government uses these taxes to build infrastructure (however poor it might be) and provide services (however flawed). And the people who do not pay any taxes also use them. That is the very definition of a parasite.

Taxes are not parasitic. The government does provide something in return for those taxes. A parasite does not provide any nourishment to its host.

[pankajs]

GDP will not grow because it counts production and produce are counted for the economy as a whole irregardless of black or white parts. This is why every major economist and investment firm is predicting an impact on growth.

The highlighted part may be true for segments (White goods, Cars, etc) and companies (HUL, Britannia, etc) but is not true for the economy as a whole. One reason why exercise folks are rich is because they help under-report production shipping out at the factory gate. These *unaccounted/off the book* production is never part of the official GDP nor does the GOI get to collect taxes and duties. Low balling of production is rampant in the unorganized sector.

These previously *off the book* production will come on to the books and boost GDP numbers. OTOH, the loss of production/trade/sale because of the currency squeeze will pull the GDP numbers down.

The maximum impact of the squeeze will be felt in the current and the next quarter. It will mostly recover, per most estimates, when the GDP *growth* will be lower between 0.5 - 1.0 percentage for FY 2018.

[Suraj]

he he he he he he!

This is getting seriously interesting...
inlined image

Ha, never thought of that angle. It would be interesting to see how much this "extra money" amounts to. A tally of official number of notes printed each year, against the serial numbers of the deposited notes (do the banks record serial numbers of all deposited notes? I hope so) would also reveal the years in which significant numbers of extra or unaccounted-for notes were printed. If there is a significant number of extra notes, I'm willing to bet (though not my left or right testimonial) that it would be during the years of 2004 to 2014.

I don't find this 'extra money' claim to be very credible. For one, it's quite damaging to multiple institutions - the Congress Party, the RBI, the former Governor of RBI Dr.Raghuram Rajan, amongst others whose reputations would be destroyed entirely, in addition to being by far the most outrageous scam ever perpetrated.

[JohnTitor]

GDP will not grow because it counts production and produce are counted for the economy as a whole irregardless of black or white parts. This is why every major economist and investment firm is predicting an impact on growth.

If the impact of the lack of cash in the white goods and farming sector is large then GDP will be impacted severely. A vast majority of the nation's farmers, small businesses and groceries depend entirely on cash.

Remember how Walmart's entry and expansion was greeted as a threat to the mom and pop stores in every village? We knew instinctively that their inefficiencies (lack of credit, lack of distribution, lack of technology, etc) would leave of people without jobs in the face of Walmart. Demonetization does a far more efficient sweep of every deficiencies they had against Walmart.

Now think of the impact of all those small inefficient stores being clobbered at the same time. And on those who supplied them.

That's not correct.

The GoI has to calculate the size of the economy based on tax revenues.

The "dark" side of the economy cannot be officially added to the figures, even if it is true & real. Otherwise it would amount to fudging of the figures - because this has not been accounted for in the tax base. Yes I know, several countries have done/do it, but that does not make it correct. Otherwise, countries where prostitution is illegal could count this as part of the economy. Same goes for narcotics.

Investment banks/Ratings agencies on the other hand, can take into account some of these "dark" parts of the economy & hence may not show an increase in GDP.

In any event, the fact that more people will have to pay taxes going further means there can be more investment toward infrastructure, defence etc.

[chola]

No parts of the economy is more "parasitic" than the rest. The economy is the economy. It grows when transactions, whether black or white, are done.

What is parasitic are taxes. But we know that they are necessary for a functioning government and a functioning is necessary for many other things.

If no one was paying taxes, then you might say that the black economy was not parasitic. Because there would be no white economy in that case - no "host" for the parasite. But the salaried class in India does pay taxes. As do large corporations and even some honest small business owners. The government uses these taxes to build infrastructure (however poor it might be) and provide services (however flawed). And the people who do not pay any taxes also use them. That is the very definition of a parasite.

Taxes are not parasitic. The government does provide something in return for those taxes. A parasite does not provide any nourishment to its host.

A parasite eats parts of its host -- it is a subtraction from the whole for the host.

A black economy grows the economy as a whole. It is an addition not a subtraction.

You are allowing the human concept of "fairness" to affect your usage of the term.

Now, in the villages there are many, many who live with the most basic of government "services", no electricity, local dirt roads and not even the goddam bank branches that were supposed to allow your long suffering rait to exchange his hard-earn 500/1000 rupee notes.

Pretty sure most BRites live in the cities where whatever sevices their salaried taxes pay for are anyways.

Now suppose everything is now white and taxed, services will suddenly flow to the villages? Possibly but I doubt it. The chances are the average pappu will get shafted of services as always except he will have less rupees in his pocket.

Now for the health if the economy as a whole, the now taxed money scrounged from the village better be spent wisely.

Remember, the average Raj and Ram from the villages needed to spend every paise on daily necessities which helped grow the economy. The taxed rupees if it ends up as salary for a babu then that money instead of growing the economy is now used to pay a true parasite designed to hinder business and growth.

[Suraj]

A parasite eats parts of its host -- it is a subtraction from the whole for the host.

A black economy grows the economy as a whole. It is an addition not a subtraction.

It doesn't grow the economy. It forces the white economy to generate more cash and more taxation upon itself to feed the black economy. Every last rupee of black economy activity is stolen from the white economy.

You literally cannot grow the black economy organically because its monetary base is stolen from the white economy (which runs the central bank that issues that monetary base), *and* it uses the public goods and services funded by the taxpayers solely within the black economy. Black economy has no independent central bank building the monetary base to back its growth, unless you count fake notes from TSP or PRC.

The extra cash that needs to be printed to run the white economy because of what was sucked away by the black economy, generates inflationary stimulus that hurts both white and black economy, and forces the black economy to suck even more cash away to itself. In a white economy, growth in capital through interest income is formal growth. In black economy, you can only grow capital base by stealing that much away from the white economy. When you do that, you place additional pressure on the goods and services funded by the tax revenues of the white economy.

Nachiket argued that some of the black money does come back into the white economy. That's true. And yet it provides no justification for the evasion of taxes - it's simply an economic transaction mandated by the fact that the black economy does not produce that item. It does not in any way justify the evasion of taxes on any moral or philosophical basis. It's simply a side-effect of lack of choice and not any sort of altruistic motive.

[chola]

GDP will not grow because it counts production and produce are counted for the economy as a whole irregardless of black or white parts. This is why every major economist and investment firm is predicting an impact on growth.

If the impact of the lack of cash in the white goods and farming sector is large then GDP will be impacted severely. A vast majority of the nation's farmers, small businesses and groceries depend entirely on cash.

Remember how Walmart's entry and expansion was greeted as a threat to the mom and pop stores in every village? We knew instinctively that their inefficiencies (lack of credit, lack of distribution, lack of technology, etc) would leave of people without jobs in the face of Walmart. Demonetization does a far more efficient sweep of every deficiencies they had against Walmart.

Now think of the impact of all those small inefficient stores being clobbered at the same time. And on those who supplied them.

That's not correct.

The GoI has to calculate the size of the economy based on tax revenues.

Not true at all, saar. No one calculates GDP on tax revenues, solely or if at all. In fact, tax and treasury bureaus are invariably separate. The reasoning is pretty apparent. You need to know the health and size of the economy to formulate the correct tax policies.

[JohnTitor]

Not true at all, saar. No one calculates GDP on tax revenues, solely or if at all. In fact, tax and treasury bureaus are invariably separate. The reasoning is pretty apparent. You need to know the health and size of the economy to formulate the correct tax policies.

I was being extremely simplistic when I said taxes are used.

They may not be used directly, but they are indeed used in the form of "income" to calculate the output of goods & services. The reason I said "tax" and not income is because I was referring to the income that was taxed i.e. that which was accounted for. How do you get an accurate figure of untaxed income? If you know exactly how much was earnt, then that would imply you know the source. That would further imply that the government is aware that some specific businessmen but is taking no action to bring them into the accounted economy. So the "black" economy is at best an estimate. GDPs (at least officially) are not estimates, but actuals. At least this is how it is done in the UK:

http://webarchive.nationalarchives.gov. ... g-gdp.html

GDP can be estimated using three different methods:

The production estimate is based on the value of final output in the economy less the inputs used up in the production process. Final outputs include products such as cars, while intermediate goods are inputs used in the production of another good or service, such as car tyres, electricity and advertising. As the value of the final good (the car’s price) reflects both the value of its inputs (the tyres) and the engineering expertise of the manufacturer, adding the final output of the tyre manufacturer to final output of the car manufacturer together would overestimate GDP. To avoid this double counting, the value-added at each stage of production is calculated and aggregated. This is known as gross value added (GVA), which is further adjusted for taxes and subsidies on products to create a GDP estimate.

The expenditure estimate is based on the value of total expenditure on goods and services, excluding intermediate goods and services, produced in the domestic economy during a given period. Whereas the production approach captures the value of production, the expenditure approach reflects the value of spending by corporations, consumers, overseas purchasers and government on goods and services. The primary data for this measure come from expenditure surveys of households and businesses, as well as from data on government expenditure. Specifically, information from the Living Costs and Food Survey, the International Trade in Services survey and the Retail Sales Inquiry are used, along with data on producer and consumer prices.

The income estimate measures the incomes earned by individuals (for example, wages) and corporations (for example, profits) directly from the production of outputs (goods and services). The main data for this approach to measuring GDP come from the Quarterly Operating Profits, Average Weekly Earnings and employer surveys, along with administrative data from HM Revenue & Customs.

[Prasad]

Suraj, per sbi, as on nov 8th cash value in 500s, 1000s was 15.5 lac crores. Not 14.xx.

Also in the removed value of 11.xx lac crore, SBI think there is a sizeable bit of double counting. So actual number will be even lesser.

I'll need references for both. I think the fact that RBI has only tweeted the 11.85 lakh crore and not posted it in a press release suggests they have not finalized the number yet, whereas previous figures like 8.11 lakh crore the week before that was firmly stated.

http://www.firstpost.com/business/demon ... 37058.html

In a report, the Economic Research Department of State Bank of India (SBI) said "around Rs 2.5 lakh crore on a conservative basis will not be coming back into the system". As per the SBI analysis, the market estimate of Rs 14.18 lakh crore currency -- excluding cash with banks -- is based on March 2016 data while in reality it should be based on data available as on 9 November, a day after demonetisation was announced.
SBI noted that going by data as on 9 November, the amount of high currency denomination notes was Rs 15.44 lakh crore (excluding cash in the banks), an increase of Rs 1.26 lakh crore compared to the March figure.

http://timesofindia.indiatimes.com/busi ... 862319.cms

"We are not releasing our numbers because we believe that there is a possibility of double-counting. Post offices and cooperative banks have accounts with us and we also started receiving new notes as deposits," said Arundhati Bhattacharya, chairman, SBI. She said it was not possible to comment on the RBI numbers as she was not aware whether the issues were being addressed. The research wing of SBI, however, said that there is a possibility of double-counting of 10-15% in bank deposits.

[chola]

You literally cannot grow the black economy organically because its monetary base is stolen from the white economy (which runs the central bank that issues that monetary base), *and* it uses the public goods and services funded by the taxpayers solely within the black economy. Black economy has no independent central bank building the monetary base to back its growth, unless you count fake notes from TSP or PRC.

Untrue and, quite frankly, an IT/back-office wallah's view of India from a glass window in Bangalore or Pune.

Saar, if there were NO currency at all, your villager would have battered and kept his savings in livestock and seeds. Instead he saved in 500 and 100 rp notes over the past decades since the last demonetization because the government says "Trust me, this is legal tender."

Now if the country as a whole were like Pune or Chennai then there is nothing to worry about. But it is not.

The sales numbers we are seeing are not good. Transportation, white goods and food, basically everything that affects day to day living are down. Some by up to 90% like cell phones.

[shyamal]

OK - I was one who had gloom and doom news yesterday.
Today I bring better tidings
It seems 500s have hit Kolkata in sizable numbers. They have been loaded in ATMs. Lots of people I know have withdrawn 500s from ATMs today - PSU and ICICI bank. The ICICI ATM in my office was loaded twice today with 500 notes.
I can see cheer again
I pray and hope that the 2000 does not make extra appearances again and the supply of 500s and 100s remain constant enough to inspire confidence in people to stop hoarding and keep spending.

We now need some big bang arrests.

[Suraj]

[Untrue and, quite frankly, an IT/back-office wallah's view of India from a glass window in Bangalore or Pune.

Saar, if there were NO currency at all, your villager would have battered and kept his savings in livestock and seeds. Instead he saved in 500 and 100 rp notes over the past decades since the last demonetization because the government says "Trust me, this is legal tender."

"If there were no currency at all" is an "if my aunt had testimonials" line of argument saar The fact is that we have a currency and the black economy exclusively transacts in it, and every rupee of 'growth' in the black economy is leeched out of the white economy. There's no other way for it to grow as long as it transacts in cash printed by and back by the full faith and credit of the Government of India, and that has not changed, ever.

When we talk of the black economy, we are not referring to the non cash barter network, which is a negligible part of the approx $500-750 billion black economy. No one cares about tax on two people exchanging a chicken for a bag of rice. Every bit of actual growth of that economy was transacted in cash, obtained by leeching from the white economy. That 'cash discount' at the store is white money turning black. 'Pay X percent of house price in cash' is that money turning black. There are endless examples.

And yet all of that activity uses public goods and services that they do not pay tax for. The argument 'but they buy goods from white economy and generate some tax revenue' does NOT hold water. It goes back to the original requirement - you cannot choose what taxes to pay, directly or indirectly. Everyone has to be on the same level ground.. As long as a black market player makes that choice to evade, even if he claims he paid taxes indirectly through consumption, he's a parasite, both to the ITvity guy looking out of his Bluru glass window, and the guy in dhoti on the street pushing a coffee cart.

[SaiK]

This is what I got from HDFC.. Lot of points to discuss here

We truly appreciate your co-operation and patience during this period of transition.
It is necessary that we all understand that the country is moving towards reduced usage of cash. Going forward, ‘Digital’ banking is a joint effort between the Government, banks and customers.
Fundamentally, the aim is to ensure that a customer is not inconvenienced on account of not carrying cash. We, at HDFC Bank, feel this is a laudable objective which will provide benefits to the economy and people in the long run.
Just to list out a few:
Demonetisation is almost a necessity to root out counterfeit notes which have a direct correlation with terror funding and other fraudulent activities.
If a country is to progress we cannot have less than 10% of the population paying Income Tax. An effort is being made to ensure that people conduct their business in a fair and transparent manner. Increased ‘Digital’ transactions will not only provide convenience to the customers but will also root out corruption and bring down the cost of banking services.
It is imperative that the savings of individuals and businesses are used to spur investments. It is further necessary that most of the currency in circulation is moving through the banks rather than being stored at various places in an unproductive manner. This will give banks the capacity to lend and also to bring interest rates down in order to spur investment and be competitive.
A study by MasterCard shows that the cost of using cash i.e. printing, transporting, storage, soiled notes, etc. is almost 1.5% of GDP. The move to ‘Digital’ transactions, through the Banking System will not only benefit the customer but also the economy through lowering of cost.
We also need to bring to semi-urban and rural India the convenience of dealing ‘Digitally’ and getting services/ loans at competitive rates.
We, at HDFC Bank, have been working to use Technology and Connectivity to provide you with the most convenient service at the best price. Specifically:
We have reduced our turnaround time (TAT) on all kinds of loans (Personal Loans, Auto Loans, Loans Against Shares, Consumer Durable Loans, etc.) to between 10 seconds to 3 hours. We have also made it convenient for you to apply through any access channel i.e. MobileBanking, NetBanking or the branch
We have developed products to make payments of all kinds most convenient. In fact it is more convenient to pay through us rather than Wallets. You first have to transfer money to a Wallet and then pay.
In our case you can pay at the click of a button:

Bills: Mobile, Electricity, DTH, Gas, Landline
Travel: Cabs, Bus, Train, Air
Entertainment: Movies and Dining
Shopping: Groceries, Apparel, Electronics, Home Appliances, etc.
All banking transactions: Pay salaries to employees, apply for loans, buy and sell shares, business transactions through ENet, Trade on Net and Mobile for trade transactions, SME portal for small and medium enterprises
Virtual relationship management available 24x7 over phone and through your mobile banking app.
Over and above all these, you can do all your banking transactions from the convenience of your own home. To do this follow three simple steps:
Step 1: Download our Mobile Banking app from Apple Store or Google Play Store or Windows App Store.
Step 2: Get started immediately by logging in with your Customer ID and Password known to you/ given to you by the bank. You could also set a quick access PIN on your own very easily.
Step 3: Get the power of the bank in your hands from quick links to all our apps- PayZapp, HDFC securities, Chillr, AutoPedia, InvestTrack and deals and discounts through SmartBuy.
Through over 125 transactions on the MobileBanking app and various other apps, you get access to world-class services, deals and discounts.
Please help us and help yourselves because you will not only get convenience (recognizing that going from one place to another in any city of any size involves pain and time), but also get some of the best prices for items purchased by you from the convenience of your home. Moreover if you use our card you will also get points which you can redeem for air tickets and other rewards of your choice.
Over and above all this, you are 100% safe and secure as our apps and digital products are designed with the most stringent security protocols using the latest security tools, so you can use them without worrying.
So here’s HDFC Bank bringing you convenience, at a competitive price, backed by robust processes, integrity and care for the customer.
I would like to conclude by saying that we must recognize the direction in which banking and payments is moving and it is in your interest, as well as, of all institutions and the country, to actively use ‘Digital’ services. If you’d like to know more about going Digital or for any queries/feedback please email us at [email protected]. Let us hope we are able to make your life simpler.
Warm regards,

Aditya Puri
Managing Director

Now add the mandatory
- Income Tax deduction at source
- GST applied electronic transactions

At least 2% GDP gain

[sudarshan]

Ha, never thought of that angle. It would be interesting to see how much this "extra money" amounts to. A tally of official number of notes printed each year, against the serial numbers of the deposited notes (do the banks record serial numbers of all deposited notes? I hope so) would also reveal the years in which significant numbers of extra or unaccounted-for notes were printed. If there is a significant number of extra notes, I'm willing to bet (though not my left or right testimonial) that it would be during the years of 2004 to 2014.

I don't find this 'extra money' claim to be very credible. For one, it's quite damaging to multiple institutions - the Congress Party, the RBI, the former Governor of RBI Dr.Raghuram Rajan, amongst others whose reputations would be destroyed entirely, in addition to being by far the most outrageous scam ever perpetrated.

Well, okay, we can wait to see what the final tally of deposits is and how different it is from the projected one. But "outrageous" depends on what the perpetrator perceives (s)he can get away with. If madam Sonia thought Rahul was going to inherit India as his personal fiefdom and she was going to be above the law, and if that perception was shared by a few key personnel, then it wouldn't seem so outrageous to them. Congress almost got away with (and they could still escape the consequences of) other such outrageous scams like tampering with the judiciary and such. But that's for the politics thread.

[srinebula]

Prof. R.Vaidya also speculated about this possibility of 'extra money'.
Does anyone know how hard it would have been for UPA to pull off such a scam? IIRC, there was some talk earlier about something PC did, which almost jeopardized the security of Indian currency printing.

I don't find this 'extra money' claim to be very credible. For one, it's quite damaging to multiple institutions - the Congress Party, the RBI, the former Governor of RBI Dr.Raghuram Rajan, amongst others whose reputations would be destroyed entirely, in addition to being by far the most outrageous scam ever perpetrated.

Well, okay, we can wait to see what the final tally of deposits is and how different it is from the projected one. But "outrageous" depends on what the perpetrator perceives (s)he can get away with. If madam Sonia thought Rahul was going to inherit India as his personal fiefdom and she was going to be above the law, and if that perception was shared by a few key personnel, then it wouldn't seem so outrageous to them. Congress almost got away with (and they could still escape the consequences of) other such outrageous scams like tampering with the judiciary and such. But that's for the politics thread.

[Suraj]

Hi, please take the extra money political discussion to the politics thread.

[achoudhury]

Except it will grow because although what you said is true, GDP is calculated on the white part. So officially the economy will grow. At the ground level the change will not be to the same degree

GDP will not grow because it counts production and produce are counted for the economy as a whole irregardless of black or white parts. This is why every major economist and investment firm is predicting an impact on growth.

If the impact of the lack of cash in the white goods and farming sector is large then GDP will be impacted severely. A vast majority of the nation's farmers, small businesses and groceries depend entirely on cash.

Remember how Walmart's entry and expansion was greeted as a threat to the mom and pop stores in every village? We knew instinctively that their inefficiencies (lack of credit, lack of distribution, lack of technology, etc) would leave of people without jobs in the face of Walmart. Demonetization does a far more efficient sweep of every deficiencies they had against Walmart.

Now think of the impact of all those small inefficient stores being clobbered at the same time. And on those who supplied them.

Black money neither grows GDP nor overall economy but rather subtracts and eventually contracts. Real Estate, which is most affected by BM , is an instructive illustration. By artificial rise in prices , it has almost killed the industry. Same is true for any sector where BM is dominant. Even from Eco 101, GDP will grow only when capital is employed in Productive sector. BM, by its very nature, can not be deployed productively rather it chases even good capital from productive sector by distorting market prices.

I would have partially agreed with you if you had separated BM from Informal sector. Yes, Cash based Informal sector will take a hit and will mostly impact small traders and SMEs. Most of them will have to change for their own survival and most will. No businessmen will insist to transact only in cash if their bottom line continues to be impacted due to unavailability of same amount of cash as before. Also, Some part of informal sector will extinguish but it will be taken over by formal sector as demand exists and will continue to exist. Impact on farm sector will be negligible. Most of the farmers are marginal farmers and their credit requirements are small and they are managing albeit with some difficulty. I know this from first hand information that too from a very backward part of country. Even the latest rabi sowing data from agriculture ministry points to the same.

Basically, medium term and long term effect of demonetization can only be good albeit with short term pain. Real Interest rates will come down as inflation will have to come down. This means more capital at cheaper cost, which will spur both private consumption and private investment. Many projects, which were unviable, will start being viable. GOI too will be able to raise its tax base and then can add to Govt Investment as well. No economist has been able to point long term detrimental effect of this act and all detractors are arguing only over the extent of short term pain.

Having said that, political impact of this is still unknown, at least to me. Further move by GoI will give pointers in which way the wind is blowing.

[Yayavar]

You are allowing the human concept of "fairness" to affect your usage of the term.

Now, in the villages there are many, many who live with the most basic of government "services", no electricity, local dirt roads and not even the goddam bank branches that were supposed to allow your long suffering rait to exchange his hard-earn 500/1000 rupee notes.

....
Remember, the average Raj and Ram from the villages needed to spend every paise on daily necessities which helped grow the economy. The taxed rupees if it ends up as salary for a babu then that money instead of growing the economy is now used to pay a true parasite designed to hinder business and growth.

In effect let Raj and Ram live without services, without electricity and with dirt roads since somehow the black 'growing economy' allows them to live only like that?
Why not enough tax base with the government, removal of those that take without giving anything (black money), and have enough so that Raj and Ram can have better access to health, electricity, better living standards and more importantly better connectivity. Won't that grow economy since Raj and Ram will have more avenues to contribute than plodding around on dirt roads? Of course you have to trust that the state will do the right thing.

If you keep the outlook short-term the economy might shrink but eventually will grow a lot more; and even more importantly raise the standard of living.

Cars bought does not matter really if the municipality cannot fix roads and you bump along at 30kmph avoiding pot-holes. The employment along the highway injured people and vehicles is no exchange for smooth running highways that will allow easier transfer of goods and growth of economy even with lesser money going to those who manage funerals.

[Melwyn]

While aam aadmi has supported the demonitisation move wholeheartedly it is slowly becoming evident that people are getting fed-up with the lack of cash and lines in banks. Some banks like HDFC have been pointed out as being very lax in their support for this move. It appears some of the private banks are complicit in converting Black to White for their rich clients while ignoring the middle/lower class customers.

https://twitter.com/KanchanGupta/status ... 1908436992

[nachiket]

A parasite eats parts of its host -- it is a subtraction from the whole for the host.

A black economy grows the economy as a whole. It is an addition not a subtraction.
You are allowing the human concept of "fairness" to affect your usage of the term.

Black economy grows at the expense of the white economy. It can only grow using money siphoned off from the white economy. Money that cannot now be deposited in banks or taxed or invested legitimately. This deprives banks of a larger deposit base as well, in addition to depriving the government of revenues.

Now, in the villages there are many, many who live with the most basic of government "services", no electricity, local dirt roads and not even the goddam bank branches that were supposed to allow your long suffering rait to exchange his hard-earn 500/1000 rupee notes.

Pretty sure most BRites live in the cities where whatever sevices their salaried taxes pay for are anyways.

Now suppose everything is now white and taxed, services will suddenly flow to the villages? Possibly but I doubt it. The chances are the average pappu will get shafted of services as always except he will have less rupees in his pocket.

Now for the health if the economy as a whole, the now taxed money scrounged from the village better be spent wisely.

Remember, the average Raj and Ram from the villages needed to spend every paise on daily necessities which helped grow the economy. The taxed rupees if it ends up as salary for a babu then that money instead of growing the economy is now used to pay a true parasite designed to hinder business and growth.

Services and infrastructure in villages being worse than cities does not mean taxes are parasitic or bad. Whatever infrastructure and services are available, whether in cities or villages are paid for by taxes and government debt. If services are worse in villages, so are the taxes collected. Agricultural income, which constitutes most of the income in villages is tax-exempt anyway.

In any event, honest taxpayers are paying for everything, however inadequate it may be. It is obvious that if the current BM hoarders were paying taxes, we would have more funds available for providing better services. The villages you are so concerned for are directly suffering due to tax evasion and accumulation of BM.

Now misuse of government revenues and corruption is a different matter altogether. That does not somehow make tax evasion and BM accumulation legitimate. The way to fix that is to vote in a better government, which the people did in 2014. I fail to see what your point is here.

[GShankar]

All of a sudden there are quite a few NRIs that I am aware of have visited India for time period ranging from 1 week to 3 weeks. All of these visits are un-scheduled. Because of the acquaintance I am hearing stereotypical answers like - "this was a quick decision, blah, blah, blah"

I am suspecting that they are either stashing money or circulating in local market but nevertheless they do not pay taxes. So may be they are going to make alternate arrangements.

Any thoughts?

[Singha]

are these NRIs salaried worker bees or businessmen ? even salaried bees may have stashed away cash in india from property sales in the past and need to convert now.

one thing I have learnt is that while NRIs will carefully follow the law in Massa, they are plenty ok with cutting corners in india just as their resident biraders do. they mentally justify it saying everyone does it here, so why not me. then he will go back, grab the old monk and rant about the chaos and corruption in india