Awrighty. Let me take a few stabs at this.
Their assessment is a bluff and to call it a bluff, we need a surgical analysis, which unfortunately missing in debates then and even now.
Indeed. So let us "surgically analyse" the surgical analysis.
The RBI informed the government that a third of this amount, about 6 lakhs crore moved out of banking system and never came back into the system. It means that this huge unmonitored cash was financing and building a massive black economy. The result - steep rise in gold, stock and land prices by almost 10 times in 6 years since 2004. This asset price rise was not matching with real growth.
Well, let type NYSEARCA:GLD in finance.google.com and you can see the numbers yourself (this is the SPDR Gold Trust ETF), which was $44 on Dec 31,2004 and on Dec 31,2010 , it was 133.58 , i.e., rose 3.04 times in dollar terms, (reaching a peak of $183, or 4 times ) some 6 months after that.
In rupee terms one can see from here
Gold Price India , between 2004 and 2010 , Gold Prices in India rose just 2.65 times. Indeed the 10 year price chart as of Sep 17, 2017 , shows that gold prices rose less than 3X from 2010. Looking at the 15 year chart, the peak rise is from roughly 2002 to Sep 2012, a rise of 6.21X .
As for land, I would like to see where it appreciated 10X in from 2004 to 2010 (or even the last 10 years). Even in Jayanagar, where the going rate is roughly 10,000 per sq.ft , I would wager 2004, it was above Rs 1000 per soft.Surely didn't increase 10X .
So definitely for gold, 1) S. Gurumurthy is factually wrong and 2). His inference (";The result") is wrong is as well, . Gold indeed spiked along with the super commodity cycle from 2002 onwards , but that has more to do with the Fed pumping in liquidity and thereby inflating global asset prices ,more so after 2008! Here his causation analysis is plain wrong.
So this hyper GDP growth was just wealth-led growth that yielded neither jobs nor gave external or internal comfort to the economy. Therefore, the reason for this spurious growth clearly was the high asset prices, which were fuelled only by an unprecedented rise in high de-mon notes
.
1) No one knows what this "wealth led growth" is. He should write up a paper on this and get this new discovery published. Yes, there is wealth effect on spending, which can increase spending and lift the economy . This is quickly jumping all over the place by attributing this to "high denomination notes" , as if only if you hold high denomination notes you feel wealthy (and not by the value of real assets such as gold, land etc or simply by rising salaries that followed high growth). Again, causality and facts plain wrong.
Unfortunately, the debates that followed de-mon then and now have not considered these critical facts and was reduced to single point issue.
What facts ? His "facts" are wrong !
The debates were more of political, casting economics aside. De-mon was such an India-specific issue that it had no parallel elsewhere in the world.
Huh ?
How can Modi explain this background to the people who are not aware of all these and wouldn't understand also? So he has to defend the de-mon in the language they understand - to detect and eliminate black money.
I see, so MoDi did DeMo, not to eliminate black money, but to prick asset bubbles created by the Fed and other Central Banks (EU, Japan). The people of India are too dumb to understand this, so he had to say to detect and eliminate black money .
If the government would have left the situation as it is, that would have been a threat to the economy with an unimaginable future crisis.
Why does this sound very similar to "Islam Khatre Main Hai" kind of scare mongering ?
So the de-mon was intended as a multi-dimensional correction to the economy. There was primarily 13 objectives of de-mon and the list is not exhaustive. (Note: please see the list and judge for yourself how far these objectives have been met).
Okay, let us go through the objectives.
(1) to catch black money
Failed. A paltry sum of black money has been recovered. In fact, even if we 100% of the 2.5L cr in that the govt has flagged is fully considered hypothetically as unaccounted, if you offset the 2L crore, output loss, the net result has been close to zero
(2) to prevent its growth
How. You have fully remonetized back to nearly full previous levels , with an EVEN higher denomination 2000 note ! - FAIL
(3) to expand taxpayers base
Very minimal success. The growth rate in tax base pre and post denomination hasn't been a huge step change, but a secular trend. And how much of the small step increase if denomination related vs, other measures like Adhaar etc is debatable
(4) to arrest and deflate cash - stoked asset prices
Fail. There has been NO asset price deflation. Stock market is at all time high, real estate prices have not crashed and neither has gold price. Goes on to prove that the original hypothesis about asset prices being high due to high denomination notes was FUNDAMENTALLY wrong
(5) to bring down villainous high-denomination notes;
What is so "villainous" about Rs 1000 and Rs 500 notes of old, while new
2000 and 500 notes are "angelic"
(6) to suck out the excess cash with people which are building a parallel economy to the banking system;
But you have fully re monetised the economy. So what "excess" cash did you such out ? On a broad M1/M2 basis, the cash base is pretty much the same
(7) to enable banks to multiply additional deposits as lendable deposits;
Err. The banks are flush with cash, lending rates are going down. So didn't happen. A fail.
(8) to bring down the interest rates;
Okay. Didn't happen.The banks were already flush with excess cash. All it did was increase the bank's costs and the RBI's costs. because they had to pay interest on the account balances
(9) to increase the financial savings in households;
How ? Will savings increase , just because you hold 10*100 Re notes instead of a 1*1000 rupee note ? What does DeMo have to do with it ?
(10) to crash the land prices to make housing affordable;
Hasn't happened anywhere - A big fail
(11) to organize the unorganized sector;
Err. How does DeMo do that ? GST , yes, I can understand ? But DeMo ? All it did was "eliminate" the unorganised sector. Sure, if that is what is meant by the statement, I would say yes.
So a Success finally
(12) to facilitate the growth of the real economy - growth with jobs; and
Huh ? The growth rate has dropped since DeMo . So fail ?
(13) to eliminate fake currency and curb terror funding.
Hasn't happened. In fact there are fake 2000 rupee notes, and the terrorist incidents So another fail[/color]
Against the background stated, none of these objectives could have been met without resorting to de-mon
.
So what objectives were met by this De-Mon. I count 12 FAILs and 1 success (point 11) .
So reading the objectives once again, we can say Modi's de-mon project has been a huge success.
Well, I read them again, and out of his 13, 12 were failures, one a "success" . I don't see this as a "huge success"
Anti-Modi bandwagon conveniently missed an important element – huge crisis which the note ban barricaded and averted. To know what India escaped, one must look at what the US got into. The fake asset prices that drove high growth in the US from 2001 to 2008 deceived the US and the world into believing it to be real and finally landed the whole world in the unprecedented financial and monetary crisis of 2008. The emergency measures to handle the crisis – nil to negative interest rates and printing money – are still on. But what is the relevance of what happened in the US prior to 2008 to the de-mon discourse in India in 2016? Read on.
Ah, but
WE escaped the 2008 crisis (which was a credit and consumer led crisis , normally recessions are investment led), thanks to the RBI. So does it follow that we didn't have any asset bubble before 2008 ? But his entire analysis was based on an "asset price inflation between 2004 to 2010 ! So again, facts , analysis and causality - plain wrong ?
Asset prices in India – stocks, gold, and land - rose by ten times in those six years as compared to the earlier five years
.
They didn't. Anyone can check them out by themselves. They gold prices didn't rise 10 times, the stock price rise between 2001/2002 to the peak before crash of 2008 is less than 6 times. So again PLAIN wrong.
We celebrated this mirror wealth as real from 2004. But what was the cause of the asset price rise? The answer lies in one word: cash — in particular, the unprecedented rise in high-value notes, a third of which, per RBI, was circulating outside banks.
Again , facts are wrong. And in addition, how does he attribute the asset price rise to "cash" and that too in "one word" , without any causality analysis. Okay, that is just as good as saying, it is so, because S. Gurumurthy says so !
What reckless bank lending did to the US till 2008, reckless printing of high-value notes did to India. This could have dynamited the nation’s financial order. De-mon became inevitable to avert the huge unmonitored cash-led crisis in the offing, to force the economy flooded by cash into a less-cash economy and to drive the excess cash circulating outside into banks. This extremely critical aspect was completely ignored in the irrationally noisy de-mon debate.
Okay, we have to accept the "irrationality" based on make believe "Facts" as "rational" and explanations such as India's economy expanded roughly 2X in the same period and a higher monetary base was needed given a largely cash based economy is to be termed "irrational" . Why does this sound like Kellyanne Conway's "Alternative Facts" (she was The Donald's spokeswoman)
An incredible achievement of de-mon is the reduction in the total cash stock and the cash stock with the public. Because of de-mon, as the cash with the public came down dramatically, the people’s deposits in the banks went up equally dramatically. The reduction of cash with the public and the rise in deposits with the banks will produce a dramatically opposite macroeconomic impact. Cash with the public fuels and funds the black economy.
Obviously confused between CASH and black money. Cash
NOT = black money.
Unaccounted Cash == Black Money.
Deposits in banks will fund the formal and organized sector. Moreover, by the fractional reserve model, money moving in and out of the banks multiplies as advances, by some six times
.
1) Hasn't happened. 2) Reserve ratio is FAR north of 20 % in India. So even at a 20% reserve ratio, the Multiplier is only 5. So again
WRONG numbers.There is no way you can lend 6 times the deposits on the economy.
The flow of de-mon cash into banks — including black money — has already led to a cut in interest rates and a huge rise in lendable money, relieving banks that were stressed by illiquidity.
T
It didn't. RBI cut interest rates, when inflation fell. In fact, they RBI mandatorily increased the CRR for the deposits post 11th Nov, as a "temporary" measure to suck up excess liquidity. Any increase in CRR hits bank profitability and guess what, the bond yield moved UP!
he impact of drawing money from the public and quarantining it in banks has crashed land prices in different parts of the country.
News to me . Please tell me where it has happened. I will rush to buy land. Okay, transactions stopped. But there was no "price crash" anywhere (yet)
The study said, “the perfectly timed” de-mon would cut land prices by 30 percent due to a reduced cash component, adding that making housing hit by speculative land prices affordable appears to have been achieved as the outcome showed a rise in demand for affordable housing.
1. Hasn't happened. I don't see any price correction by 30% anywhere.
2. Is DeMo the way to do it. How about making mandatory Escrow and Land record requirements for ANY land or RE transaction ? DeMo was equivalent to trying to swat a fly with a hammer and well, you missed as was bound to happen.
There was, of course, a costly miss in the conception of de-mon. The voluntary income disclosure scheme announced ahead of the de-mon project should have been clubbed with it so that those who had black cash would have disclosed it rather than risk depositing it in benami names, making tax collections time-consuming. This also would have avoided equating the success of the de-mon project to the quantum of de-legalized notes not deposited back and made the collection of tax on black money as the real test
.
Aww. But it massively failed the other "13" tests as well.
On the post-de-mon follow-up, two caveats. One, de-mon has sucked the entire cash stock into banks and it has also reduced the ratio of cash to GDP back from 13 percent to less than 10 percent of GDP. But this hit the informal sector
But. This was the "success" of DeMo in your 13 point agenda ! So you aren't happy?
.
Now back to the fallacy.. Informal NOT = BLACK . Cash NOT = Black.
If YOU buy a dozen mangoes from a Push Cart vendor it is NOT black. . It is UNORGANIZED, sure, but NOT Black. It becomes black ONLY if the telawala is taxable and he cheats.
Closing the tap of black money that was funding the informal sector, which contributes to 50 percent of the GDP and 90 percent of non-farming jobs, has caused a dip in the growth rate and jobs
Ah, but wasn't that the "success" . I am now very confused. You want everything "formal" , so wiped out the "informal" . So why shed a tear now ?
Had the Mudra finance scheme been implemented as originally conceived ahead of de-mon, this could have been avoided
Yeah. Right. Sounds like if only "Real Communism/Islam/Hindusim/WhateverIsm" had been implemented rubbish. So this "Mudra" whatever was the magic bullet that would have solved everything , both known and unknown to mankind.
Two, PSU banks, which control 70 percent of bank deposits, are paralyzed because of the artificial NPA rules unsuitable to India, borrowed from Basel norms. The RBI is clearly responsible for the virtual stoppage of lending by PSU banks which has hit even medium and large industries
Ah yes. You create a cash crunch and then blame the PSU banks for the problems YOU created. How sweet. And also, the lending is not happening because of "artificial " NPA rules . Indeed. So they should continue lending to all the massive NPAs in power, energy, infra, etc etc, because that is "real", even when those guys cannot hope to pay back the principal and interest already lent EVER (like Air Parasite).
And yet RBI is virtually destroying Indian business by applying the Basel norms. And the government is just a mute spectator to this sad spectacle. Additionally, the forcible reference of the NPA cases of units viable for restructuring under the bankruptcy law is a disastrous way of dealing with NPAs.
Ah yeah. RBI has "stopped" lending because the calculate reserve requirement per Basel III rules. If they only calculated that using "Chennai III" rules, all the stressed industries and companies will pay the money past due and the NPAs will disappear.
Again fundamentally wrong. The banks are FLUSH with cash , but are UNABLE to lend leading to lower credit growth. A less than Basel III tier 1 capital requirement will NOT lead to more lending, but instead, will leave the banks seriously undercapitalised and unable to withstand shocks.
If this is a "clever" way of saying, okay. Let the banks suck up the NPA losses against their capital and don't need to capitalise (by applying some hokey Chennai III norms), it is very clever by half, and not really clever I should say.
And yet RBI is virtually destroying Indian business by applying the Basel norms. And the government is just a mute spectator to this sad spectacle. Additionally, the forcible reference of the NPA cases of units viable for restructuring under the bankruptcy law is a disastrous way of dealing with NPAs.
Ah, the problem IS a city called Basel in Switzerland. You SHOULD NOT throw out bad management, bring in turnaround specialists /re-org specialists (No Jay Alix Parnters, No Alveraz and Marsal.. oh... Do they eat beef? ) on the lines of US Chapter 10 (the most well functioning restructuring system I should say ), you should NOT try to recover money, why because that is "disastrous"
However, the "right" way to do it is like Air Parasite, which is raising Rs 3000 crore (as we speak) under Govt Sovereign Guarantee and why , to finance the loans already due. ie. borrowing more money to service the existing loan ! Isn't that exactly called the Debt Trap ? And throwing good money after bad is "sound banking"?
The government and RBI must forensically distinguish NPAs caused by financial dishonesty from policy- and market-forced NPAs and punish the former and restructure the latter if they are viable.
How cute. Now Mallya rightfully claimed that Kingfisher policy was due to "policy" (he is absolutely right on that), Air Parasite due to "policy" (right again), BSNL due to "policy" (right again). So are you going to start lending again to them ? In addition, this will set up a long list of lobbying and open the door for corruption and politicking to have YOUR dues labeled as due to "policy and market forces" and ask for a bailout!
To end, unless Mudra is implemented forthwith as originally proposed, PSU banks begin lending again, and RBI frames restructured policies disregarding the Basel norms
Ah yes.
1. "Mudra" (whatever that is) will save the world.
2. PSU banks should throw more money down the bottomless pit.
3. RBI should make the banking system fragile , and avoid using "phoren -Basel III" , but use " Chennai III" , so that you don't have to capitalise the banks
to be able to take shocks, even while you do 2) and keep throwing more money into a bottomless pit.
the economy will slide into deep difficulties in the coming months and years
True. But that was caused more YOUR ilk and the hare brained DeMo that you talked the Govt into
Are RBI and the Modi government listening?
I SURE AS HELL HOPE NOT and I wish they NEVER again listen to the WhackJobs who led them into the DeMo and some other fool's errands (which while futile were not damaging like DeMo).
The Govt needs to listen to sane counsel (like the Chief Economic Advisor - Arvind Subramaniam and former RBI Guv - YV Reddy , Subba Rao and others for instance) even if cannot countenance taking advice from Raghuram Rajan.
The SJM and other Cow + Marx types must be put out to pasture and masticate there in content. They have caused near irreparable damage already. And if any of these whack job stuff as proposed is considered as anything other than a source of mirth in the govt, India is in for another 50 years of disaster like was inflicted by the Marx - Cow types.