Currency Demonetisation and Future course of Indian Economy

[Rishi Verma]

Lal B. Shastri, a great man, was bound by principles. Modi can ditch principles for national interest, at least that's what I hope. (for example he may ditch IWT).

On the same token, it's possible that Amit Shah knew. Kejri took that logical possibility and extended it with wild CT that bjp guys were showing new Rs2000 bills before anyone knew.

I have no issues if Amit Shah knew and he deferred spending on UP election. If it's in national interest I would say go for it.

[kapilrdave]

Now that GOI has introduced new 500 note, unless banks keep track of notes deposited, someone could use that "peak theory" to recycle money, that the guy who wrote open letter to AK was referring to...?? Its difficult and risky thing, yes. But I guess banks are not getting old notes deposited even in own account without ID. My MIL went to deposite notes to my FIL's account, which should be just fine normally, but was not allowed to do so.

Anyone has deposited money in bank in own account without id??

1. Person depositing in home branch with KYC info properly attached to the account, no question is asked.

2. Person depositing in home branch without KYC info attached to the account is required to carry his ID

3. Person depositing in different branch (than home branch) with KYC info properly attached is still required to carry the identity

4. Person depositing money on behalf of anyone else is simply not allowed

5. Even in case of #1 if the teller becomes suspicious (ie. foto on record not matching the face etc.) the teller can refuse to deposit without depositor's ID

This is the rule at least for SBI. Not too sure about other banks. But most likely the global rule.

[Chandragupta]

With all the hardships that citizens are going through, the constant thing I hear from the people in lines is that this is all worth it to catch black money holders and corrupt officials.

Therefore the Government will have to make some very public arrests and parade the rogue's gallery in the media so that the people feel that it was all worth it. Going cashless is an additional benefit but that's not on the people's radar right now.

I doubt many arrests will be made. Lets be realistic. No person with 100 crores in cash or even 5 crores in cash is going to deposit them as is in the bank. They are going to try every trick in the bag and many of them will get away by paying taxes but this is only for people with 5 cr or less. Anyone with more than that is gone and they dont want to go to jail so they will keep quiet and lose the money. I keep hearing grapevine from people about how their uncles and friends and colleagues have 25 cr and 15 cr and 100 crore. All these people are running pillar to post but they will not save their money. Some small traders and businessmen who take the chance may even pay 90% tax and walk away with warning.

Arrests will only happen when Modi takes action against benami land and gold. Thats when you net bureaucrats, pwd guys, netas, judges etc. Thats where majority of the big fish is.

[shiv]

Suraj can you give me your take on this article
http://www.livemint.com/Opinion/uzvIE84 ... -move.html

[Gus]

There are some catch in it. After 30th you can take any amount. Sending letter etc. will take at least 1 week. By then all the money will be gone.
Let’s say in 80% of 5.5C JDY account there is only 2.49L Rs then how can you freeze the account? Person as well say it is personal savings only.
Already many case I know have applied for cheque books (fools it takes time for check books to come and they cant withdraw money before 30th more over they will not issue cheque books for JDY , I doubt) and signed pay slips with passbooks.

Money maybe withdrawn but the person and the trail is still there. And JDY is linked to aadhaar and is unique and trackable.

[Gus]

Besides, you are assuming govt will not react and respond d and block the gaming etc and just wring their hands with sheepish grin...

[shiv]

There are some catch in it. After 30th you can take any amount. Sending letter etc. will take at least 1 week. By then all the money will be gone.
Let’s say in 80% of 5.5C JDY account there is only 2.49L Rs then how can you freeze the account? Person as well say it is personal savings only.
Already many case I know have applied for cheque books (fools it takes time for check books to come and they cant withdraw money before 30th more over they will not issue cheque books for JDY , I doubt) and signed pay slips with passbooks.

After 30th you "can take any amount"? What does that mean? You can't take old 1000 and 500 notes. They are 90% junk now. they will be 100% junk after that. Better not to be caught with large amounts

Any. ANY account can be frozen by government. If for example the IT dept finds that in one bank, or in 5-6 banks in one area have suddenly got exactly 2.49 lakhs after having been dormant for a long time or after having just a few thousand, the dept can choose to order the bank to freeze the account and send a letter.

After all how can anyone access that account? I don't know if online is allowed for JDY, but at one click of bank or RBI mouse the online part can be locked and the account marked. If the owner turns up to access his account he can be asked to explain. It does not matter if the letter takes 1 week to reach. the letter is only a legal formality.

The fundamental basis of all black money is mistrust of government
The fundamental basis of nationhood depends on coercive power of government

All money is a "promissory note" that the Government promises to give you a "value" of Rs 100 or Rs 2000. That value could be 2 kg peanuts also. But it is only a promise. The government can, under the law withdraw that promise. That is what the government did by demonetization. On midnight of 8th November the country was exactly in a state of financial emergency where the government withdrew 80% of money available. If massive riots had taken place the next day the government would have been in deep deep shit. But the people were with Modi. They knew what was happening and accepted his word that notes would come and come soon.

And yes they are coming. Large sections of the country are working again and every day it gets better. Exactly who gets hit most will come out in due course - and here this stuff goes out of my sphere of knowledge.

[Vadivel]

Suraj can you give me your take on this article
http://www.livemint.com/Opinion/uzvIE84 ... -move.html

Pretty much what i wanted to say couple of pages back , before the namo fanboys jumped on me

Also...

http://scroll.in/article/821441/five-re ... -quicksand

[pankajs]

^
If I am not mistaken the writer was an adviser during the UPA-II at the top level though I fail to recollect where. Planning commission perhaps?

While he should be heard but know that he has a bias to diss any move by the current GOI.

At first hasty scan I can point to two glaring error at least.

[pankajs]

Pronab Sen is the Country Director for the India Central Programme of the International Growth Centre (IGC). Pronab received his Ph.D. in Economics from the Johns Hopkins University specialising in open-economy macroeconomic systems, international economics and public finance.

Most recently the Chairman of the National Statistical Commission, he has had positions as the [b]Principal Adviser, Power and Energy, at the Government of India's Planning Commission[/b], the first Chief Statistician of India, acting as the functional and technical Head of the national statistical system in India, as well as Secretary, Ministry of Statistics & Programme Implementation, Government of India (2007-2010). As a representative of the Planning Commission he was principal author and coordinator of (a) the Mid-term Appraisal of the Eighth Five Year Plan, (b) the Ninth Five Year Plan, (c) the Mid-term Appraisal of the Ninth Five Year Plan, (d) the Tenth Five Year Plan, and the Mid-term Appraisal of the Tenth Five Year Plan.
--------->
Nothing wrong in being with the previous GOI BUT in India we know that quite a lot of these appointments are on political line and most of our *elites* are Nehrivan in outlook. The right of the center Indian economist have all migrated to greener pastures e.g US.

Even then his words should be read carefully and rebutted with logic and not rejected outright.

[Suraj]

Suraj can you give me your take on this article
http://www.livemint.com/Opinion/uzvIE84 ... -move.html

Hmm...
Claim: "The rich hold most of their stuff in gold / land / forex / other things, not in paper money"
Answer: They can't sell . There is no liquid black market to sell into. They cannot furnish purchase record for capital gain tax calculation purposes. Illiquid investments, as we know, fall in value. Forex cannot use hawala route. That route died at midnight Nov 9 .

Claim: "People will be inconvenienced bigly. Moneylenders badly affected"
Answer: Okay saar . Remember most of the poor don't deal with 500 and 1000 daily. If they do, they need to have their poor-ness checked onlee. Moneylenders ? Surely every village's most popular man onlee, whom everyone wants to save. GoI is massively rolling out access to formal banking - PMJDY for deposits, MUDRA for entrepreneurs etc. There are 255 million PMJDY accounts covering 99.7% of households, 35 million MUDRA loans given out in 2015-16, and another 19 million so far this year, of an average Rs.40K each.

Claim: GDP will fall!
Answer: None of the informal sector was ever part of formal GDP. Our GDP is officially ~$2400 billion. In real world it's about $3-3500 billion, because of that ~$150billion worth of cash supporting an informal economy almost 5-10x the size of it. What will happen is GDP will grow because all of it has been forced into formal economy now. Basic cash based economy will remain unaffected barring a short term bump. But all the others are going to simply have to suck it up and move to white rather than deal with black money, because technically, there is NO black money anymore. Modi basically hit reset button on their total cash value on Nov 9.

Claim: Has done nothing for corruption or tax evasion
Answer: How are they going to evade taxes ? In the past, people had the option of declaring income. This move switches the balance of power. There's no option to declare. Either they declare income or burn money. Corruption ? That's the classic switch of topic that you can apply your verbal genius to. Like Modi digging a water storage large pond for a village and someone running up and shouting 'what's the point of this ? The village STILL doesn't have electricity!' Yup...

[Supratik]

I will let Suraj - the expert answer that. On a brief glance the excuses are similar to what pro-BM people on BR have been saying. The only logic I could make out is that the informal economy may take a hit. To answer that those lending that cash also have families to feed. They will find out a way to do it legit while some will go back to trying it somehow in black. How long that takes is the main concern? There will be some disruption. It is like asking a drug addict to go cold. What the writer is saying - don't take away the drug as he needs it.

[kapilrdave]

All those opposing the demonetization are practically opposing a chemo therapy on a cancer patient saying this therapy hurts the person in various ways, completely neglecting that the person will be no more there if that's not done in time!

Black money competes with white money and it is ruthless in inflating in size. It converts more and more WM into BM on a daily basis. We have ~50% black economy today, we could have 80% in next 20 years which means govt has absolutely no way of controlling the economy. Also, black money encourages the corruption. Add to that the problem of fake currency. Thinking in a hindsight, we would have become a basket case in a distant future if this step was not taken today. It had to be taken either by Modi or someone else in future for sure. The earlier that happens the lesser it's painful.

I for one am happy that I myself and my children will live in a more safe and prosperous country after this. Like so many others, I will also have to bear some losses in my property dealing that I did recently. It aint a small amount for a small salaried person like me, but I take it sportingly. Afterall, it's not only me who loses some money like this!

It's sort of a test for all of us BRFites as well. It is easy to vent anger and baying for paki/cheeni blood on BRF on a daily basis. Afterall, what do we lose by writing verbose anti-pak posts? Little we realize that doing that, we put our soldiers' lives at stake with every single post we write. That's all fine, but what when we get ourselves standing on the line? Remember, this is as much an important war as with cheen or pak. Are we with India or against? If we are really patriots, we should be ready to sacrifice in whatever way we can for the nation too! At least we can get away by paying some money and live to get prosperous some day!

[Suraj]

There are some catch in it. After 30th you can take any amount. Sending letter etc. will take at least 1 week. By then all the money will be gone.
Let’s say in 80% of 5.5C JDY account there is only 2.49L Rs then how can you freeze the account? Person as well say it is personal savings only.
Already many case I know have applied for cheque books (fools it takes time for check books to come and they cant withdraw money before 30th more over they will not issue cheque books for JDY , I doubt) and signed pay slips with passbooks.

After 30th you "can take any amount"? What does that mean? You can't take old 1000 and 500 notes. They are 90% junk now. they will be 100% junk after that. Better not to be caught with large amounts

Any. ANY account can be frozen by government. If for example the IT dept finds that in one bank, or in 5-6 banks in one area have suddenly got exactly 2.49 lakhs after having been dormant for a long time or after having just a few thousand, the dept can choose to order the bank to freeze the account and send a letter.

After all how can anyone access that account? I don't know if online is allowed for JDY, but at one click of bank or RBI mouse the online part can be locked and the account marked. If the owner turns up to access his account he can be asked to explain. It does not matter if the letter takes 1 week to reach. the letter is only a legal formality.

The fundamental basis of all black money is mistrust of government
The fundamental basis of nationhood depends on coercive power of government

All money is a "promissory note" that the Government promises to give you a "value" of Rs 100 or Rs 2000. That value could be 2 kg peanuts also. But it is only a promise. The government can, under the law withdraw that promise. That is what the government did by demonetization. On midnight of 8th November the country was exactly in a state of financial emergency where the government withdrew 80% of money available. If massive riots had taken place the next day the government would have been in deep deep shit. But the people were with Modi. They knew what was happening and accepted his word that notes would come and come soon.

And yes they are coming. Large sections of the country are working again and every day it gets better. Exactly who gets hit most will come out in due course - and here this stuff goes out of my sphere of knowledge.

This is all correct, especially the part about the contract of trust between government and citizens. This unprecedented move (never before implemented on this scale in world financial history) only worked this well so far because the people trust Modi to do it effectively. RaGa in charge would have turned the place into Bosnia by now.

[shiv]

Suraj can you give me your take on this article
http://www.livemint.com/Opinion/uzvIE84 ... -move.html

Pretty much what i wanted to say couple of pages back , before the namo fanboys jumped on me

I have some issues with the rhetoric in the article - because it appears that the author has tried very hard to use language that diminishes the impact of what has been done and hopes that the negative impact is high and ends with the classic rhetoricians bullshit "Cutting one's nose to spite one's face".

I have a take on what the man says myself - but I thought I will ask Suraj first,

In fact if I am a policeman and I take a bribe, that transaction is black, and as the article says it will not be checked by demonetization. And exactly as the article says - once the policeman uses his tax-free income (bribe of Rs 300) to by groceries - the money is white again as long as the person who earns the money declares it and pays tax. The policeman gains in not paying tax. But that is as far as the truth goes in the article. It only means that cash transactions must be discouraged.

Discouraging cash transactions is a chicken or egg situation. Should I kiss my lover or fondle her boobs first? Discouraging cash transactions requires building of infrastructure
1. Networking of banks
2. Internet for all
3. Mobiles for all

But when all this is done how to force people to use cashless route? The black economy is so tempting because it is promoted as advantageous to all, and balls to government and taxes.

If I own a private hospital a patient is presented with a bill of Rs 20,000. He asks for a rebate. He is offered a rebate of Rs 2000 if he pays half in cash. he pays 9000 in cash. If his money is also black he has spent it usefully. Even if his cash money is white he gets a receipt and can declare it for tax benefits. The tax man is not going to check whether this man's claimed expense of Rs 18,000 can be reconciled against my fake hospital income declaration - I may declare Rs 2 crores as total income for the year and very close scrutiny would be needed to discover that I am hiding 1 crore

There are other frauds in collusion with insurance agents but I will leave it for another time. The solution for this fraud is not demonetization. The questions asked in the article are like a patient who has been treated for piles asking why his teh pain in his knees has not got better. two separate issues needing separate solutions

[pankajs]

http://www.livemint.com/Opinion/uzvIE84 ... -move.html

Fourth, it has penalized virtually the entire informal sector, and perhaps damaged it permanently. Fifth, it has done absolutely nothing to curb either corruption or tax evasion. ]

4th > The demand for road side snacks, dhobi, mali, driver, plumber, carpenter, etc will not disappear. Even folks who have curtailed non-veg consumption (As revealed in this forum) because of a lack of cash will return to it once the liquidity situation eases. While the demand will be compressed for a time it will not disappear.

5th > I don't know how he came to that conclusion for we are just at the beginning of the drive. It is too early to draw such strong conclusions when he says "done absolutely nothing". He has shaken the system at the root and most of the BM hoarders are in shock. Some of them (My bet is at least half) will think 10 times before trying to circumvent paying taxes the next time. Most folks are not too risk talking. It is just that till date they did not see any downside in evading taxes.

[madhu]

Any. ANY account can be frozen by government. If for example the IT dept finds that in one bank, or in 5-6 banks in one area have suddenly got exactly 2.49 lakhs after having been dormant for a long time or after having just a few thousand, the dept can choose to order the bank to freeze the account and send a letter.

I had given a thought about it, but I rejected this idea of freezing the account.
Freezing of account that has been credited with 2.49Lakhs will bring lot of problems to government. Opposition would says Modi told that 2.5 lakhs in account is safe… now he has lied openly to the nation. People will file PIL saying it is a heard earned money by a beggar. Why a beggar should not have 2.5 lakhs just by begging…. Etc etc….

[shiv]

The questions asked in the article are like a patient who has been treated for piles asking why his the pain in his knees has not got better. Two separate issues needing separate solutions

Mogambo khush hua..

That's the classic switch of topic that you can apply your verbal genius to. Like Modi digging a water storage large pond for a village and someone running up and shouting 'what's the point of this ? The village STILL doesn't have electricity!'

[shiv]

I had given a thought about it, but I rejected this idea of freezing the account.
Freezing of account that has been credited with 2.49Lakhs will bring lot of problems to government. Opposition would says Modi told that 2.5 lakhs in account is safe… now he has lied openly to the nation. People will file PIL saying it is a heard earned money by a beggar. Why a beggar should not have 2.5 lakhs just by begging…. Etc etc….

As they say in Bengaluru - "Don't worry madkobedi" (Don't make worry) That is why everything will be slow-slowwww. No sudden squeezing. A few will get away but they won't go far. Like SIMI Bhopal

[Paul]

Can sense the euphoria subsiding....now comes the heavy push. People will grin and bear the burden if they see a light at the end of the tunnel. Modiji needs to keep communicating...give a speech once in 3 days or so like he is doing now. Also keep broadcasting the money piling up in the banks.

One benchmark for success of the transition is the hike in the withdrawal limit. It went up to INR4500 today. By the end of the month if goes up to INR8000 or so with a target of INR15K/day by Dec 30 we should pull through.

[Neela]

Fron Shiv's link

The illegality, if any, happens only to the extent that tax is evaded on the income from these secondary and tertiary transactions. For example, if a jeweller accepts cash in payment for gold or an ornament, he is committing no illegality (indeed, by law, it would be illegal for him to refuse to accept legal tender). If he conceals this income, however, then, and only then, it remains “black” (this, by the way, is also true of real-estate transactions).

Now let me come to the cost. Eventually, the bulk of the cash finds its way into the informal sector, where it provides a part of the essential liquidity for virtually all transactions within the informal sector and between the informal and formal sectors.

Not an eggspert on these issues but refer to the parts in bold above.
Author acknowledges illegality of the transaction in secondary and tertiary stages. But then used a rich jewellers example who is _evading_ tax on cash transactions.
And it is also a grand assumption I think to say it finds its way into the informal sector. How does he know?

In the second para in the quote above, "essential liquidity between formal and informal sectors" - seems to be too a vague justification no? If it needs to be taxed , then it has to be taxed, whether it is essential liquidity or not.

[shiv]

I don't know much about nations like Venezuela, or the old Argentina. But I do know that Pakistan is a case where the black economy is a parallel economy that funds many private criminal and jihadi empires. The ISI remains powerful by tapping both these empires. Pakistan is a criminal nation but that is a subject I am going to speak about on the Pak thread. Those of us who jingoistically curse the WKK libtards are ourselves sickular libtards in misunderstanding what is happening in Pakistan. But it is an example of the chaos that reigns when a central power (federal power that is essential for a nation) is eroded by multiple power centers with an independent parallel economy

[madhu]

rediff

15:37 200% penalty on high cash deposits even BEFORE you file returns: The I-T Department may slap a hefty 200 per cent penalty on unexplained high cash deposits in banks even before annual income tax returns are filed so as to prevent black money being converted into white during the 50-day window provided for turning in the junked Rs 500/1000 notes, a Finance Ministry official said.

It is also collating data on spurt in deposits in zero-balance Jan Dhan accounts and will slap a 200 per cent penalty on unexplained high value cash deposits, he said. After withdrawing old 500 and 1000 rupee notes, the government has allowed the banned notes to be deposited in bank accounts or exchanged for new legal tenders till December 30.

This has led to cash balances popping up in millions of Jan Dhan accounts, opened under a government scheme for beneficiaries to get their entitlements like LPG subsidy. Tax Department is collating data on spurt in Jan Dhan accounts. It will analyse all data and impose tax plus a 200 per cent penalty in cases of unexplained high value deposits, the official said.

Under Section 12 of the Prevention of Money Laundering Act, tax department can ask for any information from any agency including the Reserve Bank of India and cooperative banks besides all scheduled banks. To prevent misuse of the 50-day window provided for exchange of genuine holdings of the scrapped 500 and 1000 rupee notes, the tax department may resort to imposing tax and penalty even before annual Income Tax Return (ITR) is filed, the official said.


Any unexplained source of income can be charged with tax and a 200 per cent penalty on it. That can happen before filing of ITR. No retrospective amendment is required if high value deposits are caught before filing ITR, he said. Finance Ministry has carried out series of advertisements in newspapers assuring people that their hard earned money is safe and depositing junked Rs 500/1,000 notes of up to Rs 2.50 lakh in bank accounts will not be reported to the tax department.

It has also stated that farm income continues to remain tax free and can be easily deposited in bank. Small businessmen, housewives, artisans, workers can also deposit cash in their accounts without any apprehensions, it has said. On farm income, the official said the tax department will match the acre of land the person has and the deposits made in the bank account to identify any discrepancy.

[Neela]

Another question to experts.
What queries on individual bank accounts can be run by the government to find out tax evaders?

Just also heard multiple PAN cards for different accounts from the same person are also not uncommon ( this from a Chennai based Chit fund operator who's son happens to be a long time friend of mine)

[Sicanta]

Well atleast in UP, according to Praveen Patil's latest survey, Modi is pulling through spectacularly.

[Mukesh.Kumar]

For once a balanced article from BBC

Why India wiped out 86% of its cash overnight
Justin Rowlatt South Asia correspondent

1 hour ago
India is in the middle of an extraordinary economic experiment.
On 8 November, Prime Minister Narendra Modi gave only four hours' notice that virtually all the cash in the world's seventh-largest economy would be effectively worthless.
The Indian government likes to use the technical term "demonetisation" to describe the move, which makes it sound rather dull. It isn't. This is the economic equivalent of "shock and awe".
Do not believe reports that this is primarily about bribery or terror financing, the real target is tax evasion and the policy is very daring indeed.
You can see the effects outside every bank in the country. I am in Tamil Nadu in the south of India and here, as in every other state in the country, queues of people clutching wads of currency stretch halfway down the stree
Mr Modi's "shock and awe" declaration meant that 1,000 and 500 rupee notes would no longer be valid.
These may be the largest denomination Indian notes but they are not high value by international standards - 1,000 rupees is only £12. But together the two notes represent 86% of the currency in circulation.
Think of that, at a stroke 86% of the cash in India now cannot be used.
What is more, India is overwhelmingly a cash economy, with 90% of all transactions taking place that way.
And that is the target of Mr Modi's dramatic move. Because so much business is done in cash, very few people pay tax on the money they earn.
According to figures published by the government earlier this year, in 2013 only 1% of the population paid any income tax at all.
As a result huge numbers of Indians have stashes of tax-free cash hidden away - known here as "black money".
Even the very poorest Indians have some cash savings - maybe just a few thousand rupees stored away for a daughter's wedding, the kids' school fees or - heaven forbid - an illness in the family.
But lots of Indians have much more than that.
It is not unusual for half the value of a property transaction to be paid in cash, with buyers turning up with suitcases full of 1,000 rupee notes.
The size of this shadow economy is reckoned to be as much as 20% of India's entire GDP.
Mr Modi's demonetisation is designed to drive black money out of the shadows.
At the moment you can exchange up to 4,000 (£48) of the old rupees every day in cash for new 500 (£6) and 2,000 (£24) rupee notes.
There is no limit to the amount that can be deposited in bank accounts until the end of December, but the government has warned that the tax authorities will be investigating any deposits above 250,000 rupees (£2,962).
Breach that limit and you will be asked to prove that you have paid tax. If you cannot, you will be charged the full amount owed, plus a fine of 200% of the tax owed. For many people that could amount to be pretty much the full value of their hidden cash.
This is brave politics. Some of the hardest hit will be the small business people and traders who are Mr Modi's core constituency. They voted for him because they believed he was the best bet to grow the economy and improve their lot. They will not be happy if he destroys their savings.
Mr Modi says he is simply delivering on his pre-election promise to tackle corruption and tax evasion.
He says he warned that he would squeeze black money out of the system and had already offered amnesties to those who declared their black money holdings.
And, so far at least, the policy seems to be popular, in spite of the long queues and the fact that much day-to-day business in India has ground to a juddering halt.
Most Indians resent the fact that many of the richest among them have used black money to evade paying their fair share of tax and are happy to suffer a few weeks of what Mr Modi called "temporary hardships" to see them face justice.
They also recognise the benefits of drawing more people into the income tax net.
India has very low rates of tax compared to many other countries. The tax-to-GDP ratio - how much tax is raised as a proportion of the output of the economy - was 17% in 2013.
The average across the economies of the Organisation for Economic Co-operation and Development - a club of mostly rich nations - was over 34%.
Demonetisation is part of a wider project to draw Indians into the formal economy and to get them to start paying the tax they owe.
Curbing tax evasion is part of the agenda for the "aadhaar" scheme, a giant digital database designed to give hundreds of millions of Indians a unique ID, and of the new Goods and Services tax.
And reducing tax evasion can only be good for India. The more money it raises in tax, the more it has to spend on useful stuff like roads, hospitals and schools.
The more the country spends on public goods like that, the faster the Indian economy is likely to grow - or so the argument goes.
So the big question is: will it work?
Some economists have questioned the decision to introduce the 2,000 rupee note. They say if the policy is designed to force people into the banking system why issue a higher denomination note - presumably an even more convenient vehicle for black money transactions?
But the headlines about chaos and confusion are a bit misleading.
There have been virtually no reports of violence despite the huge disruption this policy has caused.
The queues are orderly and the worst you hear are the irritated mutterings of those whose days have been wasted standing in line.
But Mr Modi needs to be careful. The new notes are in short supply and there are not enough smaller denomination notes to go around, so the banks regularly run out of cash.
That cannot go on for long without irritation turning to anger.
But some queuing may be excusable, because in one regard the policy has already been a complete success: it came as a surprise to the entire country.
Think what that means. The government managed to plan this audacious policy, printing billions of new notes without anyone letting slip what was happening.
Reportedly, even senior members of the cabinet were not told what was being planned, for fear that if word got out the entire policy would be undermined. The hoarders would have time to empty their mattresses and launder their stashes into gold or other assets.
Keeping a secret of this magnitude in India, a country that thrives on rumour and gossip, is nothing short of a triumph and surely a reasonable justification for a few hiccups along the way.

[shiv]

One benchmark for success of the transition is the hike in the withdrawal limit. It went up to INR4500 today. By the end of the month if goes up to INR8000 or so with a target of INR15K/day by Dec 30 we should pull through.

I can offer no proof - but I suspect that the daily withdrawal limit is being calibrated against how much is actually flying out of banks per day in exchange for old notes. The increase in limit may be because people are not exchanging the amounts anticipated.

If you look at Rs 4000/ day it works out to 2 lakhs in 50 days - so at the start the holder of cash in large notes black or white was offered ways to get rid of it by Dec 30. In the bank he could get rid of maximum 2 lakhs in 50 days. He is also allowed to fill petrol/diesel. If a person own 6 vehicles and fills Rs 3000 per vehicle - it is still peanuts. Maybe owners of lorries/buses can rid themselves of 1-2 lakhs in black/white cash in 50 days

Or else pay utility bills, or have a heart attack and pay a hospital bill of 1.5 lakhs for angioplasty.

Every citizen in India was given the opportunity to get rid of between 2-5 lakhs of black money legally upto 31st Dec. If it was not black its an inconvenience. If it was black - it will save the asses of small black money hoarders with less than 5 lakhs in black.

Everyone else will have to scramble desperately before getting defrocked.

[Paul]

So does it work something like...they collected 3lakh crore so far, & hence have released3 lakh crores into the eceonomy then and are waiting for the other estimated 12lk crore to be deposited into the banks? Grossly oversimplified, but is that how it works? (pardon my ignorance, but we are here trying to figure out what is going on)

Secondly, not hearing any news of usual rona dhona of printer ink missing, paper nahin hai etc. like in defence procurement. Is there enough stock of raw material to print and release new currency into the markey.

Then this brings up the next question, if Modi was into hush hush demonitisation how come the huge orders that must have been placed for ink, paper etc, went unnoticed by one and all. The paki move into Siachen which was correctly called out by RAW through their buying spree of cold weather clothing in Europe would be an apt analogy.

How did Modi pull off this POKHRAN - III?

[Suraj]

The references to tax raids on depositors who put in 2.49lakh being politically contentious, is unfair . It's worth watching Modi's speech . He knows this will happen . The poor are going to be used as agents . He has empathy for them . Unlike most of us he spent the better part of his own life in penury .

We should give the man who came up with this genius move - now being parroted for Australia and EU - more credit . Basic legal theory seeks to find the kingpin, not the flunky . Tax men only need to contact some people, 'listen we know you are holding this deposit for someone else. We don't care about you - just cooperate and tell us who gave this money' .

[Paul]

It'll work only once. Euro and Aussie baddies know this might happen & will work overtime to transfer their wealth into smaller denominations.

[Atmavik]

[quote="Mukesh.Kumar"]For once a balanced article from BBC

Yes, balanced for once. by the way have you guys noticed no mention of the large population that lives on less than $2 a day.

also lot of stories going around SM featuring Maids/domestic help facing hardships. looks like Sikulars are in Meltdown Mode.

[JayS]

Fron Shiv's link

The illegality, if any, happens only to the extent that tax is evaded on the income from these secondary and tertiary transactions. For example, if a jeweller accepts cash in payment for gold or an ornament, he is committing no illegality (indeed, by law, it would be illegal for him to refuse to accept legal tender). If he conceals this income, however, then, and only then, it remains “black” (this, by the way, is also true of real-estate transactions).

Now let me come to the cost. Eventually, the bulk of the cash finds its way into the informal sector, where it provides a part of the essential liquidity for virtually all transactions within the informal sector and between the informal and formal sectors.

Not an eggspert on these issues but refer to the parts in bold above.
Author acknowledges illegality of the transaction in secondary and tertiary stages. But then used a rich jewellers example who is _evading_ tax on cash transactions.
And it is also a grand assumption I think to say it finds its way into the informal sector. How does he know?

In the second para in the quote above, "essential liquidity between formal and informal sectors" - seems to be too a vague justification no? If it needs to be taxed , then it has to be taxed, whether it is essential liquidity or not.

Cash = liquidity is a red-herring. Whether I have cash or digital currency as long as I spend it liquidity remains just the same, no matter in what form I spend it. Whereas if I hoard it - do not spend it - liquidity would reduce only if I have cash (because it would be seating under my mattress and would be useless for economy even if its fully white). If I hoard money in my bank account its accounted for and a known thing and its still providing deposit base for bank to loan more so its not a total liquidity loss.

[habal]

there is no fixed amount for daily withdrawal limit: It is definitely not 20K as per public pronouncement.

It is a factor of how much cash that bank has lying around with them on that day. They are going to adjust the daily withdrawal limit as per their cash position. So do not go to a bank and start a fight saying Modiji has said we can withdraw upto 20K per day. Not happening.

[Suraj]

Regarding the use of 'peak theory' with the new Rs500 notes it's easily enough checked:

Bank teller: Sorry Saar . Until Dec 31 you can only deposit old series 500 notes.

This is perfectly sensible too since they want to shore up liquidity and people depositing new notes do nothing for that . That cash needs to circulate, and every second it sits in the bank is liquidity affected .

[Supratik]

SBI deposit 80000 crores. Which means about 4 lakh crore has come back.

[Suraj]

Phoren press is coming around to grudging admiration . Tim Worstall at Forbes was mocking this a few days ago and then penned a new article that goes 'blimey, this actually seems to be working out surprisingly well considering the phenomenal logistics'.

[habal]

Phoren press is coming around to grudging admiration . Tim Worstall at Forbes was mocking this a few days ago and then penned a new article that goes 'blimey, this actually seems to be working out surprisingly well considering the phenomenal logistics'.

does he realize that all bank employees will be admitted to hospitals shortly ?

[suryag]

Suraj gaaru - great, was worried about this, hope GoI is doing this or we can post it on PMOIndia or on facebook, this move has to succeed for our nation to get to the next level(whatever that may be)

[Karthik S]

Phoren press is coming around to grudging admiration . Tim Worstall at Forbes was mocking this a few days ago and then penned a new article that goes 'blimey, this actually seems to be working out surprisingly well considering the phenomenal logistics'.

does he realize that all bank employees will be admitted to hospitals shortly ?

[habal]

this week saturday, sunday working days for bank.

and moreover, this doesn't seem to have an end in sight.

banks have to submit a 'day end' at the end of working hours, which basically means all accounts should tally and there shouldn't be any discrepancy.

otherwise the system doesn't allow them to give a 'day end'.

folks are sitting upto 2AM in their branches trying to give a 'day end' because in the hullaballoo, there is always 1K-20K difference.

RBI is doing it's bit, every bundle of new currency notes have 100-300 rupees short, adding to these troubles.