Currency Demonetisation and Future course of Indian Economy

[Pathik]

http://indiatoday.intoday.in/story/new- ... 05838.html

I thought it was about time we had other Indic symbols on new currency notes and not just FOTN. Pains to see Garudas and Ganeshas on foreign currencies and so much upheaval about them in motherland

[hanumadu]

Waiting for stories of people leaving boxes of cash on chowrastha. Or people waking and finding bundles of cash outside their homes along side the news paper.

[Dipanker]

I heard from my dad that in 1977-78, they did what I think was a devaluation, and we moved from US to India that time and dad said he lost quite some money on the conversion. Maybe that is what you mean.

Demonetization of Rs 1,000, Rs 5,000, and Rs 10,000 notes did happen in 1978.

India has demonetised high-value currency before, in 1978

[saip]

In 1978 very few had 1000 rupee notes leave alone the 5000 and 10000. If I recall then a Doctor would be paid a 1000 or so a month. As a matter of fact I have never had a 1000 rupee note in my hand. Only saw those notes in an exhibition. But today it is different as the pays have gone up by a hundred fold and almost every one is paid in 1000 or 500 rupee notes if paid in cash.

[yensoy]

<snip>
Now can anyone estimate the factor by which the Rs 12 Lakh crore old series cash will be reduced in circulation & converted into electronic money(i.e bank deposits) + old & additionally printed petty cash denominations (100s,50s & 10s) ?.

Iam wildly guessing the circulation of new series high value notes will be quite less than Rs 50 thousand crore one year from now in our economy (i.e 24 times reduction in the high denomination currency in circulation).

This is very much a goal, to bring the surplus wealth into formal banking channels where it can be invested or put to good, legal use rather than sitting under the mattress.

Estimate wise, it might be a little higher than what you are saying. I think about 50% circulating cash will get converted (including cash + bank deposit), of which about 50% will be redeemed in cash. I have no basis for saying so, just the familiarity with "long tails" which tend to be much heavier cumulatively than one would expect.

[yensoy]

There's no difference between gold and property as far as black money is concerned. Both , and every other thing will fall in value because there are fewer notes in circulation chasing them.

No change to gold prices, this has been a non-event in world gold prices overnight and as long as our exchange rate remains stable it will have minimal effect on gold prices in India (=world gold spot price + spread of around 3-5%).

BTW, highly recommend fellow BRF'ers to watch Goodbye Lenin http://www.imdb.com/title/tt0301357/.

[Bart S]

How about if the Government offers to buy these defunct notes at 10 paise to the rupee, no questions asked? In effect whiting at 90% tax.

How about if the Government does what it just did instead ? They owe no arbitrary tax waiver (10% in your example) to anyone. They already very recently conducted an income disclosure scheme. Anyone with black money could have gotten away with a lot less in terms of tax and fees then. Now GoI doesn't owe anyone even a 10% rebate.

Would it make sense from the perspective of getting useful tips and intelligence on other tax evaders and tracking the money trail etc?

Another layman question: The general rule about printing money seems to be that it leads to inflation, which is why very few countries can actually pull that off. Say out of 10 lakh crore 1000 Rs notes only about 2 lakh crore are exchanged and 8 lakh crore are thus presumed to be destroyed or out of circulation. Can the GOI then safely print that equivalent amount of money and put it back into productive uses like infrastructure or investment in education etc?

[darshan]

This move has put lot of NRIs like me in a bind for taking some short cuts. This being NRI season for weddings in India. My uncle had raised some cash for counsin's wedding in December in cash for getting favorable forex rate. Is this pretty much useless now if there is no paper trail for this? Or is it still possible to hand it over to IT and authorities with 30% tax rate and penalty? Looks like all jewelers are refusing to accept rest of the payment in cash.

[Hitesh]

Not that much. Inventory hoarding will go up and compensate.

So the next step should be to disincentivize the housing hoarders.

Better than that, we have to dis-incentivize money hoarding/wealth hoarding all together. Put an artificial cap above which no body should be allowed to earn. Rich getting richer is a curse and we should make sure nobody becomes rich

Great. We got someone whose inner commie is threatening to burst open out of his chest. Need medic! Evac asap!

[hanumadu]

How about if the Government does what it just did instead ? They owe no arbitrary tax waiver (10% in your example) to anyone. They already very recently conducted an income disclosure scheme. Anyone with black money could have gotten away with a lot less in terms of tax and fees then. Now GoI doesn't owe anyone even a 10% rebate.

Would it make sense from the perspective of getting useful tips and intelligence on other tax evaders and tracking the money trail etc?

Another layman question: The general rule about printing money seems to be that it leads to inflation, which is why very few countries can actually pull that off. Say out of 10 lakh crore 1000 Rs notes only about 2 lakh crore are exchanged and 8 lakh crore are thus presumed to be destroyed or out of circulation. Can the GOI then safely print that equivalent amount of money and put it back into productive uses like infrastructure or investment in education etc?

Excellent point. So in effect govt is confiscating 100% of black money stashed in 500 and 1000 Re bills.

[Bart S]

This move has put lot of NRIs like me in a bind for taking some short cuts. This being NRI season for weddings in India. My uncle had raised some cash for counsin's wedding in December in cash for getting favorable forex rate. Is this pretty much useless now if there is no paper trail for this? Or is it still possible to hand it over to IT and authorities with 30% tax rate and penalty? Looks like all jewelers are refusing to accept rest of the payment in cash.

This is just my opinion so take it FWIW:

If it is a smaller amount like a couple of lakhs the IT dept is generally not interested, so take your chances and exchange the notes. Of course if it is something bigger, it would probably attract attention.

[yensoy]

This move has put lot of NRIs like me in a bind for taking some short cuts. This being NRI season for weddings in India. My uncle had raised some cash for counsin's wedding in December in cash for getting favorable forex rate. Is this pretty much useless now if there is no paper trail for this? Or is it still possible to hand it over to IT and authorities with 30% tax rate and penalty? Looks like all jewelers are refusing to accept rest of the payment in cash.

This is one behaviour which has been targeted, yes. I have lived abroad for 20+ years, and have never felt the need or urge to use hawala for money transfer. There used to be a time when hawala rates were markedly superior, they offered better service like door delivery (yet I didn't care); but for the past 10+ years the black market for Forex has almost vapourized and banking channels are quite convenient. The only informal exchanges we do are with known visitors for small sums (that too only when they run out of legally converted cash) - this cash is useful upon arrival in India, or for paying bills/maintenance or charitable purposes. My bulk transfers are always through the bank, and so should yours.

[Primus]

This move has put lot of NRIs like me in a bind for taking some short cuts. This being NRI season for weddings in India. My uncle had raised some cash for counsin's wedding in December in cash for getting favorable forex rate. Is this pretty much useless now if there is no paper trail for this? Or is it still possible to hand it over to IT and authorities with 30% tax rate and penalty? Looks like all jewelers are refusing to accept rest of the payment in cash.

I've been here before. Learned my lesson a long time ago. My policy has always been to keep one's nose clean. I did 'lend' some money to a cousin for a wedding but sent it by wire from my bank here - calling it a 'gift'. He returned it to me a few months later, again depositing it as a rupee wire transfer into my NRO account. Since I had a paper trail of the money, there was no problem for either of us.

I also purchased some jewelry on a trip to India last year, transferred equivalent USD to the Jeweler's account here. Of course you need to deal with somebody who can do this. Went on a trip to Coorg a few months ago, used an Indian travel agent and transferred the money again from US account into the agent's account in India. Used my credit card for all expenses while there and for sundries, the local ATM's sufficed.

In the past (years ago) it was much harder to do this, it was all cash deals then and I never felt comfortable with it. Thirty years of dealing with checks and credit cards makes you nervous with a lot of paper money.

[Rahul M]

Banks wont be giving out loans on Real Estate anytime soon, Loan against property will become redundant. It was already a tough market, now getting finance will be even more difficult

assessed prices of RE was already lower than that inflated by black money. there will be no or irrelevant change in those prices just because some notes went out of circulation.

[Suraj]

Would it make sense from the perspective of getting useful tips and intelligence on other tax evaders and tracking the money trail etc?

?? What sort of 'information' do they need ? In one masterstroke, GoI entirely turned the power power dynamic upside down. Any voluntary disclosure scheme still largely keeps the power in the black money owners hands. They can decide whether to disclose, how much to disclose, and essentially plan financially on how to handle their white and black earnings.

What happened now is, GoI waved a kryptonite wand - "Poof. See all that money you have squirreled away ? It's now worth less than toilet paper, unless you report it and hand it in, exchanging for new series notes" . No one has the power to 'offer' information anymore. There's no alternative but to do so or watch your cash to to Rs.0 value.

This was very well executed. First GoI gave ample chance to declare black money and pay only a nominal penalty . During all that time, in total secret they planned the next step - delegitimizing everyone else's black money cash holdings in one fell swoop. This is a great example of effective executive operation. Any number of sources could have revealed this plan beforehand. Remember the 'only $10 billion black money disclosed ? Fail!' just weeks ago ? Now all the remaining black money in high denominations is worth the value of scrap paper unless deposited in a bank. There's no need for GoI to provide further incentive. They gave it, and the smart people took it. The rest deal with the consequences of Modi's Nov 8 announcement.

There are references earlier as to how big fishes will simply switch to gold etc. But I argue that such claims do not think the process through. The gold jeweler (who's quite often himself hoarding black money) has to accept money that HE has to now exchange. Why would gold jewelers shift the liability of disclosure to themselves ? Realize that they have to declare that sudden windfall income too, which means they have to show who paid them that money.

There's no way out here. SOMEONE has to ultimately swap that money, and when they do so, questions will be asked. Anyone accepting that legal tender also assumes the liability associated with it now. That money has to be declared and swapped or else it becomes worthless. Ditto for political parties. All that hoard of cash kept aside for elections ? Need to switch if for new series. Don't underestimate the problem associated with liability here. Shops don't even take a tattered note, often. Why'd they take soon to be useless currency ?

Until now, there were tens (hundreds ?) of billions worth of cash running in the informal economy. That money makes a lot of things difficult. It chases assets and competes with white money. Houses ? black + white money ? Dal ? Black money hoarders. Gold ? Black money . In everything, this massive cash economy competes with you, pushing up inflation officially. Hoard and sell it to you at a higher price = black money profit. What do you think happens when that cash is taken away ? It rationalizes the task of managing inflation, price control, interest rate propagation (which can hardly work well when a lot of purchases don't care about it) and more.

[shiv]

Shoot and scoot from me.

Sick and tired after too many decades of driving to work I have started using public transport (currently bus/auto). Rub shoulders with hundreds and there is not a single 500 or 1000 rupee note in sight. Most people in India do day to day transactions of less than Rs 500, many less than 100. If plastic money and direct bank transactions are used for higher value transaction the role of large value notes is ONLY for black money.

Typically huge stashes of cash hoarded for elections, or for property deals. The story goes that a local Bengaluru Medical college where MBBS seats sell for 25-40 lakh and PG seats for over 1 crore - a room with 5-10 crores cash is always kept ready for tax raids. Income tax people raid the place take the money and go. 5-10 crores is small change for someone who has 1000 crores in black

[ManSingh]

For the record...Modi's address to the nation:

[Rishi Verma]

I am in a locality full of retired IAS officers with their ill-gotten villas and those who put on their expired blue light on their cars even when they go out 50 meters to buy rotten bananas. There is total and eerie sannata on the streets this morning. I am hoping their cash will be used to pick up the poos of their dogs.

[yensoy]

Until now, there were tens (hundreds ?) of billions worth of cash running in the informal economy. That money makes a lot of things difficult. It chases assets and competes with white money. Houses ? black + white money ? Dal ? Black money hoarders. Gold ? Black money . In everything, this massive cash economy competes with you, pushing up inflation officially. Hoard and sell it to you at a higher price = black money profit. What do you think happens when that cash is taken away ? It rationalizes the task of managing inflation, price control, interest rate propagation (which can hardly work well when a lot of purchases don't care about it) and more.

That's all fine sir and I am supportive of this move.

However just demonetization is an incomplete story. Otherwise a year down the road the same black marketeers will continue their merry ways with the new purple 2000 rupee notes.

This is required first-aid, the cure has to be stronger. Government can ensure limited supply of currency (and do the "currency printing" in virtual ways like the good old USA), but this will cause inconvenience to people. Government can supply currency in smaller denominations - so many folks doing larger transactions are physically incentivized to use cheques or electronic means. The data gathered by the currency exchange process can be mined for targeted tax collection efforts (GST will help a bit here). Government can delegitimize cash transactions for a wide variety of payments - including non-anonymous charitable donations, airline tickets & upper class rail travel, star hotels, medical treatment, large purchases etc - a lot is already in place but there is room for more.

[Rishi Verma]

Is it technically possible for powerful politicians to arm-twist the local bank branch to deposit their crores in cash then withdraw on 24th in New denomination? Remember hospitals still can accept "old" bills.

[uddu]

If there is a surgical strike, then this is the one.
I am sure that chances of poverty getting reduced because of this move is there. Imagine some of them donating some of the money to their servants, drivers, cleaners, Dhobi etc.. and say keep the change. So chances are that the poor will benefit to some extent and even some of the money will become white. The percentage could even be in the range of 40-30 percent. But the more of it gets converted by the corrupt, the faster poverty is going to get reduced.

[pankajs]

Is it technically possible for powerful politicians to arm-twist the local bank branch to deposit their crores in cash then withdraw on 24th in New denomination? Remember hospitals still can accept "old" bills.

Why arm-twist? Banks will accept any amount in deposit provided it is to a KYCed account and accompanied with a PAN number. There is no bar on deposits.

[Suraj]

That's all fine sir and I am supportive of this move.

However just demonetization is an incomplete story. Otherwise a year down the road the same black marketeers will continue their merry ways with the new purple 2000 rupee notes.

There's no reason to presume GoI has not thought this through. Give them credit for that. How many of us authoritatively knew GoI were being so meticulous about this ? That's right - no one. They thought through and executed something like this in complete secrecy, something that was essentially impossible in porous past regimes where it would have been TV breaking news 2 months before they could think of announcing.

IMHO, through GST, replacement with the new series, cashless transactions, PAN/Adhaar requirement, they'll implement an entire framework to rapidly stimulate legitimate economic and monetary activity.

[sooraj]

less corruption in defense deals

[Primus]

One of the biggest changes this will bring about is the importance of the 'business man' in society.

Growing up in the 60s and 70s, even highly placed salaried people never did as well as the smallest of business owners. This gap continued to widen thanks to tax evasion and black money. I watched relatives who were lower-middle class around Independence (as per family lore) gradually get richer and richer while even the loftiest government or private employees remained where they had always been. It did not bother anyone that the business-man never paid any taxes and had plenty of money to buy up huge properties, which of course filled up their coffers even more. That these people were high-school dropouts or at best token 'BA Pass' while the salaried guy had graduated from the top university made the pill even harder to swallow.

I have relatives who owned factories and were forever looking to 'hook up' with corrupt babus and netas who would get them tenders and push their products. One even went to the extent of marrying his daughter to an IAS man hoping for great returns on his 'investment'. Imagine his disappointment when son-in-law turned out to be a truly honest person!

All of that has changed. The playing field is now level. You run a business (like I do here), you pay tax on every penny you earn and if you are good at what you do you will make it. The competition is fair and thus much more palatable to all.

[Rishi Verma]

Is it technically possible for powerful politicians to arm-twist the local bank branch to deposit their crores in cash then withdraw on 24th in New denomination? Remember hospitals still can accept "old" bills.

Why arm-twist? Banks will accept any amount in deposit provided it is to a KYCed account and accompanied with a PAN number. There is no bar on deposits.

But I thought there is a limit to deposit. Sorry I didn't read the new rules.

[sooraj]

Two black swan events, surgical strike on black money and Trump winning

[Suraj]

Is it technically possible for powerful politicians to arm-twist the local bank branch to deposit their crores in cash then withdraw on 24th in New denomination? Remember hospitals still can accept "old" bills.

It's also possible for GoI to suspend the bank's operating license on the 23rd once bank hours end, and then review all the deposits and the depositors' antecedents

My point here is that those who hold black money, fundamentally don't have power to decide what to do with it anymore, short of outlandish theories like 'reverse-robbing' a bank like this. In any VDS scheme the power still rests with the guy with the black money. GoI can try to scare him into paying up through raids.

But now, there's no way to really finesse this. If they try to switch cash for assets, they have to find people who will take that cash and deposit it, and accept the liability to being questioned as to where the money came from. No gold jeweler who reported Rs.X income suddenly reporting 20x in deposits will be able to do so without questions asked - this is not a VDS in that regard.

[pankajs]

But I thought there is a limit to deposit. Sorry I didn't read the new rules.

There no limit to deposit provided you identify yourself via KYCed A/C and PAN. There never was. However, what happens AFTER deposit is another matter when the Income-tax dept. comes knocking.

The limit is for Exchange of currency.

http://www.firstpost.com/business/ban-o ... 96146.html

According to basic calculations, with a daily limit of Rs 4,000 a day, a maximum of Rs 60,000 can be exchanged by a person, in 15 days from 10 November to 24 November. From 24 November onwards, the exchange process will be eased for convenience, meaning the exchange limit will be increased. However, there is no limit on deposits.

[yensoy]

That's all fine sir and I am supportive of this move.

However just demonetization is an incomplete story. Otherwise a year down the road the same black marketeers will continue their merry ways with the new purple 2000 rupee notes.

There's no reason to presume GoI has not thought this through. Give them credit for that. How many of us authoritatively knew GoI were being so meticulous about this ? That's right - no one. They thought through and executed something like this in complete secrecy, something that was essentially impossible in porous past regimes where it would have been TV breaking news 2 months before they could think of announcing.

IMHO, through GST, replacement with the new series, cashless transactions, PAN/Adhaar requirement, they'll implement an entire framework to rapidly stimulate legitimate economic and monetary activity.

Never implied GOI didn't think this through. Look at my previous posts, I am the first person in this thread to laud the secrecy. I am only saying that this is one (drastic, sudden, important, but one) step in a multi-step program.

[MohdKav]

One of the biggest changes this will bring about is the importance of the 'business man' in society.

Growing up in the 60s and 70s, even highly placed salaried people never did as well as the smallest of business owners. This gap continued to widen thanks to tax evasion and black money. I watched relatives who were lower-middle class around Independence (as per family lore) gradually get richer and richer while even the loftiest government or private employees remained where they had always been. It did not bother anyone that the business-man never paid any taxes and had plenty of money to buy up huge properties, which of course filled up their coffers even more. That these people were high-school dropouts or at best token 'BA Pass' while the salaried guy had graduated from the top university made the pill even harder to swallow.

I have relatives who owned factories and were forever looking to 'hook up' with corrupt babus and netas who would get them tenders and push their products. One even went to the extent of marrying his daughter to an IAS man hoping for great returns on his 'investment'. Imagine his disappointment when son-in-law turned out to be a truly honest person!

All of that has changed. The playing field is now level. You run a business (like I do here), you pay tax on every penny you earn and if you are good at what you do you will make it. The competition is fair and thus much more palatable to all.

poppycock,
Businessmen flourished, because there was business. Because the salaried class were scared to invest money and take risk. I can understand the need to fight against corruption and fake notes, but to have one converted to communist tendencies is nothing but 'jealousy'

[tsarkar]

Will it stop corruption? No, the corrupt are much more savvy.

Just like Augusta Westland gave "offsets" to a company for developing "software". The IT dept is not savvy enough to assess the "software" or validate it's pricing.

These days crooked bureaucrats expect NEFT/RTGS fund transfer to properly registered NGO's (often run by their worthless children) for Stray Dog Welfare, Anti Pollution Drives, etc

How will Income Tax Department verify how many stray dogs have been sterilised? Or whether they've been fed caviar? Or whether the stray dog shelter built is a farmhouse or villa?

[MohdKav]

NGO's, is a extremely bad way to store cash from one perspective, because it is stuck in it forever.

[pankajs]

NGO's are now under more scrutiny with more reporting requirement. Yes there will be leakage but much less than before.

With greater push for digital payment that portion too will go down in the long-term.

[chetak]

Would it make sense from the perspective of getting useful tips and intelligence on other tax evaders and tracking the money trail etc?

Another layman question: The general rule about printing money seems to be that it leads to inflation, which is why very few countries can actually pull that off. Say out of 10 lakh crore 1000 Rs notes only about 2 lakh crore are exchanged and 8 lakh crore are thus presumed to be destroyed or out of circulation. Can the GOI then safely print that equivalent amount of money and put it back into productive uses like infrastructure or investment in education etc?

Excellent point. So in effect govt is confiscating 100% of black money stashed in 500 and 1000 Re bills.

this is not going to happen. The govt has just avoided the burden of redeeming those undeclared black notes.

there are many who will not dare to declare it and risk stringent scrutiny from the ED. They will accept the loss and hope to continue with stashing away new notes. This will become increasingly difficult and dangerous because Modi may strike yet again.

starting with what is virtually a fresh slate and hence forth strictly controlling and limiting the float of high value currency notes, Modi has wound up the black economy as we know it. Gold will take on a new meaning in India, going forward.

jetli seems conspicuous by his absence?? Movement of jayant sinha, out of the FINMIN may not have been all that innocent too.

[Manish_Sharma]

In bihar elections the aadti mafia did the daal thing to turn election from bjp to nitish lalu directions. Hopefully this hit will keep such mafia off balance to do anything in punjab and UP elections.

[Suraj]

Never implied GOI didn't think this through. Look at my previous posts, I am the first person in this thread to laud the secrecy. I am only saying that this is one (drastic, sudden, important, but one) step in a multi-step program.

My point is that any of us claiming 'good but the work is not done, XYZ needs to be done too' are being a little too clever, considering we didn't even guess this step. Odds are the next steps are already in advanced stages of execution, to be revealed in the coming days.

[kmkraoind]

In bihar elections the aadti mafia did the daal thing to turn election from bjp to nitish lalu directions. Hopefully this hit will keep such mafia off balance to do anything in punjab and UP elections.

Pardon me for using wrong analogy. BJP has behaved like a simple housewife, but it has not given satisfaction to Nitish. He coveted the pompous brothel and ditched the faithful wife. Now after living sometime with brothel, he realized the value of "gruhalakshmi wife" and now Nitish is trying to comeback to home.

P.S. Nitish has fully endorsed the latest move by Modi without using any ifs and buts.

ANI Verified account @ANI_news

Initially people will face some problem but this will be helpful for our economy in long run: Bihar CM Nitish Kumar

[Manish_Sharma]

No my question was that if this move will weaken daal dalals enough that they don't repeat their dirty game in punjab and UP elections.

[sooraj]

what will happen to judges with hordes of black money?