Another Blow for Modi? India Validates 82% of 'Cash Ban' Notes

[88m3]

Another Blow for Modi? India Validates 82% of 'Cash Ban' Notes
by
Siddhartha Singh
December 5, 2016 — 5:01 AM EST December 5, 2016 — 7:32 AM EST

• About 12.6 trillion rupees of 15.3 trillion deposited in banks
• Government estimated 4-5 trillion rupees would be unclaimed

Rogoff: India's Modi Takes 'Very Radical' Cash Move

Indians have validated 82 percent of bank notes rendered worthless by Prime Minister Narendra Modi’s surprise move last month, according to people with knowledge of the matter, undermining the government’s estimate of unaccounted wealth in the economy.



About 12.6 trillion rupees ($185 billion) had been deposited into bank accounts as of Dec. 3, the people said, asking not to be identified citing rules for speaking with the media. The government had estimated that about 5 trillion rupees of the 15.3 trillion rupees sucked out by Modi’s move would stay undeclared, implying that this was cash stashed away to evade taxes, known locally as black money.


Lack of a meaningful cancellation could be a double blow for Modi as the measure was being used as a political and economic gauge of the success of his Nov. 8 move. One of Modi’s biggest campaign pledges was to expose black money in Asia’s No. 3 economy, and economists were viewing the cash as a potential windfall for the government.

Read: An explainer on Modi’s shock clampdown on cash

"Some of the windfall that the government was hoping for from the cancellation of notes will be dented," said Anjali Verma, chief economist at PhillipCapital Ltd. "That means the fiscal stimulus that was being expected might also take some hit. That is not good news at a time when direct consumption, private investment is not expected to pick up."

Private indicators published over the past week signal that the $2 trillion economy will be hurt by the cash clampdown. Economists have also slashed India’s growth forecast for October-December, imperiling the nation’s status as the world’s fastest-growing big economy.

Parliament has also remained deadlocked, with opposition parties demanding a debate and vote on the measure, which would censure the government. The lower house has been active for only 13 percent of the time allotted for the month-long session that started Nov. 16, and the upper house for 22 percent, according to data from PRS Legislative Research.

‘Defeats the Theory of Black Money’
Finance Ministry spokesman D.S. Malik wasn’t available for comment. The rupee ended little changed at 68.22 a dollar in Mumbai on Monday, the benchmark stock index rose 0.5 percent and the yield on the 10-year sovereign bond fell to 6.22 percent from 6.24 percent.

"Markets are not too worried at the moment," said Chakri Lokapriya, Mumbai-based managing director at TCG Advisory Services, which manages about $3 billion. "But if 12-13 trillion rupees comes back into the system it defeats the whole theory of black money."

In such a situation where the gains of demonetization aren’t apparent, individuals will more closely analyze the pain. A slump in demand due to the cash shortages will hurt company revenues and government tax collections, widening the budget deficit and ultimately weakening the rupee, Lokapriya said.


India Validates 82% of Black Money


What's his end game?

 

[TLR Is Mental Poison]

This was a huge mistake. Economist has a good article on this.

http://www.economist.com/news/leade...igate-damage-his-rupee-reform-has-done-indias

India’s currency reform was botched in execution
Narendra Modi needs to take measures to mitigate the damage his rupee reform has done
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INDIA is not the first country to introduce abrupt, drastic reform of its currency. But the precedents—including Burma in 1987, the former Soviet Union in 1991 and North Korea in 2009—are not encouraging. Burma erupted in revolt, the Soviet Union disintegrated and North Koreans went hungry. All the more reason for Narendra Modi, India’s prime minister, to prepare the ground before the surprise announcement on November 8th that he would withdraw the two highest-denomination banknotes (the 500-rupee and 1,000-rupee, worth about $7.30 and $14.60). Yet he did not and the result is a bungle that, even if it does achieve its stated aims, will cause unnecessary harm.

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• India
• Narendra Modi

Shops stopped accepting the old notes at once. Holders have until the end of the year to deposit them in banks or swap them, either for smaller-denomination notes or for new 500- and 2,000-rupee ones. That 86.4% by value of the cash in circulation is suddenly no longer legal tender has already caused predictable and needless hardship. It is too late—and politically unthinkable—to start again (ses article), but Mr Modi should do more to limit the damage; and he should abandon the flawed leadership style that caused the mess.

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Not the way to do it

The plan has laudable aims. Its initial popularity was based on the idea that the greedy rich, with their ill-gotten “black money” stored in stacks of banknotes, will get their comeuppance. Those who cannot justify the sources of their wealth will face punitive taxes. It also accords with Mr Modi’s manifesto pledge to normalise India’s black economy, estimated by the World Bank in 2010 to be worth about one-fifth of official GDP. The idea is that India will become more efficient, as more people and more money enter the banking system; counterfeit currency will become worthless; India’s woefully low tax base will expand; and government coffers will enjoy a windfall of cash expropriated from the corrupt.

It is a pity, then, that Mr Modi’s scheme to achieve these aims is so flawed. Banknotes are not just a way for the rich to store their wealth; they are also how the unbanked survive. As so often, the burden of this reform has fallen most heavily on the poor (see article). Over four-fifths of India’s workers are in the “informal” sector, paid in cash. Untold numbers have been laid off because their employers cannot pay them. Tens of millions have queued for hours at cash machines and bank branches, to get rid of the useless notes and get hold of some spending money. A new business has sprung up in laundering cash for a fee for those without the time or inclination to queue, or with more notes than they can account for.

Cash is used for 98% by volume of all consumer transactions in India. With factories idle, small shops struggling and a shortage of cash to pay farmers for their produce, the economy is stuttering. There are reports that sales of farm staples have fallen by half and those of consumer durables by 70%. Guesses at the effect on national output vary wildly, but the rupee withdrawal could shave two percentage points off annual GDP growth (running at 7.1% in the three months to September).

With a bit of forethought, much of the mayhem could have been avoided. It turns out that the new notes are smaller and require all the country’s ATMs to be reconfigured, which takes 45 days. Some 22bn notes are affected, but printing capacity is said by the previous finance minister to amount to only 3bn a month. So even if fewer notes are needed, because more money will be in banks, printing them will take some time. The banks were ill-prepared to handle about 8.5trn rupees in new deposits in the three weeks after demonetisation. After they used the deposits to buy bonds, lowering interest rates, the central bank had to order them to park the new money with it, in zero-interest accounts.

If Mr Modi’s plea for patience for a 50-day period until the end of the year looks optimistic, so does the promise of “the India of your dreams”, purged of the corrupt and their loot. In India’s black economy of undeclared, untaxed income, all sorts of transactions, from medical bills to house purchases, are sometimes settled with suitcase-loads of banknotes. Yet even if the hoarders will be wary of another confiscation in the future, they will be tempted to make use of the new 2,000-rupee note just as they used the old 1,000-rupee one.

Moreover, Mr Modi was wrong when he said that the rich now need sleeping pills, while the poor sleep peacefully. In past seizures of illegal wealth, only between 3.75% and 7.3% was found to be kept in cash. The sleepless are those who need cash to get by; the truly rich are laughing all the way to their flats in London. The punitive taxes levied on black money that is deposited will feel like flea-bites. As for the counterfeiters, most estimates of the value of fake rupees are in the tens of millions of dollars, out of $250bn in circulation.

Both for the sake of Indians and for his premiership, Mr Modi needs to mitigate some of the harm he has caused. He should find ways of printing the new money more quickly. More important, he should also lengthen the period over which notes may be exchanged or deposited and allow the old notes to remain valid as payments for a range of goods and services (tax payments, say, would seem logical).

Somewhat too sensational

Much in India needs reform—abolishing restrictive labour rules, for example. In the past such reform has often been stymied by a system that favours government by committee. Mr Modi has lurched to the other extreme. The perceived need for secrecy (to take cash-hoarders by surprise) fed into the innate sense he has of his own infallibility and his misplaced faith in his technocratic skills. By designing a scheme that was needlessly callous and which is becoming increasingly unpopular, he has squandered political capital. In future he needs to consult more widely, centralise less decision-making in his own hands and acknowledge that not all criticism is partisan or special pleading from the corrupt rich. India, fortunately, is not North Korea, and is aware that leaders are fallible. Its federal, democratic system will give voters plenty of chances to let it be known how badly Mr Modi has messed up his rupee rescue.

Just like everywhere else, the people who use cash in India are the poor. So of course they would be the ones who get killed by this.

India literally needs to get its head out of its ass. It's so mired in bureaucratic bullshyt it can't even properly identify problems

 

[the cac mamba]

This was a huge mistake. Economist has a good article on this.

http://www.economist.com/news/leade...igate-damage-his-rupee-reform-has-done-indias



Just like everywhere else, the people who use cash in India are the poor. So of course they would be the ones who get killed by this.

India literally needs to get its head out of its ass. It's so mired in bureaucratic bullshyt it can't even properly identify problems

and its hand

 

[levitate]

What's the background on this? The article kind of dives in without providing info on what lead up to this. Consequently, I have no idea what this article is talking about.

 

[88m3]

What's the background on this? The article kind of dives in without providing info on what lead up to this. Consequently, I have no idea what this article is talking about.

supposedly worried about tax revenue loss, bans high denomination bills to get them out of circulation, end result not a lot of dirty money out there, hurt the poor/middle class/business owners


That's what I've seen so far

 

[CHL]

supposedly worried about tax revenue loss, bans high denomination bills to get them out of circulation, end result not a lot of dirty money out there, hurt the poor/middle class/business owners


That's what I've seen so far

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".

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.

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.

 

[FaTaL]

supposedly worried about tax revenue loss, bans high denomination bills to get them out of circulation, end result not a lot of dirty money out there, hurt the poor/middle class/business owners


That's what I've seen so far

why didnt the poor and middleclass business owners take their cash to the banks like everybody else?

 

[David_TheMan]

Mises had a great article on this a couple of months ago, just a raid on the poor.

India's War on Cash and the Poor

But many Indians are so sick of corruption that they are willing, albeit grudgingly, to bear these hardships if the move should end it. They don’t know that it won’t: the move did little more than temporarily inconvenience the large money launderers and tax evaders, who have already found loopholes allowing them to profit from and minimize the effects of the government’s move—and that is a good thing.

Some have, however, realized that “the actual black money… is stashed away in Swiss bank accounts” and that it is regular people and businessmen who are the most affected. They have been and will be left with the large portion of the worthless bills once banks stop redeeming them. And as the money supply deflates, it further produces a reversed Cantillon effects phenomenon: a transfer of wealth from those still waiting in queues to those who have already exchanged their notes, as the diminishing cash stock pushes up the purchasing power of the rupee.

This high purchasing power, however, will also be short lived: new currency is being printed, and India’s central bank is already planning to further re-inflate the money supply with open market operations. All this is triggering the ‘classic’ Cantillon effects, again transferring wealth to banks, those in power, and the already wealthy—who receive the new money first—from the nation’s poor, who will be waiting for it to ‘trickle down’.

Unsurprisingly, the hardest hit are the always the poor. Sadly, they are also the ones who will likely head to vote in the next elections believing that the system will ‘now’ change and will ‘now’ work in their favor to reduce the government corruption they so despise. Often, the most difficult lesson to learn is that the best and only way to get rid of such evils is to get rid of the system.

 

[CHL]

Mises had a great article on this a couple of months ago, just a raid on the poor.

India's War on Cash and the Poor

Thanks for posting. I'm glad sites like Mises & Cato exist, true warriors for the working class.

 

[88m3]

I cant read because I'm blind drunk

so ll leave this

 

[CHL]

I cant read because I'm blind drunk

so ll leave this

Don't drive drunk and watch out for the devil, you know

 

[Domingo Halliburton]

why didnt the poor and middleclass business owners take their cash to the banks like everybody else?

Would you take your money to the bank and get 86% of its value back?

This is rhetorical by the way.

 

[88m3]

Don't drive drunk and watch out for the devil, you know

god bless the mta I wasn't fit for the wheel by noon

driving a manual S4 in the city is no after multiple southern tier 2xipa ibu and manhattans

holiday madness

 

[Professor Emeritus]

why didnt the poor and middleclass business owners take their cash to the banks like everybody else?

I think 88 is misunderstanding some of what happened, but I'll try to answer you fresh.

For weeks, there were giant, hours-long lines at banks and ATMs (still are in a lot of places), and you were limited to about $30 in what you could take out.

The poor generally work with cash all the time, and don't have anyone to hire to wait in lines for them. So they were totally screwed - missing days of work to deposit their cash before it became completely worthless, missing days of work to get cash, not being able to get enough cash or get it fast enough for major things that came up.

Then you're forcing everyone to navigate the system when poor people aren't as good at it. Some of them live a long ways from banks, or don't have a bank account, a lot of people aren't literate so they're intimidated by the things they have to sign. As a result, a lot of the lost money in the end won't be black people, but just poor people who couldn't navigate the systems effectively enough. However, there will so some positive effect as forcing everyone to navigate the system made a lot of people more familiar with it (lots of poor people opening up bank accounts for the first time), so that at least is good in a way.

Then the cascading effect was that it messed up the economy of a lot of the poor areas. If everyone's worried about cash, no one is spending cash - so all sorts of poor storeowners and such were getting hit hard in the pockets as all their customers got stingy real quick.

So yeah, in terms of time and hardship it hit the poor in a lot of ways, while it was just an inconvenience for the wealthy.

Meanwhile, you know all the ultra-rich had their black money in offshore accounts. At lot of the ones lower down from them had black money in cash, but most of them figured out ways to launder it in time through the system, bribes, etc., so they were hit a bit but not much.

 

[newworldafro]

This all about the Cashless Society. Control your ability to buy and sell.