Cash Ban Experiment
On November 8, India’s Prime Minister Narendra Modi stunned the country with an announcement that 500-rupee ($7.30) and 1,000-rupee notes, which account for more than 85 percent of the money supply, would cease to be legal tender immediately.
India’s Cash-Canceling Experiment set off a wave of panic that is still underway.
The announcement set off days of turmoil as millions of Indians tried to swap their suddenly worthless old notes for hard-to-find new notes of 500 and 2,000 rupees or older ones in smaller denominations. On Nov. 17 the central bank tried, with little effect, to reassure the nation that the situation was under control. “There is sufficient supply of notes,” the Reserve Bank of India said in a statement. “Members of the public are requested not to panic.”
Modi’s action is aimed squarely at the cash-driven shadow economy, which accounts for about 25 percent of gross domestic product. Fewer than 5 percent of all Indians file tax returns. Many shop owners use cash for their transactions and don’t declare their income. Wealthy Indians often avoid taxes by paying cash for property and jewelry. Those businesses “are where black money is hidden,” says Capital Economics economist Shilan Shah. With so much money going untaxed, Indian governments have had difficulty funding infrastructure projects and other public spending.
Tax officials will get reports on cash deposits in excess of 250,000 rupees and compare those deposits with income disclosures. The authorities can demand a tax payment and impose a penalty equal to 200 percent of the tax owed. The government estimates that as much as 5 trillion out of 15 trillion rupees will remain unredeemed as tax evaders unwilling to risk detection accept large losses.
As cash disappears, so does economic activity. For three decades, Ashok Kumar has been a trader at Azadpur Mandi, Delhi’s largest fruit and vegetable market, where much of the buying and selling involves the now-banned notes. Since Modi’s announcement, Kumar says, cash transactions have nearly stopped. “We are sitting almost idle,” he says. “There are no buyers.”
On Highway 24 between New Delhi and the town of Dadri, gas stations are empty and trucks stranded. Drivers spend their days playing cards, unable to operate their vehicles because transport company owners can’t get the cash to buy fuel or pay the drivers their 100-rupee daily food allowance. “There’s no work,” says Sundar Singh, a 38-year-old truck driver from Aligarh, a city about 90 miles southeast of Delhi. “I can’t even charge my cell phone,” he says, because he doesn’t have any change.
86% of Cash in India Withdrawn
The Economist reports a crackdown on India’s black economy makes life harder for everyone as India Grapples Withdrawal of 86% of Cash in Circulation.
A NEW strain of trickle-down economics has been spawned by the decision, on November 8th, to withdraw the bulk of India’s banknotes by the end of this year. As holders of now-useless 500-and 1,000-rupee ($15) notes rushed to deposit them or part-exchange them for new notes, an e-commerce site offered helpers, at 90 rupees an hour, to queue outside banks in order to save the well-off the bother.
Elsewhere, a chronic shortage of banknotes in a cash-dominated economy has left most trades depressed. Seven out of ten kiranas (family-owned grocers) have suffered a decline in business, according to a survey by Nielsen, a consultancy. Supply chains, in which wholesalers and truckers deal mostly in cash, have fractured. Some 20-40% less farm produce reached markets in the days after the reform. City folk admit to hoarding the 100-rupee note, the largest of the old notes to remain legal tender. Taxi drivers refuse to break the new 2,000-rupee note. Road-tolls have been suspended until at least November 24th, to prevent queues. Beggars have disappeared from parts of Delhi; no one has spare change.
India’s prime minister, Narendra Modi, is gambling that this temporary pain will be worth it. His goal is to flush out “black money”, stores of wealth that bypass the tax system, finance election campaigns and grease the wheels of high-level corruption. An enforced swap of high-value notes, say the reform’s boosters, acts as a tax on holders of illicit wealth. The element of surprise is disruptive but without it, there would be time for black-money holders to launder their funds by purchasing gold, foreign currency or property. A tight deadline makes it hard for holders of large stashes of notes to swap or deposit them without alerting the tax authorities.
This swiftness comes with a cost. Aside from cases where hyperinflation has rendered a currency worthless, such swaps generally take place over long periods to avoid disrupting commerce. GDP growth might be as much as two percentage points lower this quarter and next before returning to normal as the money stock is replenished, reckons Pranjul Bhandari of HSBC, a bank. Much depends on how quickly new cash can be swapped for old. It has not been a smooth process so far. The Reserve Bank of India (RBI), which issues notes, waited for six days before setting up a task force to ensure ATMs could dispense the new 2,000-rupee note. Only a quarter of ATMs in four big cities were full on November 21st, according to Goldman Sachs.
Despite the distress, and the raucous protests, the reform seems to have widespread support. Bashing the rich is popular even if the poor are inconvenienced. Some may also hope it will bring new state benefits for the poor and make housing more affordable. Indian real estate is so expensive in part because it is a store of illicit funds. In theory, whatever black money cannot be laundered will be worthless, yielding a gain for government’s finances and perhaps ultimately for poorer Indians. But such a boost cannot be relied upon. The RBI has not yet formally said that old notes will be cancelled for good, says Ashish Gupta of Credit Suisse, and it may be loth to do so. No central bank likes to say it no longer stands behind the paper it issues.
Cash Chaos Intensifies
Bloombergd reports India’s Modi Holds to 50-Day Pledge as Cash Chaos Intensifies.
Indian Prime Minister Narendra Modi used a radio address Sunday to assure the country that the cash crisis caused by his plan to remove large-denomination bills from circulation will ease within his proposed 50-day period.
Modi said in the monthly radio address that the difficulties India has encountered since he announced a ban on the use of 500 rupee ($7.30) and 1,000 rupee notes in a bid to curb graft should come to an end within the period he originally outlined. The policy, which requires holders of the bills to deposit them in a bank, will help curb tax evasion and the country will start to see its benefits soon, Modi told the nation. He also warned people against using the poor and their new post office bank accounts to recycle money.
The change has caused problems for individuals trying to pay for everything from weddings to funerals because ATMs are running out of smaller bills, and caused headaches for the Reserve Bank of India, which has seen a surge in banking liquidity pose an inflation risk.
A banking system awash with unused cash could cause borrowing costs to crash and lead to inflation, threatening to hurt financial stability in the $2 trillion economy. Indian sovereign bonds, which have rallied in November, may react negatively to the news, according to South African lender FirstRand Ltd.
Cash Still King in Japan
In contrast to India, Cash Is Still King in Japan.
As anyone who has visited Japan knows, cash is still king.
Even though many places now take credit cards, Apple Pay and other forms of cashless technology, the actual amount of notes and coins circulating in the country has doubled in 20 years. And that’s while the economy and population has shrunk.
More than 101 trillion yen ($966 billion) of cash was circulating at the end of October. It was used for more than 80 percent of transactions by value in 2014.
The tendency of Japanese to prefer cash means that any attempt to further lower negative interest rates or to impose them on private bank accounts might push people to take their money from the banking system and add it to their stash under the mattress.
The decision in Europe to stop printing the 500 euro note prompted concerns that governments were trying to make it harder to hold cash, and thus make it easier to impose deeper negative interest rates.
In Sweden, where the vast majority of payments don’t use cash and many bank branches won’t even accept cash deposits and withdrawals, the central bank argued last year that negative rates function better in a cashless society.
Rates are minus 0.5 percent in Sweden, but that isn’t an option in Japan, which “is a cash-based economy,” according to former Bank of Japan board member Sayuri Shirai.
Negative Interest Rates Logically Impossible
Negative interest rates and currency bans are nothing more than government sponsored financial repression.
Negative interest rates imply logical absurdities such as one would rather have $90 in ten years than $100 today.
Negative interest rates do not occur naturally. Rather, the must be imposed on savers by repressive forces.
There can never be negative time preference.
Note that I am talking about interest rates, not storage fees, a completely different thing.
Free Market in Currency
I am in favor of a free market in currency. Whatever consumers decided would be fine by me. Gold and silver would be the logical choices, as they have been for thousands of years.
Mike “Mish” Shedlock
Amazing that the sheeple of India have not hung PM Modi upside down from a lamp post yet.
Stuki Moi said:
Few countries’ sheeple seem to be that enlightened wrt showing proper respect for their rulers…..
Mox Nix said:
You have no idea how much ‘black money’ used for bribes (which perpetuates the oppression of the decent people) is sitting in rooms waiting to be distributed to corrupt politicians and authorities in charge limited resources (rail, shipping, licensure, access to same). This helps to flush some of that out. Also, there are rebel factions within India that are using phony bills to fund their chaos. This hurts them as well, and is a step toward hitting a reset button that hurts the schemers and dodgers. Yes, in the beginning there is pain, but in the end, I am hoping for prosecutions (naive, but hopeful) of the rat bastards that plague this country.
Might be because many are poor and know there is rife tax dodging. We don’t know what goes through the mind of the lowest 75%+ there. Perhaps they have few high denomination notes.
Les Francis said:
May not need the Sheeple for lamp posting.
Indira Gandi was assassinated by her own body guard.
In all my time involved in markets and finance, the most unbelievable and incomprehensible thing I have ever seen is negative interest rates.
It seems everywhere in the world the citizens are starting to rebel against these fools. France right wing is a remarkable concept, Brazil was about to get burned down this week, as politicians tried to actually legalize corruption.
It all does make for great entertainment though.
and in other news… Fidel Castro will no longer need to be cremated, as it has been discovered that he is already burning in hell.
” Brazil was about to get burned down this week, as politicians tried to actually legalize corruption. ”
Trump advocates giving Hillary a ‘get out of jail free’ card. This after Trump repeatedly said others were in prison for lesser crimes… thus legalizing corruption for the elite but not for the peasants.
” Brazil was about to get burned down this week, as politicians tried to actually legalize corruption. ”
Trump advocates giving Hillary a ‘get out of jail free’ card. This after Trump repeatedly said others were in prison for lesser crimes… thus legalizing corruption for the elite but not for the peasants. That brings me back to my “maybe it’s time to storm the Bastille” comment.. eventually the peasants weary of “eating cake” or something worse.
No, Trump didn’t…
You can spin the truth it any way you like.
Trump has repeatedly gone back on his word. Hillary is only one of many examples.
My first thought… maybe too many of those notes are counterfeit ??
Or maybe it’s time to storm the Bastille !!
“Members of the public are requested not to panic.”
So at least *that* is taken care of.
All this over a fiat currency bill worth $7…
None of this would be needed if:
Government corruption was small
Government debt was small
Government didn’t need to buy vote of the Free Sh*t Army to stay in power.
And this is what they do instead. Why? Because it is easy.
Easy to kick the can down the road for a little while longer.
And it is coming to America.
The Indian action might be brute force to help kill tax evasion. There are 100’s millions poor in India that don’t have enough to be able to dodge tax. A developed western economy mindset might not understand the full picture there.
Sweden is the scary one. Sounds like a prison. High taxes, negative rates, no way out.
And a muslim Bubba to rape you in the shower
In sweden rapists get very short sentences so when a muslim immigrant rapes a swedish woman he will be back out in a couple years to enjoy free life paid by welfare and look for his next victim.
Bureaucracy is corrupt so tax everyone !
“The ‘have-nots’ remain outside the banking system and never get a chance to establish their credibility. This keeps them at the mercy of the ‘cash economy/parallel economy’. The political system – due to the lack of government funding (white money funding) – is at the mercy of the parallel economy and black money. This inevitably leads to increased criminalisation and corruption in politics.”
And I am sure you are able to read into what this is about.
At a political and social level it is apparently not going smoothly
Swedish people still has access to the Euro – so I wonder where all that hot cash and folding stuff loved by many might be spent. Not Sweden for sure (no blond jokes please).
Looking at the graph above German business wins again as Italy is a bit of a stretch too far.
India has one of the most corrupt governments on the planet. Every transaction requires baksheesh…
I wonder if this stupidity in India will cause hyperinflation. Once the dust settles, smart people — honest and dishonest — will convert any extra money they get into dollars, euros or gold. Nobody will trust holding their savings in rupees.
As long as Modi or his party is in power everybody with a brain will instantly convert their rupees to dollars or euros.
Indian rupee is now as trustworthy as a Zimbabwes currency or Venezuelas currency.
Most likely all the people incompetent Modi wanted to target with this already had most of their money in real estate, gold or dollars and euros.
If indians had any sense they would be marching by the millions to the government buildings and throwing them with rotten fruit and eggs until Modi resigns and until Indian Central Bank leadership also resigns and this complete insanity hurting regular indians and especially poor indians is reversed.
Central planning NEVER works.
There is already heavy demand for dollars in India, now accelerating as no one will accept these bills.
Michael Graub said:
Excellent article today
Michael Graub Direct: 313-682-7638 Michaelgraub@gmail.com
Your article is well writtten but the point of this exercise by Modi is to do a “reset” on the “untaxed money” that many politicians and businessmen had hoarded in the last 10 years when corruption reigned supreme under Sonia Gandhi. That reset was long needed and it has been welcomed by the common folk in the country. If we thought it was madness sitting here , yes it is but in a complex country like India it was much needed.
To understand more of what is to come, read the article below here:
That is the stated goal. ZH has run a good series of articles, in short outlining that this is aimed at being supported by the middle class, that many well off or corrupt have managed to steer around the move, that corruption will continue while using the new bills, that it is hurting the economy, the poor, the middle class. Modi insinuated a move to cashless as well.
So really I look on it as shaking out hoarded cash only… at great cost to all. India won’t go paperless unless it is imposed after a currency collapse, and as this is so badly organized, unless you think it on purpose, no way they are going to introduce near a billion people to digital without martial law in place.
A bad, bureaucratic, stunt IMO.
Taxation is not the incentive?
There are reasons why India is a 3d world country…the Government is a big one…
Since the RBI going to replace the notes with the new Rs. 2000, this does not means the India will be heading to Cashless society yet.
Hi Mish. India’s government says that the move is aimed at curbing black money, which accounts for only 6-8% of cash in circulation ( out of the 86% of the currency ban). As such the move dosent seem to be of much relevance with respect to curbing black money.
Another point to be considered here is the political side of the move. The current government has left the other political parties cashless at a time when state elections are coming up. It implies that the other parties will not have sufficient funds to sponsor the major event and capitalize on the existing vote bank.
Apart from this, this move could also be a huge scam since the profit generated by cash which will not come back to the Reserve Bank could be well transferred to the books of the government. Now the question is how transparent and accountable the government is with its profit and its expenditure??
On the conomic front, the move seems disastrous due to poor planning and execution. In the most remote locations, it takes around 3-5 days for the money to travel from the Reserve Bank to the local bank or the ATM. in the short term, thousands of small businesses will shut down due to lack of working capital, leading toa vicious downward spiral.
Adding to this, going around Bangalore where I live, almost every business is saying there is anywhere from 30% to 50% drop in business volumes. From the car dealership (where they did 250 cars from 1st to 8th and in the last 20 days they have not managed even 100) to the small printing/photocopying shop which has a >60% hit to business.
This is in one of the most connected, populous metros. Life in rural India must be hell. Perishable goods prices are down 20-30% as people are selling in distress (one guy even told me to take away my purchase without paying as it would otherwise rot).
The Govt keeps spinning the story that GDP growth (an already cooked up number) will drop a mere 0.5%. Since most businesses in India eventually end up serving consumers directly or indirectly, I fail to see how (at least) 30-50 days of 30%+ drop in business will result in only a 0.5% drop in GDP growth.
Deficits are soaring and Govt tried every trick in the book to grab more cash (Gold monetization, disclosure of previously undisclosed income) and most failed to provide much relief. Apart from this the state elections in the most populous state (sending 80+ members to a parliament of 542) is coming up. The party in power has lost most of recent state elections and losing this would have the writing out on the wall for next general elections to parliament in 2019. So, this cash grab shows signs of desperation.
Besides, the biggest electoral promise of the Prime Minister (to get back unaccounted money from accounts held abroad by Indians) was a complete disaster and they are not even willing to disclose the names of these Indians.
You now have a better perspective of what is happening on the ground. If there is marked relief to the common man on the street, this will be proclaimed as successful. Otherwise, there will be hell to pay in the next general elections.
The common man (mostly the young urban middle class which is mostly clueless to the finer points of the economic emergency worldwide) has not been affected and actually benefits if street level corruption is eased. So they are backing it and are waiting and watching.
When the Govt strikes at property and gold (and arbitrary inspector-raj-like decisions are made by Govt and its functionaries about things like how much gold one is allowed to hold and the rest is taken by Govt with a Bond issued in return) I expect the tide to turn as they will get directly hit and praise will turn to anger.
Great experience as we watch this unveil in real time.
“OK people, we’re going to keep trying this again and again until you do what I tell you to do!”
Modi is an example of the complete idiocy of central planners.
When a politician talks like a central planner he should be booed immediately instead of letting them spread their pablum and get into positions of power to destroy peoples lives like Modi has done to millions of indians.
India will enter severe recession or depression thanks to Modi..
Sidharth Sankar said:
I’m living here in India. It’s not as bad as press articles make it out to be. Yes, there is a cash crunch now; but, the vast majority of Indians, myself included, are willing to bear with the short-term inconvenience for long-term gains. Anticipated long-term gains include: lower interest rates, increased tax revenue, mild deflation in retail, significant deflation in real-estate, decrease in terror-incidents (which are cash-fueled). So, what’s not to like about it? Please Note: cash has not been banned in India.
Yes, and at a push there are always negative rates. Increased tax revenue means paying more taxes, as it is the bad guys who will concede defeat because the amount they owe is actually so worth keeping that they will feel guilty. If you want deflation putting the whole system into the hands of central finance and its possible corruption is not an answer. ‘Terrorists’ are food, emotion, and ideology fueled, digital payment systems don’t get in the way, at best they leave traces to help investigators, something that can be applied to ‘ordinary’ people too. What’s not to like?
Sidharth, you seem to have swallowed the propaganda whole (as have most Indians). Let us now decode your statement …
Short term pain may not be as short as you believe. Besides, unless you live in rural India or are among the poor this pain is a nice drawing-room discussion point but you are really not feeling the pain.
This “anticipated” long term gain is mostly wishy-washy feel-good statements which feeds the desperate need for relief among all Indians.
1. Govt has already slashed term deposit rates (for large deposits) to 4.25%! This is astounding as it is a mere 0.25% over savings rate and a far cry from the 9-10% that was available a mere 2 years ago. This will deal a death blow to savers.
2. Lending rates have NOT be dropped. So, this implies 2 things. There is very poor offtake of loans by businesses (obvious as there is demand deflation) and so this is also a negative to people needing credit.
3. Inflation will fall officially, but it will remain high in real terms.
4. Jobs growth (an election promise of the Prime Minister which has already become a disaster) will spiral further down as global deflation deepens and AI/Robotics decimates whatever jobs remain (the IT sector, which provided much of the high-paying jobs in the last 15 years is officially slashing 20-30% of current workforce while also swapping costly experienced managers with cheap freshers to remain relevant with the old outsourcing model and trying to get onto the next model).
There are many other points which specifically point to there not being much long term gain. Meanwhile the Govt gives absolutely NO specifics relating to the long term gain propaganda, except perhaps to hint that all the cash grabbed will go into Govt projects in Infrastructure, etc (lots of pork for affiliated businesses there, we all know who the big businesses aligned with Govt are).
All feel-good and right now catching the imagination of the clueless.
This is a global trial balloon
Engineered by the global elite.
Kenneth Rogoff, Lawrence Summers..
Are you listening?
Global trial balloon instigated by the Elite and deep state
As usual, the elites were aware of demonetisation well in advance of the announcement by PM Modi on 8th November.
There were images of people showing off their new note bundles of Rs 2,000 on Twitter and Facebook.
Coming soon to your wallet: ₹2,000 notes | Business Line bit.ly/2fHwxLj
Before PM’s Announcement, Rumours of Demonetisation Abounded – The Quint bit.ly/2g6V8d2
Are our Currency Notes being printed by Companies earlier Blacklisted for printing Counterfeit Indian & Pakistani Notes? | SabrangIndia bit.ly/2fF7cAS
I am living in India. I don’t believe there will be rampant inflation in consumer goods. Instead there will be deflation. But the most frightening thing will be rampant inflation in basic food items. It will not be available as farmers who have been screwed by this useless demonitization will not be able to sow crops or harvest or sell them. Who cares for gold if you cannot eat?
BTW there is no problem in using old notes for paying black money component in buying property. Property developers are already well ahead to circumvent restrictions using corrupt bankers, bureaucrats, buying shell companies etc. This whole demonitization is a hoax and fraud perpetuated on the poor by a corrupt oligarchy. Property developers who had some fear in the first two days have found their way around and are now converting black to white with impunity
There is now a parallel Underground market to exchange any amount of old notes to new and the premiums are being quoted like Dow Jones ticker. I am hearing on TV channels that even the premiums have crashed to just 5 pct in Surat City.
Please be informed that till date almost 70 pct cash has already flowed back into banking system although the last date is end of the year. I expect almost 95 pct will come back thus making this whole demonitization the “most foolish monetary exercise carried out in the 21st century”.
Further to my earlier comments I would like to bring to attention of your readers following facts about Indian Black Economy.
1. Real Estate investments per year are estimated to be around USD 130 billion. As against this investments in Gold and Jewellery. is just about 5 billion and Stock exchanges also about 5 billion.
2. Most big tracts of land are owned by Political Bigwigs belonging to various political parties. They have very good influence on the Govt. to get their land cleared for housing development projects. Developers have to pay them money in black.
3. To get various permits for construction, Developers have to pay Local Authorities also in black.
4. Developers have no other way but to demand large black amounts from customers to pay for the above mentioned transactions. Many salaried and other people holding legal white money have to convert their white to black to pay these developers. It is now a norm that almost 40% of new house purchases have to be paid in Black cash.
5. Even Judges hoard black money (paid for giving favourable judgement). Last week one Sub Divisional Judge and his Driver in the town of Palghar (Near Mumbai) was caught with hoarded cash and they are in Police Custody. It will be interesting to see how the case proceeds.
6. Most of the State owned Banks are near insolvency caused by making bad loans to Big Businesses. It is estimated that such bad loans are to the tune of about 450 Billion USD.
7. The super rich have stashed away their loot abroad in Properties. Several Indians were named in Panama Papers but Government has not taken any action against them so far.
8. German Government provided a list of Indians holding Swiss accounts to India. Also India was given a List obtained from a HSBC whistile blower. Government has not taken any action so far.
9. Present Demonitisation had not made any dent on the Super Rich in anyway as mentioned earlier.
It seems that India will also join the cashless society 😐
if this is true, then there is more control by the government of people spending like in Greek and Cyprus.
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There are claims that you can cause a depression by crashing the money supply. I have not tried it myself, but it appears that Modi has. We must wait and see if the Indian economy has shrunk over a reasonable time period.
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Great article on the subject. However, the currencies of the world are all busy collapsing. Gold is the only Real money around as it has value. Fiat currencies are worthless and only has manipulated trading value. Bitcoin and Cryptocurrencies will be the money system of this new world of the internet.
One of the brave moves govt took of demonetizing. Lot of people are going digital and we don’t have to carry cash all the time .