Indian banks are fearful of running out of cash as lines queue up to withdraw money.
Bankers say they cannot cope with any sudden increase in demand, and warn against lifting cash withdrawal limits.
A decision by New Delhi on November 8 to scrap all large-denomination banknotes overnight removed 86 per cent of India’s currency from circulation. In an effort to prevent banks running out of cash, the finance ministry then imposed strict limits on the amount of new notes that could be withdrawn. Customers can currently withdraw just Rs2,500 from an ATM per day — equivalent to $37 — or Rs24,000 over the counter per week.
“If the government lifts the limits on Friday and there is a sudden rush, banks will be totally dependent on the central bank to give them enough liquidity,” said Soumyajit Niyogi, associate director at India Ratings and Research. “The Reserve Bank of India has been giving assurances that it has enough cash but reports of how much currency there currently is in the system suggest this might not be the case.”
New Delhi claims that purging most of India’s old cash supply, and replacing it with a smaller quantity of new banknotes, will eliminate illicitly earned or unaccounted for income that has been beyond the reach of tax officials.
But as of December 19, banks had replaced just 38 per cent of the Rs15.3tn in demonetised notes that was sucked out of the system by November’s announcement, according to RBI data.
The figures have alarmed bankers, who are now urging the government not to lift the curbs immediately. One executive said: “The government and the RBI need to make sure there is enough cash in the system before they lift the withdrawal limits.” A private banker told the Indian Express newspaper: “If the limits are relaxed, people will ask for more cash and there is limited cash. This will only turn banks into villains.”
When the policy was first announced, the government estimated that Rs5tn would remain undeclared as it would be part of illicit money hoards. But R Gandhi, RBI deputy governor, said earlier this month that over Rs12tn had already been handed back, and a newspaper report on Wednesday said the figure had since climbed to Rs14tn, leaving just over Rs1tn remaining.
This suggests either that the amount of illicit money in the system was overestimated by the government – or that new ways to launder cash have been discovered despite the government’s efforts.
The RBI did not respond to a request to comment.
More Experiments Coming
Speculation is rife that further unorthodox measures are coming: Modi to Crank Up Campaign Against India’s Black Money.
Well before India’s surprise ban on using 86 per cent of its cash supply, rightwing circles were abuzz with speculation about prime minister Narendra Modi taking such a step to fight so-called black money.
Mainstream economists paid little heed to the chatter — deeming it “too preposterous” to take seriously, given the economic damage it would inflict.
But with India now reeling from the acute cash crunch triggered by the decision to cancel its old Rs500 and Rs1,000 notes, many economists and observers are debating what other unorthodox economic policy experiments may lie ahead.
Mr Modi is expected to intensify his campaign against black money, with his next target likely to be property purchased with illicit wealth and not registered in the true owners’ names. Speculation is rife that he is also seriously considering other dramatic and unusual reform measures — including possibly abolishing income tax and replacing it with a banking transaction tax.
Expect More Pain, Failures
The hit to India’s GDP will be much larger than expected.
Nonetheless, it appears that Modi is prepared to follow up with the popular economic philosophy: If it doesn’t work, do more of it.
Mike “Mish” Shedlock
Fear it ?
The government will cause it.
“Nonetheless, it appears that Modi is prepared to follow up with the popular economic philosophy: If it doesn’t work, do more of it.”
Modi is emboldened by the fact that the common man has accepted it and is presently on his side as evidenced by recent emphatic victories in civic polls in different states. That a couple of state polls are in the offing ensures that he will continue to beat the opposition with this black money stick as it seems to have garnered votes for now. Also that he is great orator helps the process along. In short since this black money war cry (forget the fact that only 6% of the black money is in cash) is a winning strategy right now, you can bet the game is on, economics be damned. The plot can be thin, what counts is how well the story is told and whether it is winning awards (votes)!
Indians are voting for their own lives being destroyed when they vote for Modi but at least they believe some black money millionaires will also suffer.
.
Maybe indians will next vote for communism and for government owning everything?
.
I am considering that if this collectivist mindset is prevalent among indians then they are also undesirable as immigrants if they support big government and collectivist democratic party policies instead of being entrepreneurs like the few indians I know.
India is a country that believes in ACADEMIC THEORIES.
India believes that reality must be made to obey academic theories.
The beatings will continue until morale improves.
Who is Modi? (The same thing happened when Merrkel staged her serial coups which have violated the German GG, the constitution. First, when she ordered the end of nuclear power stations. Next, when she violated article 16 a GG banning asylum for people coming from Austria…)
What happened to the legal process? Where are the clas action lawsuits and injunctions to stop the atrocities? Wouldn’t or shouldn’t the souverain have something to say about this?
Is currency like a passport? (Ask Mr. Snowdon about his views on this) The government giveth and the government taketh away? Who OWNS currency?
George Orwell wrote the script?
The mindset of the Indians who have been lulled into the belief that this is a great way to get at black money hoarders is not the same as the mindset of the Indians who migrate. Ocean of difference.
This is a political exercise that has been simply painted as helping poor people and socking the black money hoarders (IMO, it is also an exercise at taxation). Propaganda is not necessarily the truth though it has to be said it has succeeded to such an extent that all the flapping by the opposition only makes them look more corrupt. It has become immaterial whether it achieves anything because Modi has made it so that anyone opposing it is treated as supporting black money. The coming state elections will be crucial. As of now Modi seems to be in the driver’s seat. In elections you never know.
Whoever said that lambs know that they are being taken to be slaughtered.
“The mindset of the Indians who have been lulled into the belief that this is a great way to get at black money hoarders is not the same as the mindset of the Indians who migrate. ”
Talk to a few of the ones who migrated. You will see that they have been lulled into the same kind of beliefs. Most of them see this as a step to “modernizing” India. Very few see the economic aspects or the loss of individual freedom etc. All they say is the opportunity to develop point-of-sale systems, smartphone apps etc.
India is fact in depression right now.
.
The demonezation was one failure after another and when the banks say that just 38% of demonetized currency is back in circulation and Indian central bank claims that 14 trillion rupees are back in circulation out of the demonetized 15,3 trillion this means:
1. Some blackmoney millionaires got money from central bank through corruption instead of that money going through the banking system.
OR
2. Indian central bank is lying to protect the prime minister and themselves from getting consequences like getting fired for their incompetence,
OR
3.Indians already know that the banks and politicians can not be trusted so they are taking more new money out of the banks in case there is further crackdown on bank accounts after demonetization is completed.
OR
4.Indians are changing investments and apartments and other property into money to hide it from the crackdown in these that the prime minister is promising.
.
In a functioning democracy the prime minister and his government would have stepped down after the colossal bundle of epic failures that demonetization was.
.
The funny thing is that piling 2000 rupee notes into your safe is easier than piling 1000 rupee notes so the tax evading indian can put twice the amount of black money in his safe or under the mattress than before.
“The funny thing is that piling 2000 rupee notes into your safe is easier than piling 1000 rupee notes so the tax evading indian can put twice the amount of black money in his safe or under the mattress than before.”
Yup. But you have to first convert your loot of 500 and 1000 rupee notes (some inconveniences here!), if you want to retain your loot.
How many Indians were so inconvenienced by this changeover (and betrayal of trust in the Indian money) that they will choose to keep a smaller amount of their savings as Indian money? Might they not purchase gold, US dollars (or Singapore dollars or whatever), bitcoin or whatever is negotiable and able to be kept away from the tax man or the actions of Modi?
They would. But it is likely that they will store in new currency also since these exercises cannot be undertaken every other day. The government will have to consider that propaganda may not work always. You have to also take into account that public may not be so obliging always and if things get out of hand it wil not be easy to handle (even this time there were a few instances of bank employees being manhandled).
I read that in order to deposit or exchange bank notes you have to have an account at that bank. This means that all the transactions are tracked. All the money will be visible to the government. They are trying to force everyone to have a bank account and pay taxes. Many of these people can’t even read.
good observations
Mish
When the Indians cancelled their cash, about half of their citizens had no bank account. This is partly on account of bank branches are few and far between in their rural areas. A bank account is not that useful when the nearest ATM or bank branch is half a day’s travel away.
Nevertheless, let us think the “track the transactions” angle through.
Since every deposit of the old notes generated a paper trail at a bank, what then was the need for the rush? They could have exchanged their notes over say ten years, and would have obtained the same paper trail without the disruption. People with illicit cash in old notes would have time to spend those notes in legitimate ways. Those notes would eventually be presented at a bank as part of legitimate income and would thus end up in the taxed economy.
Voilà, a cleanup of their tax evaded income held in the form of cash, sans the disruption!
On the hand, if their banks were failing and had needed an emergency cash infusion, then that panicked deadline of Dec 30th, the last working day of their banking quarter, would make sense.
If it walks like a bank bail-in and quacks like a bank bail-in, then it very likely is a bank bail-in.
The $1 trillion question here really is: did Great Indian Bank Bail-in succeed? Or is their banking system still on track to fail?
Indeed, this is so preposterous as to boggle the mind. I can’t think of any other examples of countries inflicting such large scale economic damage on themselves so deliberately. I can’t begin to guess the magnitude of harm this will do to their GDP, but I can easily imagine that a lot of people will start hoarding USD. There aren’t enough USD to satisfy world-wide demand if other countries take similar action.
BINGO!!!
India is a country that believes in ACADEMIC THEORIES.
India believes that reality must be made to obey academic theories.
The beatings will continue until morale improves.
When a check is written to pay taxes, the bank must pay the bill from reserves, because currency and reserves are official money. Demand deposits are just bank IOUs, and they are worth nominally less than official currency. So when a government calls in currency to be exchanged for deposits in banks, two inferences can be made: that depositors are being involuntarily taxed in exchanging real money for bank IOUs; and that the necessity for this extremity was a shortage of bank reserves or insolvency in the banking system. There is a difference in framing the problem in India as one of tax avoidance, in a system where 95 percent of transactions are historically done in cash, versus one of banks unable to complete tax payments to the government for lack of reserves, which implies financial misconduct of some other sort. However trying to understand Indian PM Modi’s actions may be fruitless, as every question seems to lead to more questions. For example, one may ask if Modi is living on the same planet as the rest of us, and the answer may be it depends who is interviewing him at the time. I saw a recent interview Modi gave with David Letterman, and he seemed to say that a billion Indians could switch to solar power immediately, with just a little help from the West.
paragraphs
The Indian demonetization was a bank bail-in, a forced recapitalization of their state run banks using the cash held by the public.
The bulk of banking in India is state controlled. These banks had a large ‘hole’ in their books, due to the non-performing loans that had been issued to large and politically well-connected business houses. The size of this ‘hole’ has been estimated at being between 5% and 10% of the Indian GDP.
By Q2 2016, the situation had become untenable; India’s state run banks were about to fail.
So India cancelled the bulk of its currency and forced its public to deposit their cash in banks. Replacement cash was not provided, because these deposits had to remain inside the banking system. Their rural cooperative banks, which did not have a crony loan problem, were barred from accepting the old notes, forcing rural cash into its state run banks.
After the cash flooded in, the state run banks reduced their interest rates, benefiting their corporate debtors.
Search for ‘indian state bank NPA problem’.
Pakistan finance ministry finaly rejected vote by upper house to scrap the 5000 Rupee note
http://www.ndtv.com/world-news/pakistan-rejects-call-to-demonetize-5-000-rupee-note-1642387
Good for them. Some share of Indians’ cash demand will be supplied by Pakistani currency.
Idiot Modi has just massively strengthened the finances of smuggling networks operating along the border. The same guys who are supplying materials for terror ops inside India.
I know it’s “India” and all, but is printing new, high-denomination notes really so difficult? Russians, Zimbabweans, and Venezuelans, et al, all figured it out.
There’s this ‘thing’ called “planning”….
They say it was being kept secret…
Pray for Modi: Psalms 109:8 Let his days be few; and let another take his office.
I am wondering what the response will be when Modi or another future Indian A-HOLE PM instructs the masses to turn in their gold and silver for more paper maggot currency or perhaps digital maggot currency.
Is there no end to the mindless stupidity of the masses ? Of course there is. And it ends just like it began….In a RIVER of BLOOD.
Whoever dares to ask Indians to surrender their gold will be mincemeat within minutes. Indians’ love of gold goes back millenia and could very well have become genetic. Roughly 25% of the world’s annual output in new gold is bought by Indians.
The Indian government had successfully confiscated its people’s gold in the 1960s.
There are no records of anyone being turned into “mincemeat” then.
In India it’s not just the printing of notes. Distribution can be a real headache outside of the large cities. Delays in getting notes to some areas would be no surprise.
People always underestimate the power of stupidity.
Banks that needed an infusion of cash to stay afloat and their Gov’t cronies whom are drumming the beat. Once the medium of exchange function is damaged beyond repair both loose complete economic control. It is going to be a fascinating spectacle once they reach that point.
‘People always underestimate the power of stupidity.’ And the willingness of voters to screw themselves in an attempt to get the rich.
For those who have some wealth, bitcoin offers an escape from Modi’s monetary experiments/assault,
For those who have some wealth, bitcoin offers an escape from Modi’s monetary assault.
Bitcoin is a big brother currency where every transaction is openly trackable.
I would much rather have cash dollars and cash euros and some gold also than bitcoin.
.
The current bitcoin value is a bubble caused by indian demonetization craziness and chinese crackdown on money transfers abroad.
To get a permit to send money out of China has been made much more difficult and there was even a crackdown on the amounts chinese can withdraw in Macao ATM’s so as to slow the flow of currency abroad.
.
Both of these things are the reason for the bitcoin bubble and both of these things together with the soon to be unfolding italian banking mess and Deutche bank mess which will hurt Euro are the reason US dollar is so high right now.
If bitcoin is a bubble, I don’t see why the same isn’t true of the USD. (Except one can be inflated and controlled.)
Electronic fiat is a big brother currency; bitcoin is far less so. You can acquire bitcoin without providing ID, or you can use exchanges that require ID and then transfer your bitcoins to an anonymous address/wallet that you control. Then if you want to use your bitcoin in unapproved ways (e.g., donate to wikileaks, send money to a relatives in another country), there are ways to further cover your tracks.
I agree that the bitcoin rally may lose steam when governments around the world stop engaging in currency wars and return to the gold-standard or other form of sound money. However, I think a more likely scenario would be one or more central banks or governments beginning to accumulating bitcoin, which would add a great deal of fuel to the bitcoin fire.
Once again…
Central economic planning by people with too many academic credentials and zero real world experience ==> total economic chaos.
If a private sector business failed this badly, the business would collapse and the proprietor would be shunned for years by creditors he/she screwed over.
But when a government official fails this badly, he gets a cost of living increase and free TV time to list as many lame excuses as he can and deflect blame onto as many other people as he can.
When in doubt, blame Putin or Bush or the deplorable people who pay the bureaucrats salary.
Mish,
Giving you ground report from India. You can deduce your own conclusions.
1. Since last 15 days RBI (Central Bank) has stopped publishing data regarding how much old notes have been returned. Informed people believe that almost 100% notes have come back into the system.
2. Almost no cash in 85% ATMs.
3. Although Banks have been allowed to disburse Rs. 24,000 per week OTC, many banks are not getting adequate new cash from RBI and hence giving less cash. Urban areas are not so badly affected. But in rural areas the OTC cash is rationed to about Rs. 4 to 5k.
4. The first week of each month is most crucial since people have to make their end of the month payment and the need for cash is highest.
5. Farmers and farm laborers are under extreme stress. Even rich farmers are not able to pay their laborers and hence they have left the farms. India’s farms are entirely cash based. Poor farm laborers are on starvation diet (Ex:Darjeeling Tea workers are on Tea leaves diet). Vegetable/fruit vendors sale has plunged since they are all cash based.
6. Lots of small enterprises have closed down and more than 20 million jobs have vanished.
7. In the next 2 month elections in the most populous state of UP will show how much political damage Modi has suffered. Media visible Middle class still supporting Modi, but the poor (who are not visible to media) are completely against Modi.
1. In semi-urban & rural areas, not only is the functioning ATMs less than 10% of total (which are anyway few and far between), but many are closed indefinitely for many days now.
2. Now that Modi’s 50 day grace period is over (and we thought 50 days was too long a time, but how time flies) he is due to launch the next broadside Sat evening. Take cover!
3. Any evidence rural folk are completely against Modi? I suspect another 1-2 months of this and the inflexion point may be reached.
Finally, the opposition is so weak, stupid and self-centered that, despite all this Modi may carry the day. This is going to be a GREAT lesson for other countries about what is coming to a country near them soon! 🙂
Last week in their election campaign in UP rural the attendance in Modi’s rally was much thinner compared to Rahul Gandhi rallies.
“Indian banks are fearful of running out of cash as lines queue up to withdraw money.”
That makes a lot of sense if the government is going to eliminate some of the currency, when they have a billion people needing it.
Does Summers still want to eliminate the 100 dollar bill?
You guys are missing the point.
1. India’s economy runs on black money. He will bring that under control.
2. Pakistan sponsored terror is funded through counterfeit notes. India has a lot of insurgencies going on, all funded with counterfeit notes.
3. The people support him….wisdom of the crowds and that sort of thing..
Next step will be the crackdown on irregularities in real estate deals…watch for it.
If things continue to be this messy for another 1-2 months, there will be no “next step”!
If Indians never fully trusted banks or paper money, one billions of them trust them even less today. People are STILL standing in line for cash in what looks more and more like Modi’s collusion with the central bank as part of the worldwide war against cash (i.e., to clip a bit off every single digital transaction.) There could hardly be a more perfect argument for return, if not to a gold standard, a reintroduction of money as an actual store of value, such as small-denomination silver coinage. Ditto for the miserable people of Venezuela who have been dragged from pillar to post, and even to lesser-suffering Mexico whose workers mine a quarter of the world supply for everyone but themselves while enduring payment in ever-depreciating pesos.
Well, I don’t know enough to discern whether or not this turmoil is good or bad. If the common classes, including the untouchables are for it, could it be good? If India’s monied class is against it, is it bad? Corruption is so to the bone in India and most other countries so that there is only 5% of income tax payment compliance, good or bad? Is having 99% of real estate owned by shell companies-individuals good, or bad? Is having 90% of the population having no bank accounts, written into laws as deplorables, good, or bad? No property taxes, no SS taxes, no sales tax, bribes demanded for even basic services, no indoor plumbing….. How could anybody govern a country with the majority of the population “kept” mired in the 12th or 15th century.