India scraps its two largest rupee notes in shocking anti-corruption move

[kujo]

There is a thin line between courage & foolhardiness. I don't trust politicians (of any stripe). This should be seen as window dressing until proven otherwise.

Yes indeed. very thin line between courage and stupidity!!

But in this case, I will give credit where it is due. as Jay pointed out earlier
a) rolling out bank accounts to millions of new people in the last 2 years
b) giving time to surrender all unaccounted money

Are all pointing to good planning ahead of this....

Also, for me: making these notes invalid with *immediate* effect. If instead, you had tried to transition it out - with both old and new notes being valid for a certain amount of time - then it would not have worked.

[gbelday]

Yes indeed. very thin line between courage and stupidity!!
.

I see only courage here, no stupidity. Curious to understand why you guys feel that way? From what I read, this was attempted before by Morarji Desai's government and it was successful to some extent.

I understand kujo's points and I was also hoping to see some policy announcements that would deter future accumulation of black money. Maybe Modi's got some more aces up his sleeve.

[arjun2761]

Yes indeed. very thin line between courage and stupidity!!
.

I see only courage here, no stupidity. Curious to understand why you guys feel that way? From what I read, this was attempted before by Morarji Desai's government and it was successful to some extent.

I understand kujo's points and I was also hoping to see some policy announcements that would deter future accumulation of black money. Maybe Modi's got some more aces up his sleeve.

Perhaps, he could scrap the Rs 2000 notes in a couple of years in favor of a new Rs 1000 and so on. Of course, by then the surprise factor will be a lot less..

[kujo]

Perhaps, he could scrap the Rs 2000 notes in a couple of years in favor of a new Rs 1000 and so on. Of course, by then the surprise factor will be a lot less..

Yes, the current 2000 note is a dangerous one to hold on to!

On that note, why not scrap 500, 1000 and 2000 notes every 5 years or so? i.e) get a new government after elections, get new set of RBI notes! everyone will be afraid to have any cash after that.

Also, elections will be one GALA affair - with ALL the black money either spent and in circulation or converted to other forms of assets!

[kujo]

Yes indeed. very thin line between courage and stupidity!!
.

I see only courage here, no stupidity. Curious to understand why you guys feel that way? From what I read, this was attempted before by Morarji Desai's government and it was successful to some extent.

I understand kujo's points and I was also hoping to see some policy announcements that would deter future accumulation of black money. Maybe Modi's got some more aces up his sleeve.

More aces for sure - but criticism is about the way this whole thing has been implemented, with a lack of supporting cast I mentioned earlier.

Also, it is an inordinate amount of burden on regular folks and poor to deal with this in a reasonable manner.
1. Not all have access to banks within their range of regular commute
2. Even if they do, the queues in banks AND ATMs are horrible
3. Assuming you stand in the queue - you end up with a situation:
a) no more money left to withdraw
b) rinse repeat, tomorrow. because your cash needs (deposit or withdrawal) was hitting some limits
4. not to mention the simple things that are transacted with cash are no longer easy / possible! whether it is eating in a restaurant, paying for auto, buying vegetables - they don't have change for your 2000!

[prasen9]

What is the cost that the economy will bear due to loss of productivity, sales, days lost, etc.? Is it negligible with respect to the amount of black money recovered? What do the experts say? It is interesting that PKB is quiet.

[jayakris]

What is the cost that the economy will bear due to loss of productivity, sales, days lost, etc.? Is it negligible with respect to the amount of black money recovered? What do the experts say? It is interesting that PKB is quiet.

I think it is not negligible, though not large enough not to take this step. I think it will be difficult to make a case that we would really suffer more than 10 lost days of productivity, effectively, over a 30-40 day period till cash-flows generally normalize (people and businesses do find creative ways to make it normalize because life has to go on!). That is about $60 billion or so in productivity loss (with a $2.25 trillion annual GDP). The total value of currency removed last week was about $220 billion. So, at least about 1/4th of the money removed has to be black money for things to even out. But really, it seems difficult to measure the many longer term impacts of removing that much of black money. So much happens in real estate (and in bribe payments) using black money... Unlike the 1978 currency-withdrawal, this time there seems to be a general fear that business-as-usual is ending in India and that the government and taxman can and will come after you. There is so much of electronic paper trail on banking and other transactions now - and a lot more people are aware that they can be under the radar pretty easily. So the population may indeed behave differently from now on, in generating new black money (unlike in 1978). Modi has to keep the heat up for a while for this to work. It was time we did some thing, anyway.

Everybody is waiting for our resident economist to chime in. PKB, we need you.

[sameerph]

We will know the results after some time but is a courageous decision for sure.

Will we? How? What is the metric by which this will ever be measured?

I suppose they have to declare how much would be the tax collections out of the unexplained cash deposits a year or more down the line when all the assessments get completed. That will be the measure of success of this initiative as opposed to the cost of short term negative impact on the economy.

But as Jay said, the deterrent for creating new black money ( with the fear that the government will crack down some way) will be a more long lasting impact.

[sameerph]

I didn't say more security features - new notes may or may not have more security features than current ones. I still consider it possible and reasonably easy to fake most, if not all of these new security features. The question remains, where is the all out blitz to educate everyone on these security features?

By the way I compared the old 1000 note Vs the new 2000 note security features. Can't find anything remarkably new that would result in less counterfeiting!!

https://paisaboltahai.rbi.org.in/1000.aspx

Vs

https://paisaboltahai.rbi.org.in/rupees ... usand.aspx


https://paisaboltahai.rbi.org.in/500.aspx

Vs

https://paisaboltahai.rbi.org.in/rupees ... ndred.aspx

Here is an article which explains the security features -

How To Identify Between Real and Fake Rs 2000 and Rs 500 Currency Notes

Several such articles are there on the internet. So, it is not that no information has been put out for people.

[sameerph]

Also, it is an inordinate amount of burden on regular folks and poor to deal with this in a reasonable manner.
1. Not all have access to banks within their range of regular commute
2. Even if they do, the queues in banks AND ATMs are horrible
3. Assuming you stand in the queue - you end up with a situation:
a) no more money left to withdraw
b) rinse repeat, tomorrow. because your cash needs (deposit or withdrawal) was hitting some limits
4. not to mention the simple things that are transacted with cash are no longer easy / possible! whether it is eating in a restaurant, paying for auto, buying vegetables - they don't have change for your 2000!

It is all a bit exaggerated. It was probably true in first 3-4 days but I think there is less of a problem now. ATM's are still an issue because they need to be recalibrated so that new size notes ( and more Rs. 100 notes can be fit it). Currently, the ATM's can only store about 10% of the cash whichthey would have earlier. It was mentioned by FM that they could not recalibrate the ATM's earlier as they wanted to maintain the secrecy.

But, it is easier in banks. Yesterday, my wife managed to withdraw 10000 from bank after standing in queue for about 15 mins.

[jayakris]

We will know the results after some time but is a courageous decision for sure.

Will we? How? What is the metric by which this will ever be measured?

Well, currency demand itself will be a pretty good initial indicator on how much black money got removed from the system. RBI knows how much money got printed in new currencies. We just removed ₹ 15 trillion ($220 billion) from circulation. 86 percent of all money in circulation in India, that is. I believe the expectation is that we will only have to print about ₹ 10-12 trillion in the form of new ₹500 and ₹2000 notes. That reduces the liability of RBI and government can print extra for spending, I suppose. I am not an expert on money details, so don't take my word on it ...

I would think that the national productivity loss during the chaotic 50 days is somewhat of the same order as the extra money that the government will have. But the long-term impacts is much tougher to gauge. For one thing, as per various independent observers, electronic banking was already expected to improve drastically in India during the next 5 years because of all the new accounts put in place (something like a 5-fold increase in total monetary value expected, I think). In fact, this pain now may accelerate things and people may move away a bit more from cash transactions in legal businesses. A further demonetization of ₹2000 in say 3 years could end up being much less painful for the common man. So, again, the wheels have been set in motion. If we can stay with the program, we could really make a big dent in the black money problem and all its associated corruption in a few years time. It is worth it.

[jayakris]

It is all a bit exaggerated. It was probably true in first 3-4 days but I think there is less of a problem now.

This is what I hear from everybody in India that I've talked to, since I returned. I thought banks were just fine in my place in Kerala by even last Saturday, the day before I left. You could deposit, and withdraw money, for basic life-sustenance after something like half an hour of queuing. The issue of ₹2000 bills being less usable by small traders like fish-salesman was real, but people are already making creative arrangements like paying for the next so many days etc. People get creative pretty fast.

The problem is that we have a whole bunch of our press and "intelligentsia" who still cannot stomach the fact that the "chaiwallah" just did something that stunned the hell out of them, against which they could not even voice much opposition in the first 4-5 days. They are so troubled by it, that they are grasping at any straw to discredit what the gutsy chaiwallah just did. This is not to say that there isn't pain and that everything was planned flawlessly, but I have no doubt that the issues are vastly exaggerated by the press and intelligentsia, a majority of whom are anti-chaiwallah. They got a few days to quietly sulk at something that they suspect would ultimately be a good thing, but they can't admit it, and will exaggerate real and potential problems. Let us wait and see. The chaiwallah usually gets last laugh!

[SaniaFan]

Issue is that pain is not evenly distributed and poor people are suffering a lot. I feel we'll see the result in UP elections.

[prasen9]

Tax cheats will always find a way irrespective of whatever scheme you come up with (see Trump). Even I, with little experience, can think of how/where to park money. Just buy something overseas. Or put it in a Swiss bank account if you have a lot. Or find some of the Caribbean banks. Now the money will go outside the country, outside the reach of the tax man. For smaller amounts, put it in gold, real-estate, etc.

Maybe the government should require registration and reporting for transactions in gold by every individual/shop?

[Prashant]

I think the two largest things still unaddressed for me (plenty of opinion, not much data) are:

1. How much of the parallel economy is in the form of Rs 500/1000 notes? I think only the small users of black money would be storing it in suitcases, whereas all the large users would have converted to hard assets (real estate, foreign accounts, other things). Thus, this seems like a way to go after the foot soldiers & leave the generals alone.

2. How/when are they going to report metrics (not anecdotes) on the efficacy? As Jay points out, currency demand would certainly be one metric, but will that data be made public?

To clarify - I am not saying this is a bad idea. I am saying I don't see any real evidence that it is a good idea. I am open to being convinced otherwise, but not based on anecdotes.