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

[Mugundan]

Jay, it has been "plain tax-cheating" all these years and it will continue to be so. I wasn't suggesting that our cheating is any different from Brazil, Korea or any other country.
Yes, I do agree that from now on the cheating guy will find it difficult to give away the black money since the scope would be limited, perhaps real estate in the main.
The talk of demonetization was there when the Cong Govt started withdrawing certain Rs 1000 notes(pre-2005) (was it in 2014?). Nothing happened. (BTW those notes are still valid, at least for depositing up to Dec 30, 2016, I presume).
Govt could have pumped in more of Rs 100 notes while withdrawing some Rs 500 notes (I don't know what method could have been followed).
Was secrecy so important is another important question.
What if Govt had announced in advance that notes were going to be withdrawn? If you say real estate transactions and gold purchase could be traced back would it have mattered when these transactions took place?
If from Nov 8 to Dec 30, 2016 those people whose accounts have shown deposits of large amounts that raise suspicions and IT is going to seek information regarding such deposits (they have already started doing that), nothing could have prevented IT from seeking such information if people started dumping demonetized notes into accounts had demonetization been announced in advance. I am a novice in economics and these sort of deals etc and would be interested in knowing more. Suppose demonetization was announced in advance, the people dealing in black money would not accept the old notes any more. The only way then would be to put them back in accounts (as it is being done now). If people misuse Jan Dhan accounts (as being done now) or purchase gold (as apparently done now) or transfer money to assets abroad (how beyond a point this is possible is not understood), I presume these things can be found out and people prosecuted and fined. May be there would have been some drawbacks but those would have been worth it instead of putting a whole nation into queues loss of jobs and resultant slump in economy (expected by many experts though according to FM and others in Govt it could be a lull for just a quarter or two).
By the way, the new Rs 2000 notes (practically useless since no one has change) would have been printed only after Sept 4 after the new RBI governor took over. What a "brilliant idea" to print Rs 2000 ahead of anything else since Govt concluded it would take 1/4th of time of Rs 500 printing and it would be great to flood the market with some cash, no matter what denomination!
Let's hope things will get back to normal in about three months. I also hope Jay that your optimism about this exercise proving a great boon to the country turns out to be right. And the temporary/minor inconvenience would have been worth it.

[jayakris]

Jay, it has been "plain tax-cheating" all these years and it will continue to be so. I wasn't suggesting that our cheating is any different from Brazil, Korea or any other country.

Actually, our cheating was quite different all these years, because a whole parallel economy and governmental agency actions/decision that largely depended on bribes got built up over decades, because it was so easy to do bribing with unaccounted money. The reasons for that are a long discussion, but in a nutshell (in my opinion) it is the remnant of 40 years of socialist policies which prevented political and governmental processes being based on high-level corruption with big businesses. I.e., political processes and governmental actions being driven or influenced by companies who competed with each other, and thus competed in corruption with politicians as well - as happens in free-market countries. Instead, our socialism put in place wide-spread black money based corruption, as this was the primary way for politicians to win elections. I would go even so far as to say that it might have been the primary mechanism that drove the economy. Our constitution and governance system, otherwise, provide hardly much incentive for politicians or government employees to do anything good, and it hardly provides mechanisms for the government to continue to run the country even half-way efficiently. Nobody really wins elections because they did great things (except may be the PM or CMs), and almost no government employee gets quicker promotions or higher salary for doing good work (or any work). It was corruption that kept the country moving, to some extent. But that kind of corruption made a lot of people in the government agencies have no choice but to turn corrupt. And it's not just in India that such corruption developed. It happened in most socialist countries. In many cases, bribes were received, to be shared among many in a chain of government or political party hierarchy too.

When I say our system "prevented politicians' corruption with big businesses", I mean it in a relative sense compared to most free-market countries. Anyway, though we dropped socialism some 25 years ago, the black money and bribes never left the system, and instead we now have high-level corruption with big businesses ALSO!!! In some sense, if we succeed in reducing the black money substantially, Modi will end up making the latter remain, and the former go away. No wonder that he is friends with big businesses! I am anyway in favor of high-level corruption, and think that it is a GOOD thing, on balance. I am on record to have said it many times before. If it becomes "competitive corruption" that forces companies to have to show better results for politicians to take their money, then it usually spurs better economic development in free-market economies. I am brutally realistic on human behavior and don't believe in much of idealism in people. It is just my theory, and I don't know if anybody else looks at things this way. I realize that it all may look totally wacky, but my thinking over decades bring me to these views.

Anyway, back to what you said, the "plain tax cheating" I mentioned is not what we have always had. I was talking of the tendency to cheat on tax in every country, which is quite a different thing. A lot of black money activity was no longer for tax-reduction purposes. People in many businesses absolutely NEEDED black money to do business. They needed it for real-estate transactions. They needed it for political and other bribes. They weren't always calculating the tax that was saved. That is the part of the equation that can be removed with this kind of 86% demonetization, if the government follows through properly with a series of legislative actions. Some first steps are to reduce stamp duty, and take out the tax officers' discretion. And I saw a report today that legislative action on these may indeed come soon.

The "plain tax cheating" that CREATES black money (but is not what sustains it) will continue in India like everywhere else. But in other places, that money will be used for cash transactions or something, and would mostly turn white later - unlike the black money in India which pretty much remained black, once it was created, because it was in a sense an essential need in our system earlier. May not be needed anymore. It needs to go. People want it to go, anyway. They are sick of the bribe-based economy we have, that pervades every walk of life. The political parties will just have to find ways to move the corruption up to the higher-levels like in other countries like the US, to sustain their operations using big business' money, as Indian people aren't too fond of giving political donations!

The talk of demonetization was there when the Cong Govt started withdrawing certain Rs 1000 notes(pre-2005) (was it in 2014?). Nothing happened. (BTW those notes are still valid, at least for depositing up to Dec 30, 2016, I presume).

If there was talk of it, then nothing could have happened, of course! This whole exercise has no meaning if even a day of notice is given.

Govt could have pumped in more of Rs 100 notes while withdrawing some Rs 500 notes (I don't know what method could have been followed).
Was secrecy so important is another important question.

It could have helped a little bit, but I doubt if that is much of an answer either. You need 5 times as many notes to be printed to replace 500s with 100s. Even if they printed 100s over a 3 or 4 months period at normal shifts, the number they could have pumped in was probably less than 1/10th of the 6 lakh-crore money that was in the Rs. 500 form. It would not have really made much of a difference and ATMs and banks would have still run out pretty fast.

[jayakris]

Like I said earlier, if hoarders spread whatever black money stacks they had into others' bank accounts, that is a terrific thing in my opinion because I know they are not getting all of it back. No way. By and large, people won't do that (even the illiterate poor people would sense some risk) unless they see some benefits in helping out. A minimum average commission of 10% will effectively get back into the economy, in my opinion, like money that got taxed and sent back out by the government to people's bank accounts. I have no doubt that this will happen, as people will use the money for some urgent things for themselves and then say "I will return it later, but I really needed it now for my kid's school" or whatever. Indians know that game very well, and the original owner can't do much about it. In my opinion, again, unless I am missing something, this has a huge wealth redistribution and economic stimulus effect. But I just don't see a single analyst out there talking about it. So far, the only real mechanism for saving liquid black money wealth (cash, that is) I have seen reported, is using others' accounts. Sorry, a lot of people aren't going to get a lot of that wealth back. Indians who helped move money around aren't dumb and will take a good chunk of it before giving it back. This is terrific, if you ask me!

I had said that earlier, and was hoping that people would not give money back. If they withhold 20 or 30%, this whole thing would be an unbelievable success and turn into a monumentally smart step.

I haven't seen any reporters or economic professors talk about it, but here is Modi being acutely aware of it. He asks that nobody should give back the money. So timely!!
PM's call: Grab benami deposits
ATABOY, PRIME MINISTER!!

Can you believe that our PM just asked people to be dishonest with their friends and grab their money?? But I am so glad he said this. It is absolutely the right thing to tell people to do, in this case. The clueless Congress party is after the PM though. They find it "shocking and shameful" that the PM asked people to "usurp the black money deposited in the Jan Dhan accounts". What??? The Congress party thinks that black money is something sacred that should not be "usurped"!! Haha. The Cogress party just admitted that they want the benami deposits to be returned to the crooks. Can you believe this? It is hilarious to see Modi making the opposition say so many ridiculous things! He has got everybody tied in knots.

I am sure the Kolkata economists who in my opinion hardly helped our country (sorry, PKB, but you aren't included) can see the communist principles involved in this "despotic action" (what Amartya Sen called Modi's demonetization). They won't admit it though.

I hope people will listen to the PM and will simply steal others' money. Go for it. National theft at a monumental scale. [Disclaimer: I am no economist, and all my views may be wrong!]

[Prashant]

But printing massive amounts of new Rs.500 could not have been done before-hand because there is no better way to let out the secret than that. Yes, they had introduced newer bills earlier, but they were getting released too. But printing for months to come up to lakhs of crores on a denomination already in the market, and not releasing it to the market would have let out the secret instantly

Which is why, the very simple solution would have been to introduce a Rs 200 bill & print that in the same vein as the Rs 2,000 bill. No one would have been any more suspicious than they would have about the Rs 2,000, and it would greatly have helped with liquidity. Poor planning.

[Mugundan]

Jay if you are planning to buy (or sell) a one crore rupee property in Kerala (or anywhere else in India) in the immediate future, yes there will be no cash left with anyone to manage "black money".
No one needs to have ''black cash". You take out your white money from bank and pay cash to the other guy along with a cheque (part payment). Though yours is ''white'', the moment it gets into the hands of the other party it becomes "black" (or let's say it can become black depending on the next step that other party would take).
In order to avoid taxes, the other party may continue to hide the ''black cash" (white from your bank and white when you gave it to the party) in his tax statements. Much of black money possibly might have been generated like this only in the past. People with "white money" who go to buy property are often told that they would need to pay some portion of it in cash.

Absolutely. Plain tax-cheating, that is. This happens in many countries. ALL countries, actually. It will be there in India too. But Indians are not particularly more dishonest or anything, so we will have similar black money as there is in Brasil or S. Korea or Italy.

I was just echoing your your sentiments Jay when I said it is similar to other countries! I have no idea about in which all ways tax cheating happens in India or any other country.All I was trying to say was there is no requirement for ""Black cash". (Cash could be in short supply if restrictions continue).

[Mugundan]

If there was talk of it, then nothing could have happened, of course! This whole exercise has no meaning if even a day of notice is given.

[/quote]
But why?This is what I have not understood. Suppose demonetization of Rs 500 and Rs 1000 is announced six months earlier, where do you think those notes would disappear? In real estate? Who will take currency that is going to be worthless? In gold? Govt can always go back and check books to figure out who dumped huge amounts of cash and then seek sources of income. (They are doing it now after having frozen books of jewellers about a week into demonitization). Investments abroad? Never understood how any Indian can be allowed to purchase assets abroad beyond a limit. Hawala? Again the problem will be useless currency.
If black money hoarders have got 50 days this time to convert black into white (and they are at it even now) how can you say even a day's notice would have meant failure?

[Mugundan]

But printing massive amounts of new Rs.500 could not have been done before-hand because there is no better way to let out the secret than that. Yes, they had introduced newer bills earlier, but they were getting released too. But printing for months to come up to lakhs of crores on a denomination already in the market, and not releasing it to the market would have let out the secret instantly

Which is why, the very simple solution would have been to introduce a Rs 200 bill & print that in the same vein as the Rs 2,000 bill. No one would have been any more suspicious than they would have about the Rs 2,000, and it would greatly have helped with liquidity. Poor planning.

Agree with Prashant that Rs 200 note could have been introduced and would have been a better option than Rs 2000 (Of course it would have taken 10 times more time and this Govt was running against time for some inexplicable reasons). Even with the Rs 2000 note, barring a few no one seemed to have known about it. There were some newspaper reports (English and Hindi). In the end by the time it got into the market, it only became an object of curiosity for the common man (and a tool for the unscrupulous to amass new currency as daily reports reveal) since it was impossible to change Rs 2000 for, say, a purchase of Rs 150.
So far no one has explained why Nov 8 was important. Could they have waited another six months to bring in more Rs 100 notes (also Rs 200 if wisdom had dawned on the chosen few) and from trying to bring in more total value of currency in the market by printing Rs 2000?
Even now queues are lengthy in several places in Delhi. Even now reports say cash is running out within a couple of hours in several cities. Even now not many banks are giving more than Rs 10,000. Even now ATMs are dispensing just Rs 2000 per person. How long is the question. Could it have been better planned?

[Atithee]

Almost every queue should be shorter. Almost every project can be planned better. However, even the best planners cannot anticipate the irrational behavior of over one billion people.

[Mugundan]

Almost every queue should be shorter. Almost every project can be planned better. However, even the best planners cannot anticipate the irrational behavior of over one billion people.

If you are referring to post-Nov 8, a large majority of that billion (over 95 per cent, I would assume) has behaved admirably, if reports are anything to go by and if assertions by the ruling party could be believed. People have stood in queues for four to five hours for days together and some of them have not managed (going by reactions heard on TV channels) to get anything or else received just Rs 2000 or Rs 4000.
Again, going by the reports that have appeared people have also coped with no money, no jobs, sleeping on the pavements overnight (waiting for banks to open), postponing essential medical procedures, and of course unfortunate deaths in the families.
Hats off to people of this country. The PM made repeated references to the people braving all the hardships during his Moradabad speech the day before and thanked everyone.

[Atithee]

That's what I've been saying Mugu. I was referring specifically to your post just before mine where you ended with these questions. The point is that people's reaction as to their hoarding tendency vs recirculating the small currency couldn't be gauged. This resulted in new rules everyday by RBI.

[Mugundan]

That's what I've been saying Mugu. I was referring specifically to your post just before mine where you ended with these questions. The point is that people's reaction as to their hoarding tendency vs recirculating the small currency couldn't be gauged. This resulted in new rules everyday by RBI.

Some of the new rule have hurt. But keeping them flexible was not a bad idea. So many problems came up and Govt had to be flexible. The "exchange"' idea was misused. Lots of people changed multiple times at bank branches where there were limited queues. Suddenly stopping limited use of old currency up to Dec 15 was a bad move. But Govt perhaps had information that this was also being misused in a big way. Restoring use of Rs 500 at toll booths looks rather comical though it is a good idea, again, till such time there is sufficient currency in circulation. I would have been happy had all the concessions been extended up to Dec 30. THere is some unconfirmed news yesterday that pharmacists have started accepting old Rs 500 notes again (I haven't seen an RBI/FM statement on this). When the facility was extended to private pharmacists this was a great move even if some of them might have misused the facility.
People are going to hoard even the limited amount of currency available since they are wary of the slow pace of currency printing and the moves of the government.
The queues have shortened at banks though they are unending at ATMs. (Managed to deposit some old notes in a bank nearby without hassles this morning . There was a long queue for withdrawals. Mercifully crowds had not spilled onto the roads). Most of the banks are giving only Rs 10,000 (max) in one withdrawal. They seem to have stuck to the original limit that was lifted by RBI after some time. I wonder how many banks would have given Rs 24,000 in one go in one week as promised by Govt. ATMs are mostly providing Rs 2000 only since there are not many Rs 500 (new) notes available.
I saw one report that said that credit/debit/e-wallet transactions have all come down drastically in November, showing the paucity of money in the market and the tendency of the people to keep something in "reserve"for a rainy day.

[jaydeep]

Russia is objecting big currency notes ban.

Russia Objects To Notes Ban, Threatens 'Counter Steps'

[jaydeep]

Another blame on demonetisation ...

Demonetisation hits IPTL: No Roger Federer or Serena Williams for Indian leg of tennis league

[jayakris]

Russia is objecting big currency notes ban.
Russia Objects To Notes Ban, Threatens 'Counter Steps'

They can go take a leap of the cliff, for all I care. We have 1+ billion people being affected, and they want special consideration. I have a simple suggestion. Pack your bags and leave for Russia, and come back when you think you are really wanted here. Maybe we will have some currency to change your rubles by then. And to the Indians who work for the Russian embassy, I humbly suggest that they join their brethren in the queues, like what I had to do, a couple of weeks ago.

[Varma]

In his letter, Mr Kadakin has said the limit set by the government is "not even enough to pay for a decent dinner" and totally inadequate for operational expenses.

Buy some potatoes and cook, my comrade!

- Varma