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

As we had often come back to discussing economic benefits/impact of sports I thought it was about time for an economic discussion forum.
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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by prasen9 » Mon Sep 04, 2017 5:40 am

jayakris wrote:
Mon Sep 04, 2017 4:48 am
I really don't see much of an agenda in what he wrote.
I'm sure you don't. But, saying things like tax revenues increased (tax revenues should always increase unless you changed tax laws or are in a depression because the number of people are increasing and the economy grows) or that the economy has come to a standstill smacks of one.
He seems to say both sides of the equation and generally give some facts.
I hope they are facts. I see some as just hyperbole.
But now, some people are indeed talking finally of the key point that money being accounted for and in the system could have an impact, regardless of whether the cheats were caught or not.
Can you explain to me what you are saying here? I do not get it. I still see black money as black money.

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

Post by prasen9 » Mon Sep 04, 2017 5:43 am

jayakris wrote:
Mon Sep 04, 2017 12:14 am
Even those who opposed and continue to oppose it, are not saying that it did anything bad except for 6 weeks of serious inconvenience (and deaths). I can understand some - like Mugu, for instance - whose opposition was perhaps more due to being affected by the deaths and hardship.
People did not have money and thus could not spend. How could this not affect the total economic production? I don't understand this part.

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

Post by prasen9 » Mon Sep 04, 2017 5:49 am

jayakris wrote:
Mon Sep 04, 2017 12:14 am
The point is this. If what we have seen so far are pretty much the majority of the negatives we were in for, and we are seeing no indication that anything more negative is happening, then can't we just be hopeful that the positives from now onward will be substantial? Some folks are just pessimistic by nature, which I can understand, but some here are more than just pessimistic - they are even hoping for not much positive now and later. Or so it would seem...
I am pessimistic by nature. But, I can assure you that every time I am pessimistic and the good of the team/country is involved, I hope that I am badly wrong in my pessimism. We can be hopeful, but, that is like hoping that a year from now I will suddenly get rich. What is the benefit of this exercise if we do not catch the tax cheats? That is what I am missing.
By the same token, I am hoping for substantial rewards from all the money that turned white, and got accounted for, in the long run.
But, you can do so by just granting general tax amnesty. What will be the rewards and how?
And really, if we see income tax revenues go up due to an enlarged tax base and more economic activity down the line because of this, I probably wouldn't give Modi much credit for it, because he didn't really articulate it all too well, beforehand.
How did demonetisation enlarge the tax base? The cheats got their currency notes changed, but the money is still black. And, just because it is in the new currency notes does not mean that they will spend it. It will go to the same savings box where the old notes were. What am I missing?

Also, if this brings tangible benefits and I hope it does, I will give Modi credit for it. It will be absolutely brilliant. He owns demonetisation and he owns the successes of it. I don't really care about whether someone articulates it or not. Obama gave tax credits silently because people are more likely to spend things that way. But, he did not get credit.

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

Post by prasen9 » Mon Sep 04, 2017 5:55 am

I have no idea what this means. Tax collections Is the increase abnormal? Or is it within the range of variability? What is the y-axis in the first graph? It talks about whatever I do not understand. Other things also don't seem abnormal. So, I wonder what is going on. If demonetisation impacts things, we should see some abnormality in the curves assuming other factors are equal (which I do not know if they are either).

Wrt cashless society, I think about 1/3rd of our rural areas have no electricity. Maybe about 1/3rd of the entire country does not have mobile phones either. What are they going to do? [Not a rhetorical question. I really want to find out what the plan is.]

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

Post by jayakris » Mon Sep 04, 2017 6:04 am

A whole bunch of people got a bunch of money to spend and it is showing?
Who got money to spend? I don't understand this assertion either. People who had black money gave some others a small amount of money to launder it. But, even after they have the new notes, it still remains black money. If they take it to the bank and deposit it, it will still be black money and they will be caught for having disproportionate assets in comparison to their stated income. On that money, they still have not paid the taxes. Demonetisation is not amnesty. How is the money white now?
First, on how plain currency was made white. People indeed found others to accept their currency and put it into their ow accounts. A huge increase in bank account creation that had gone on over the last couple of years under this government (something like 40% increase in bank accounts (?) for direct subsidy payments, though mostly without much money in the accounts). They did show substantial increase in deposits. Up to 2.5 lakhs is exempted. So a lot of people with actual cash stacks did find their farmers and drivers and relatives to help them. Nobody knows how much black money was in actual cash stacks but various estimates I saw was all somewhere in the 3 to 6 lakh-crore area, as reported initially (3 to 6 lakh crore was the currency amount that some thought RBI wold not get back, if all the black money got simply destroyed). The question is on how much money got transferred to others' exempt accounts. Some numbers have started to come out over the last 3 months

The latest numbers on new tax-filers is about 0.91 crore new tax-filers, which was a jump from 4.5 crore. Now, about 0.5 crore has been the normal increase per year lately, and so about 41 lakhs new ones are now reported as caused by demonetisation. That is as of Aug 18th (See this official clarification from Tax Commissioner Surabhi Ahluwalia, after the press messed around with numbers and confused themselves about what Modi and Jaitley said in separate statements). I believe these are not the final numbers. Considering the Rs. 2.5 lakh exemption, and lower bracket till Rs. 5 lakhs, it seems the "new money" that got accounted for, with minimal or no tax, is somewhere in the 1 to 2 lakh crore range. That is probably not all of the black money but at least 1/3rd of it. We may find it to be higher and somewhere in the 50% range later. But that depends on the estimate of black money, which may have been exaggerated too. In any case, at least about 1.5 lakh crore of rupees went to a whole bunch of new people in the population. Considering that these are folks who never were in the tax base, they are poorer ones too. That money has indeed become white, and will get spent out of their accounts in some form or other.

Now I have no idea what the people who accepted others' money in their account gets from it. A commission (probably no less than 10-20% because the original tax cheat was saving on nearly 50% tax on it) perhaps, and how they return the money over time in cash or kind, is all uncertain. But people are creative. In any case, this money is out there and it will get spent over time. As I guessed in a post at the demonetization time, there is no legal mechanism for the original cheat to get this money back fully and they WON'T get it all back that easily. About half a crore people (may be 2 percent of Indian households) will be spending a lakh or something each on their debts or whatever, like the government gave away that money to them. That is quite substantial. probably 1/4th or 1/5th of what my original hunch on numbers were, but still a pretty good "economic stimulus" but given at the bottom than at the top. That is my uneducated logical "economics" of it.

Did that make sense, prasen? Again, the money became white mostly because of the tax exemption of 2.5 lakhs that was there.

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

Post by jayakris » Mon Sep 04, 2017 6:19 am

prasen9 wrote:
Mon Sep 04, 2017 5:40 am
jayakris wrote:
Mon Sep 04, 2017 4:48 am
I really don't see much of an agenda in what he wrote.
I'm sure you don't. But, saying things like tax revenues increased (tax revenues should always increase unless you changed tax laws or are in a depression because the number of people are increasing and the economy grows) or that the economy has come to a standstill smacks of one.
Hey, I checked the numbers. He is right. There are enough undisputed numbers now, on the normal increase of tax revenues, and what we just saw is much higher. You are the one who just started out with a suspicious view. Are you saying that we were in a worst case than a "standstill" and that he was painting a good picture? I think you are not, if I get you right. I thought you said we were not in a standstill because we did have 5.7 growth. So, for him to still say that it was a standstill, was actually taking the side of the anti-demonetization side who said it would happen, right? I am missing something on what is upsetting you on this!
But now, some people are indeed talking finally of the key point that money being accounted for and in the system could have an impact, regardless of whether the cheats were caught or not.
Can you explain to me what you are saying here? I do not get it. I still see black money as black money.
I tried explaining it to the extent I understand, just above. Black money got spread into tax-exempt accounts of others. Once it is in an account and the others file a tax return saying they are exempt, it is white money. The original cheat will get it back in some form, but not all of it. Hence the redistribution of some of it. It is like they paid say 20% tax on it, and the government pumped it back into 5 million households, in effect. I am not too good at this topic to say very confidently that this is how it is, but that is my understanding!

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

Post by prasen9 » Mon Sep 04, 2017 6:34 am

Sorry, I did not understand two posts before where you ask me if it makes sense.

Let us say, I have 10 lakhs in black money. I ask my cook, my servant, and my driver to find four people to take this money in old notes and bring them back in new notes. Now these are poor people. So, I tell them, look, if you do this for me, I will give you Rs. 1000 each. Take it or leave it. Most would take it unless they have another babu giving them a better offer. I do not know how much competition there was but my dad says that he knows people who did it as low as Rs. 200 per person. But, given the number of poor people, the competition would not be much and you could find several takers at even these low "commission" rates.

So, the old money goes via the servant and comes back as new money. Yes, the servants get some money but that is a pittance. Did the Rs. 200-1000 per person one time payment really change the economy?

Also, these people were not filing taxes anyway. And, they say that 2.5 lakhs is their annual income. So, they pay no taxes.

If you can tell me where in this simplified example I am missing anything, maybe I can understand. It is quite possible I did not understand this demonetisation thing at all.

The only way I can see some difference could happen if some cheats chickened out and decided to pay taxes for this year whereas they would not have without this psychological shock.

What am I missing in my simplified example?

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

Post by jayakris » Mon Sep 04, 2017 6:55 am

Ah, I see now, prasen. This was probably because you were not in India when it happened, like Atithee and I were. The cook and the driver could not just go change your money and bring back 2.5 lakhs. There was no currency for that. That money HAD TO go into a bank account, and there were strict withdrawal limits. There was no currency in circulation to change to! The currency shortage was to some extent a necessity. The money that went into others' account could be used with credit card purchases etc, but then everything is white, and you couldn't do anything crazy like getting the cook or the driver to pay for your uncle's hospital fee by credit card the next week, and risk getting caught by the taxman later.

No way, Charlie, for any cook or the driver to just accept a 1000 or 2000. Indian public, even the poor ones who live hands to mouth, are not that dumb about money. They knew that the tax-cheat clearly didn't have many great options, and the time was short. The awareness of these things among the Indian public, in quick order within a week or so too, was something impressive for me to see. You had to get rid of the money into others' accounts, and get it back, expecting to lose no more than say 20% of it (less than the tax you would've paid, had you used the tax amnesty earlier).

I had given an example a few pages back, of the cook saying, "sir, sir, I will return it, but can you take it as a loan to me for my daughter's wedding?"... Heck, you are at the mercy of the cook, as you can't dictate terms. The cook controls his bank account and you cannot go to any court to get your money back. And you may or may not get it back somehow in some form. Not easy. Then you negotiate to the 20% commission I was talking about, by threatening to fire the cook/driver on which you still had some leverage. Oh yeah, poor people in India are not dumb, and can be very creative when it comes to money. If they smell a chance to make something, and they knew they had the upper hand, they would use it. They all knew what was going on, which is why we had long but rather peaceful queues all over the country and we got through it! If anybody other than the cheats felt that they were getting ripped off, this wouldn't be the case. A lot of others were queuing up with other people's (cheats') money, though nobody talked about it.

Without a whole lot of this happening, we would not get some 50 million extra new taxpayers already.

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

Post by prasen9 » Mon Sep 04, 2017 7:18 am

No, I was not. But, I knew it would go to an account. There are some poor people with deep loyalties (at least in the neighborhoods I know of). People who had been helped by others. Now, human beings are complex beings. So, they could be very charitable on one side and avoiding taxes on the other --- heck, maybe they had helped these poor neighbors with black money. So, some of these old favors got returned by people who had been given jobs when they were destitute, etc. I am not saying that the poor are stupid. Everyone tries to get the best offer they get. So, if you are in an area where there are a lot of middle-class tax cheats and few poor people, then the commission would be high. In other places, it would be lower.

And, yes, even after there was enough currency notes, I have heard of some people refusing to give the money back and succeeding to keep it. I have also heard of people being "taken care of" (beaten up etc.) by the rich (think thakur-type people) if they did not return that money. And, I have also heard of these people going to the police and slipping the police a reasonable note to get them harass the launderer about how they got the money in their account or threatening to do so (most middle-class people can find some relative who works in some police department who can make a call to the local police department). In most of these cases, they got their money back. So, it is not that easy to figure out who really had how much leverage. Certainly the poor had some leverage. Admittedly, these are anecdotes from my dad and a friend.

Basically, we are arguing what the cut was and whether this cut was significant enough to cause an increase in the revenues. How does the tax on these cuts compare to what the government would have gotten by an amnesty scheme at a low-enough tax rate?

Wrt the 50 million, how much was the year-to-year increase in the last five years?

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

Post by jayakris » Mon Sep 04, 2017 7:47 am

prasen9 wrote:
Mon Sep 04, 2017 7:18 am
And, yes, even after there was enough currency notes, I have heard of some people refusing to give the money back and succeeding to keep it. I have also heard of people being "taken care of" (beaten up etc.) by the rich (think thakur-type people) if they did not return that money. And, I have also heard of these people going to the police and slipping the police a reasonable note to get them harass the launderer about how they got the money in their account or threatening to do so (most middle-class people can find some relative who works in some police department who can make a call to the local police department). In most of these cases, they got their money back. So, it is not that easy to figure out who really had how much leverage. Certainly the poor had some leverage. Admittedly, these are anecdotes from my dad and a friend.
Terrific. So, you have more info on this than I do. I was mostly guessing in what I said (and had predicted way back at the demonetization time). Looks like exactly that is happening.
Basically, we are arguing what the cut was and whether this cut was significant enough to cause an increase in the revenues. How does the tax on these cuts compare to what the government would have gotten by an amnesty scheme at a low-enough tax rate?
The point is that you cannot give any amnesty in income tax without the standard tax rate and at least a minimal penalty. No adding too much penalty is all yo can do. That would still bring it to some 40%. Anything else would be very unfair to those who actually pay honest tax, and they will not take kindly to it. The government would get roasted. My guess is that on an average the cheats lost some 20% at least. Some lost a lot more, and some managed with less using intimidation tactics. The police story your dad said is surely what many well-connected cheats would've done.
Wrt the 50 million, how much was the year-to-year increase in the last five years?
Did I say 50 million or 50 lakhs? I get confused between lakhs and millions :) .... 41 lakhs actually. Many outlets and the Tax commissioner press release linked above, reported recently that 91 lakhs (.91 crore) is the increase this year. I assumed 100 lakhs, as there is still time. They reported that 60 lakh new people join and 10 lakh leave due to death and retirement every year, so 50 lakh is the normal increase. It seems like we are at double that this year.

What I want to see is the number of people who filed exempt. I saw numbers on it for 2015-2016 (and I didn't know that exempt people had to even file!)... I have not seen the number for 16-17. The jump in that number would be rather telling. That may be where most of the 41 lakh are, right now. By the way, it may not be not just those people who might have helped the cheats. There may be a bunch of people who helped with a lakh or two here and there, or agreeing to even pay some tax. Final numbers will take a while more.

But we may simply not know the amount that really started getting spent by all these borrowed accounts people. No idea about the effect of that, as of now. Anyway, none of it can hurt one bit. It is all a good thing from now on. If the manufacturing and other slowdowns in the first quarter isn't a serious drag beyond another 3 or 4 quarters, this may all have some very serious impact later. We will see. I just don't think Modi knew well, or foresaw all of this. He was driven by some simpler ideas of black money, counterfeit, etc, and a gut feeling that it will politically help. I will still give him credit for trying to do something and managing to pull it off.

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

Post by prasen9 » Mon Sep 04, 2017 8:07 am

I give him credit for doing this. Any failure or success he owns.

I think you are ignoring the cost. The cost in slowdown of the economic activity has to be weighed with the potential gains. Some of the gains may be very long term because people may realize that this demonetisation thing may be done again and for low tax rate people it may be better to give the 10% tax now (what is the first bracket after the free filers?) than 20% later on. If 20% is the average/expected cut. The losses/costs are possibly one time as far as I can tell. As for the deaths, unfortunate as they are, the economists also put a figure on that. And, if extra tax money helps in creating more hospitals that helps in reducing deaths in the future, the country as a whole may be better off (and I hope it is). But, try telling that to a person who lost a loved one (I am not).

I think statistically it would be easy to determine what the probability is of the increase in the number of tax filings and whether the null hypothesis holds. That is, of course, assuming all the other confounding factors were held at bay.

And, I fully agree that my anecdotes are anecdotes perhaps gathered from a few data points and I did not question them seriously to figure out whether all those anecdotes are first or second hand only. And things get distorted if they are passed around more than 1-2 hands.

Anyway, I fully agree that it is perhaps too early to say anything conclusive. Let's see what happens.

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

Post by Mugundan » Mon Sep 04, 2017 2:27 pm

At least for the time being this cartoon sums it up for me:

https://twitter.com/BishanBedi/status/9 ... 6030818304

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

Post by Mugundan » Mon Sep 04, 2017 2:40 pm

jayakris wrote:
Sun Sep 03, 2017 8:11 pm
Sin Hombre wrote:
Sun Sep 03, 2017 10:32 am
If the likes of Forbes and the Economist (leftist anti-India rags) are against it, it likely was the correct thing to do.
Boom! There you go :)

And I don't think Mugu is right above, that the increase in tax payers is only the natural growth as incomes rise. What I read was that it was quite clearly much higher than would normally happen year to year.
I go by figures being supplied by various writers and publications The Wire has been giving quite a lot of stats. I had already put a link to what Mr James Wilson wrote. He seems to have credible statistics, too since these figures look authentic.
Here's his latest:
https://thewire.in/173706/demonetisatio ... -tax-base/
This doesn't show tax collection has gone up 2016-17 compared to previous years. In fact it has gone down. This despite amnesties, threat of heavier taxes if wealth other than declared found out etc.
No, Jay, I didn't mean to say tax collection goes up only because of salary hikes. That is one of the reasons. Obviously when a Demon type of measure is taken a lot of people (if not all) are bound to come out with some portion (if not all) of their black money and pay taxes from 40 per cent to 50 per cent to 85 per cent or whatever. The total collection would thus have gone up.

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

Post by Mugundan » Mon Sep 04, 2017 3:10 pm

Jay wrote:
"Even those who opposed and continue to oppose it, are not saying that it did anything bad except for 6 weeks of serious inconvenience (and deaths). I can understand some - like Mugu, for instance - whose opposition was perhaps more due to being affected by the deaths and hardship."
I am afraid you got me wrong again Jay!
Yes, deaths were pretty serious even if we presume more than half of 104 would have been exaggeration. Some people died, isn't that bad enough?
Hardship: Yes it was nightmarish. Queuing up in front of banks. People from all walks of life complained: Daily wage earners didn't have money to eat (exaggeration?), students didn't have money to pay for bus or any other transport (exaggeration?); they had to attend exams but had to also find a way out to deposit their old notes and take out new currency.
I was in Delhi at that time. For the first month I didn't have the guts to go near a bank. We went around the areas to see how long the queues were and then returned. No luck at ATMs too. My son managed some money from colleagues. We had carried a good amount of cash while travelling from Kerala to Delhi.
I needed money to buy medicines; some shops accepted cards, others didn't. Paytm, Ola etc were done after the initial nightmare. Yes some hardship it was.
But was I just concerned about my own plight?
Daily wage earners were suffering (later I learnt they suffered in Kerala, too). Then, as well as now, reports say informal sector practically collapsed. TV channels initially showed many interesting stories about farmers, small-scale industries etc suffering. (May be they were all anti-BJP channels!!) Slowly they all went silent. No longer was any daily shows from around the country about the effects of demon.
They all suddenly became pro-BJP!
Before I left Delhi in the first week of Jan, farmers had started dumping their produce on roads (for the TV?), they continued for quite a while after I returned to Kerala too.
in Kerala, I found (and still find) there are hardly any shops that take credit/debit cards. Forget Paytm and the like, I haven't seen any board since I came over here in Jan.
I was told skilled and unskilled labour was finding tough to find jobs. I had engaged some labour through a contractor for some repairs to my house. Two guys were from Jharkhand. I asked them about the demon effect. They said they had the jobs all right but were not paid fully by their 'maalik'. That was March. Demon was over in December.
I have lost some money through Demon (now please don't say, Mugu lost some money and that's why he is crying). Left some in Kerala, didn't even realize that I had stashed away some; couldn't get railway tickets confirmed for our scheduled Dec 27 journey and by the time we reached here it was too late. I didn't even bother to search; it came up after several days. Even if the SC now rules that one can go and change in select RBI branches, I know it won't be in our area. Travelling to Chennai or Mumbai or Kochi would mean I will lose more money than I have in old currency. This is not black money Jay, taxes paid fully!
All reports nowadays suggest unemployment on the rise, industrial slowdown, wrecked informal sector coming to grips yet with recovery etc.
What more did we want to say this was a bad experiment?
Even if you eventually say two lakh crores came in through Demon (taxes plus cash converted into white) would it be compensation enough for all the trouble, deaths?
By the way, fake currency is being caught almost every day. And terrorists strike have increased and deaths have gone up among security forces.
If you were just interested in getting that unaccounted wealth (and not the tax and no intention to jail them etc) why couldn't the government announce a total amnesty and ask people to come out with it? "Convert all your black money into white; no questions asked; no tax to pay. Just come and deposit into your accounts".
If Govt just wanted to curb cash it could have as well stipulated a limit of Rs one lakh or two lakh in cash payments through a notification and be done with instead of demonetizing. How many people in those queues would have dealt with cash payments of one or two lakhs on a regular basis?
Now, we have just claims. Let's wait of course. If the trend continues the economy would be hit if it hasn't already been.

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

Post by Mugundan » Mon Sep 04, 2017 4:10 pm

prasen9 wrote:
Mon Sep 04, 2017 5:55 am
Wrt cashless society, I think about 1/3rd of our rural areas have no electricity. Maybe about 1/3rd of the entire country does not have mobile phones either. What are they going to do? [Not a rhetorical question. I really want to find out what the plan is.]
As I posted earlier in reply to Jay, I haven't seen many shops taking credit/debit cards here in my town in Kannur District of Kerala. Bakery, veg, fruit, medicines are all on cash. I do get to pay by debit card in a departmental store from where I get my grocery. Transport is strictly cash.That is from Jan 2017 till now. I couldn't find a single chemist shop out of around half a dozen in the market that I normally go that accepts cards. No Paytm, Bhim or Aadhar or any such facility either. It is all cash, cash and nothing else. I can understand then what could be the situation in remote areas of UP, Jharkhand, Bihar, Andhra, TN, North East etc. Figures released by Govt also shows cash spending has gone up since March.

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