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

[kujo]

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 ...

Don't know where you are getting these numbers from Jay? can you substantiate?

thanks!

[kujo]

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.

If you are truly trying to deal with fake currency, using demonetization - internet articles are the least effective way to communicate anything on the security features. Only a fraction of the population has access to internet.
I am asking for a LOT of TV, newspaper and radio Public service announcements to educate the entire country!!

Also, how different / fantastic are the new security features from old ones - that it would make life difficult for "fake currency" mafia to duplicate these new notes?? Ans: there is NONE

[kujo]

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.

At least the second point of reference you are seeking will and should be public by next year around August. RBI publishes yearly report on the number of "currency notes in circulation".

[jayakris]

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 ...

Don't know where you are getting these numbers from Jay? can you substantiate?

It's all numbers that newspapers reported. The total amount of money removed is based on RBI's estimates, as they know that 86% of the money in circulation is in the form of 500 and 1000 notes. After all, RBI knows what has been printed and so should have the estimates on what is in circulation. There will be a portion that is fake currency but, if I remember correctly, it was reported to be much less than 1 percent. As I saw the ₹ 15-16 trillion figure in multiple places, I think that is generally the correct figure for the estimated amount of currency that became demonetized. The questionable part is how much of it will not come back and be exchanged to new currency, as they are in black money stacks. I suppose that is anybody's guess, but about 2 to 5 trillion is what I saw reported in newspaper articles. But people dispute that. Generally about 20 percent may be lost as useless paper, maybe.

EDIT: It seems 1.25 trillion black money got accounted for during the last two years when a chance was given to pay tax and convert it. So the estimate of 2 to 4 times as much of it being still out there (₹ 2 to 5 trillion) seems right.

[jayakris]

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.

How does large users change black money to hard assets like real estate? I thought real estate will only help in moving black money out of your hands to somebody else's hands. Black money remains black money in those transactions, right? You can't buy with black money and show the actual price of the real estate, because then tax man comes. Again, I am really a novice in monetary details, so maybe I am wrong. Foreign accounts is a separate thing. Yes, there is some fraction of black money that is in foreign accounts. Again, what I read is that a lot of the black money bundles have not gone abroad.

The black stuff may indeed be in the proverbial stacks in storage. Political party big-wigs probably have the largest bunch of it, as a lot of people use only black money for political donations because the politicians are usually the ones who can accept it easily and store it. I think Modi probably cut into a lot of Congress funds, and the question remains on how much warning BJP wigs got. Seeing the opposition politicians immediately focusing on this issue and bringing up accusations on some BJP folks to have got early hint and converting money etc, I think the general perception of a lot of black money ultimately being in political party go-downs is probably correct!

[kujo]

Did you ever wondered the enormity of replacing all these High denomination notes? I did and here are my findings!

The Math behind this madness.

According to Reserve Bank of India, there are 22 Billion notes in circulation as of this year (15 Billion in Rs.500, 7 Billion in Rs.1000) Rs. 14.18 Trillion total value

Approximately, say you want to exchange or deposit 22 notes per person. Rs.14,500 in value (seven Rs.1000 notes, and fifteen Rs.500 notes). Obviously, there are folks who would deposit a lot more than this amount, similarly there is equally enough number of people who would exchange a lot less than this. Let us stick with 22 notes for now, as it results in a nice round number:
1 Billion deposits / exchanges to be made in order to get rid of ALL of these old notes!!

There are 180 banks in India – from RBI website
I checked and IOB has 3400 branches, ICICI has 4700, SBI has 18000 branches while Abhyudaya Cooperative Bank has 110, ZILA SAHAKRI has 35, Karur vysya 770 branches.
Say 1000 branches on average per bank.

So, with 180,000 bank branches
5 days = 40 working / bank hours
Let us say, each hour they can process 20 transactions i.e) takes 3 mins each – taking into account multiple counters and dedicated bank staff for this.
180,000 * 40 * 20 = 144 Million transactions completed in 5 days.
So, another 42 days or 6 weeks to get the remaining 856 million transactions all done – and reach 1 Billion transactions?!

https://rbi.org.in/scripts/AnnualReport ... px?Id=1181

[prasen9]

How much does it cost to replace all the notes? Are there extra hours that are being paid to retired clerks, etc. to get the exchange done?

I still have no grasp on the exact cost and benefits of this move. Rarely am I a fence-sitter on things like this. But, it seems there is not much past history to project capably what the cost-benefit analysis on this would be like.

[jayakris]

kujo, I am unsure if your number assumptions are right. The 22 bills you estimated may need to go up to about twice or thrice, but the number of transaction will be down to half or one third. India has 250 million households, and I suspect no more than an average of 1.5 trips to the bank would be made per household for exchanging the old currency they have. Perhaps 350-500 million transactions (not 1 billion that you estimated).

This TOI article today says that SBI did 11 crore transactions in 11 days. That is a crore transactions per day. I find that SBI has 14000 branches in India. That makes it 700 transactions per day per branch. That is about 3 times the rate of transactions per day at the SBI branches than you estimated. Possibly because there are (I suppose) about 3 lines per branch than 1 that you assumed. That was indeed the average I saw at about 5 or 6 banks I visited last Saturday to find an ATM that worked in a small town, Chengannur, Kerala. They got about 20 people cleared per hour per line, but I was easily seeing 50 people cleared in 2 or 3 lines per hour. I think SBI tend to have larger bank branches and more counters than many other smaller banks though, and so I assume most banks operate at 300-500 transactions per day in other banks, rather than the 700 the SVI data show.

That means 2 times the speed of transactions and maybe 40% of transactions compared to your estimates. That implies about 1/5th or 1/6th of the 50 days that you estimated too. 10 or 12 days that is. The speed of all of this are reducing after the frenzied first week (I am sure bank employees are drinking more tea now than they were earlier!) ... So we can assume that it will drag on for 3 weeks or so before some 90% of old currency is all exchanged. I.e., most of the old currency will be exchanged or deposited within the next 10 days or so. So, that is not as much of a problem.

The real problem is the supply of new currency getting into people's hands. This is where the PM has asked for 50 days. People just don't have enough new 500 rupee bills and that is the real crunch. ATMs need to come back to working, and banks need to get more currency to disperse. It's a real crunch right now.

[kujo]

kujo, I am unsure if your number assumptions are right. The 22 bills you estimated may need to go up to about twice or thrice, but the number of transaction will be down to half or one third. India has 250 million households, and I suspect no more than an average of 1.5 trips to the bank would be made per household for exchanging the old currency they have. Perhaps 350-500 million transactions (not 1 billion that you estimated).

I came pretty close. See my next post....

[kujo]

So, are you wondering what is the current status of demonitisation? How much high denomination notes have been captured and what is still left out there??

According to last published Finance ministry data – from November 10th to 13th, upto 5 pm

In four days, they have collected Rs. 3 Trillion in high denomination notes and dispensed about Rs.0.5 Trillion back. This was done with 180 million transactions overall.

What I wrote before is very close to real data. Although the banks are more effective than I assumed! They did 45 million transactions a day, when I had approximated 29 million per day. So kudos to the bankers out there!!

Also, 3 Trillion / 180 million = Rs. 16,667 i.e) per transaction about Rs 16,500 was deposited / exchange of old notes. VERY CLOSE to the Rs. 14,500 I had approximated!!

So what is left? Another 11 trillion to go. Which, at current pace would take about 16 days.

The bigger problem seems to be the lack of 100 and 500 notes to actually perform your day to day transactions!!

http://www.finmin.nic.in/press_room/201 ... _Notes.pdf

In the first four days ( from November 10th to 13th , upto 5 pm ) about Rs 3.0 lacs crores of old Rs.500/- and Rs.1000/- bank notes have been deposited in the banking system and about Rs.50,000 crores has been dispensed to customers by either withdrawal from their accounts or withdrawal from ATM’s or by exchange at the counter. Within these four days, the banking system has handled about 18 crore transactions.

[jayakris]

You got it right, kujo. The numbers seem to be be right around what I expected after I took a look at your initial numbers. Yes, the banks were more efficient than you expected, which was the main correction I had on your numbers. I felt you underestimated it it a bit, mainly based on what I saw in Kerala. I was pleasantly surprised at how nicely the bank employees (in multiple banks) were doing their job. I saw no chaos. This was quite like they were all feeling that they had to do a duty. Very unusual for Indian public and employees to get behind something that the government asked for, other than in a war situation. It shows how much Indian public is aware of the black money issue and how much they cared. Yeah, many people knew that it may only work to a certain extent, but they are willing to try it. Whether they like him or not, they do seem to trust the PM to a large extent, especially in the general feeling that he is not directly tied to much corruption at a personal or family level, even if he is supposedly friends with some of the large corporations and his policies can be questioned on that count. It was a bit of an eye-opener for me, being in India when this happened and seeing how Indians pretty much agreed to do what the PM asked them to do, at least for a few days. Apparently, there is no riots or anything even now, and it doesn't look any of that will happen if the Government keeps monitoring things and is responsive over the next few weeks with the problems caused by the 500/2000 notes' supply (like in the farm seed money decision today). Bank employees definitely deserve kudos, in any event.

[kujo]

Yeah, I was guessing and approximating a couple of key numbers. But still ended up close to what they are actually seeing.

Real data:
16500 per transaction - 45 million per day. = 19.1 days to convert Rs. 14.18 Trillion
Vs
Approximate model:
14500 per transaction - 30 million per day. = 32.6 days to convert Rs. 14.18 Trillion

[Varma]

PM Modi has requested people to declare the so called unaccounted (or black) money and has given a hard deadline of 30th Sept. He clearly mentioned not to cry foul if any stricter actions are taken after that day. Whether or not one has any hidden money, not many have taken his word seriously then. Now that it is clear that he is capable of going to any lengths in an attempt to make corrections/changes to the system, no one will ever take any of his future warnings lightly...be it money related or something else altogether. I think this is the first time in India that a leader's word will be respected and supported for its worth, which is what I see as the single biggest gain. I don't think I have ever seen an Indian leader commanding so much of respect and support from an average citizen.

- Varma

[prasen9]

Are you sure the average citizen supports this? I guess we will get our answers in the polls.

[Sin Hombre]

Very important polls if further economic reforms are to be made.