Could someone fix the title, please? The notes aren't being made illegal, they are just ceasing to be legal tender. There's a big difference! Right now, the title is clickbait.
Using an arbitrary piece of paper for a transaction isn't illegal, is it? If two individuals in India agree to an exchange of goods, but with USD instead of INR, that isn't illegal, is it? It's just that whoever received that amount in USD can't deposit it in an Indian bank; not without converting it into INR in the first place, at which point they're effectively depositing INR.
Replace USD above with any paper currency, or non-currency paper for that matter. If you have someone willing to take a piece of paper from you in return for something, there, you have a transaction. It's just that, the other person would be unwise to accept a piece of paper they can't put to use.
A ₹1000 note being "not legal tender" simply means that no Indian bank will accept it being worth one thousand INR. If someone wants to accept such notes in return for anything, they can; they just can't deposit it in an Indian bank (after December 30).
A ₹1000 note being "illegal" would mean that it would be a crime to possess, offer, exchange, display, disperse, aerosolize, or apply some other action or combination of actions to it that isn't otherwise illegal already.
This is a great move. Though I only hope that depositing whatever money you have is easy because all I can imagine now is kilometer long lines at every bank
Strange part about this is that they are going to issue new 500 and 2000 notes as per
> 8:32 pm: A new series of Rs. 500 currency notes and Rs. 2000 currency notes will be brought into circulation.
Pulling current notes I can understand, but the problem is that the denomination allows people to move lots of money in a minimal amount of space, so replacing them isn't really solving the problem.
It is. To get new notes, you will have to submit the old notes to the bank. In that case, you will have to declare the money to the Income Tax department. And if the sum is huge, a criminal enquiry will be started by IT department.
Also this will at once curb all the fake note issues.
The duplication is a minor concern the major concern is lost income tax revenue due to an underground cash economy. By restricting numbet of 500 and 2000 notes and forcing owner declare assets it put massive pressure on the black money.
Isn't this exactly the issue addressed by money laundering? Would this not simply force a large number of people into dealing with organisations or individuals who can convert their existing stockpile of (no longer valuable) cash into a smaller pile of cash that still has buying power? A naive approach would be to 'hire' a large number of people to cash in amounts of notes that would be just under the level considered suspect by promising them a cut of the exchanged money. I'm sure there are existing criminal networks that could achieve such schemes (or better thought out ones) within the window of Nov 10 to Dec 30.
No one will be willing to do that work. And its difficult to scale such operations. They may convert some small amount (probably upto 50k), but anytihng more than that, it'll be getting tougher
The whole point is to bring out undisclosed money by tax evaders. This way you have two options - you declare all your money and face the income tax department or just let it all become zero value.
Meanwhile you only need three 500€ bills to make up for the average European income.
(And 500€ is 36651 rupees.) Those 500 and 1000 rupees are the largest denomination bills in India, but you need almost 10 times more of them to make up for the respective average income.
In fact, the same is said in Europe about the absolute uselessness of 200 and 500 euro bills. I have only held a 200 euro bill once, and never a 500, but also thanks to the Schengen area it is trivial to (illegally) being insane amounts of money to Switzerland. This is why the EU was pressuring Switzerland to abolish bank secrecy.
If you're spending 30k, paying an extra 20 for a banker's draft is insignificant. And it's not like you buy a car every week. (I also can't imagine feeling safe carrying anything like that much cash around. What if you lost it?)
Banker's drafts can be an even bigger pain in the ass in the EU, with some banks charging percentages for them... And losing one of those tends to be a Bad Thing too.
Anyway, my point was that despite being rare the 200 and 500 euro notes are far from "absolutely useless".
I really struggle to see how it's useful to an ordinary person. You maybe save a little money, sure, but for a non-1%er the risk just seems completely disproportionate. I mean any dealer/business would accept a bank transfer, right? So it only makes sense in the first place for buying a car person-to-person (and for friends/family a bank transfer would work too). Carrying 30k to meet a more-or-less stranger who knows you're going to be carrying 30k? Sheesh.
Are banker's drafts the same thing as money orders? That's how I paid my cars; they are worthless if stolen (though if you lose them, the money's gone) because only the recipient can convert them back. Banks give them out for the same cost as withdrawing cash, which is a few euros.
Currency conversions are largely irrelevant to most people's daily life. What matters more is how much you get paid, the cost of house, food, and transportation.
Always think in terms of local currency or you will do much worse than getting down-voted. As my wife says about Chinese currency: "You have to respect the RMB!"
For international readers:
Rs 500 and Rs 1000 are the highest denominations notes in India. Other available denominations are Rs 100, 50, 20, 10.
This is such a major move to curb black money in the history of Indian Politics and Economy
1 USD is ~Rs 66. That is a staggering difference in purchasing power! I would guess that the only note in the US with a similar reputation which is still issued would be the $100. Notes larger than this ($500, $1000, $5000, and $10 000) have been discontinued since 1946 and actively destroyed by the Federal Reserve since 1969.
Isn't there a concern that those who were using these high denomination notes just switching to other currencies? Bhutan has a currency that is pegged 1:1 with the Indian Rupee and will (presumably) still issue Rs 500 and Rs 1000 notes. Sri Lanka is another possible candidate; and of course there are the standard global reserve currencies - the US dollar and the Euro - whose notes worth over Rs 1000 are relatively common place.
The circulation of new notes will have to be controlled because there will be a limited notes in circulation for some time. The distribution problem has to be solved to ensure everybody have enough notes for daily activities.
It would be interesting to see how the notes make it to all the bank branches and ATMs in the next two days and beyond. ATMs are unavailable for 2 days, bank branches for 1 day.
The consumption market is India. The terrorism target and hawala money laundering targets are India. You destroy the market...the support structure will fall in line.
> 1 USD is ~Rs 66. That is a staggering difference in purchasing power!
How on earth do you derive purchasing power from comparison of arbitrary units? ~Rs 1 does not have the purchasing power of 1 USD,. 1 Zimbabwean dollar does not have the purcahsing power of 1 GBP.
The grandparent comment wasn't comparing arbitrary units, they were comparing the units of each country's currency denominations. The largest active legal tender in the US is worth $100 while the largest in India was worth $15 (now will be $30). I think it is a fair assumption that those numbers aren't arbitrary and that some thought went into choosing those denominations. That gives you insight into the economies of each country.
I wasn't particurarly supporting the argument that it is a foolproof way to measure buying power. Just that the decisions central banks make about their currency denominations aren't arbitrary and they do lend insight into the economies that they manage. The €500 probably isn't about buying power but it does tell something about the motivations for easing a transition to the Euro. In fact, now that the transition has been completed, the bill is being phased out. I wouldn't be surprised if that was the plan from the beginning.
Things in the UK are a little more complicated with their multiple central banks, but the £100 note is still being printed and while uncommon, it is in circulation throughout the UK.
Some £100 notes are circulated by some Scottish and Northern Irish banks (which are allowed to print their own currency), but given how rare the £50 note is, I'd expect the £100s be very rare even locally, and almost non-existent anywhere in England.
They almost certainly wouldn't be accepted anywhere except banks (many shops are suspicious of even low value non-standard notes), so I don't know if you can really call that "in circulation throughout the UK".
I don't see how that makes the argument of the grandgrandparent post. If some thought had been put into the denominations then what you'd assume to be normalized is purchasing power (since the smallest denominations should correspond to "a fraction of the cheapest thing I could buy" [if we include change] and the biggest should correspond to "more money than is reasonable to carry around for buying stuff"). Following that logic and combining it with yours the conclusion is "100$ in the US has similar purchase power to 15$ in India" or "things are cheaper in India", which really doesn't say much to me.
To add some data to this discussion: the Purchasing Power Parity (PPP) was ~17 rupees to 1 dollar as of 2015, as per "The Organisation for Economic Co-operation and Development (OECD)".
The PPP is, in simple terms, the amount of money in each currency that can buy similar amounts of goods; so taking this PPP at face value, what 1 dollar can buy in the US, 17 rupees can buy in India. This is of course not entirely true, because it's an averaged value, and there's other complications, but it's at least a better starting point than assuming Rs 66 per dollar.
Since the current Rs 500 and Rs 1000 notes themselves are no longer considered valid legal tender, they'd have to be exchanged for legal tender before they can be exchanged for foreign currency, even the Bhutan ngultrum (it's pegged to the Indian rupee, but that's irrelevant if the Rs 500 and Rs 1000 notes aren't legal tender representing rupees anymore). This exchange process from no-longer-legal-tender to legal tender is what provides the government visibility (and taxability) into any currently hoarded cash pile. You're correct that future hoarding can be done in a foreign currency where the same maneuver can't be pulled off again, but that doesn't provide an escape from disclosing currently-hoarded cash piles. It's also not nearly as easy to hoard large amounts of foreign currency undetected, since large transactions would be visible via the regulated institution that does the exchange (either when converting local -> foreign or foreign -> local)
A better comparison would be on the basis of PPP instead of nominal value. Given that India's nominal and PPP GDP are $2B and $8B respectively, $1 ~ Rs.15 PPP.
Just to add to your comment, the highest denomination note in India is worth just $1.5USD.
According to the Global Findex by the World Bank [1] 47% of the Indian population doesn't have a bank account. And only 22% of the population have debit cards.
I don't know, this seems too extreme to me. Certainly 500 euro notes or 100 dollar bills are very useful in dark markets, but the Rs 1000 note was just worth $15USD. This may end up being just a temporary recall and they will reissue 500/1000 notes in a couple of years.
The new bills have yet to hit the streets, and the old bills don't count as long term stores of value. So, for a little while India is arguably 'without' Rs 500 and Rs 2000 notes.
Basically, they are no longer bills but checks with expiration dates.
So I spoke to economists friends asap - and while I share your views, the point added was that wealth is not stored as cash by most people, but as jewelry, assets, cattle and so on.
What about people not in India with a few 1000 rupee notes lying around, those are valueless for good? I have 2 notes.
Wont the funds be effectively destroyed and removed from circulation, for those who don't put their cash in the bank by the end of next month. Wont this have deflationary consequences?
I don't see why you wouldn't be able to exchange them at a money changer wherever you happen to be now, but for that amount it may well not be worth it.
Same problem! I always hold some rupee notes so I have some cash on hand until I get to my hotel. My plan is to find a co-worker travelling there over the holidays and give them a good exchange rate to cash them in.
It'd not be unusual even for a resident to be out of the country for a few months. They now need to figure whether it makes more sense to let the cash lying turn worthless or make a trip to "exchange" it!
I grew up in a tier-2 city in India, and the amount of black money rich people hoard around here is of ginormous proportions. Easily > 50% of the income for most rich folks.
Cash, money-laundering, sketchy real estate transactions (Benami- transactions under fake names), informal banking (hawala), the same as in most places in the world. Think early mafiosi in the US. The most significant legislative actions for curbing these are: Benami and Hawala legislations, computerization of land records in the late 90s and early 2000s, PAN numbers in the 90s and Aadhar in the last few years (a bit like SSN in the US), and the OP.
(I'm watching the news live in New Delhi right now). The move is being pitched as an attack against 'black money' and terrorist/criminal activities and counterfeit .
The idea is if you have very large sums of money stashed away in cash, you're now forced to deposit it into a bank and reveal it. If you're not comfortable doing that, you're basically going to lose your money.
There is always some rationale that involves bad actors. Then you peel back the layers of the onion and find out the government just wants to screw regular people out of whatever.
I don't disagree with your premise, but in this case, how can this screw regular people? If someone has chosen to store a lot of their money as cash instead of in a bank and doesn't know about this, I can see that. Am I missing something else?
Not sure if they will do this during the exchange, but technically you can attach your Aadhaar ID to the exchanged sums. That means in one swoop they know who has how much money...
I am not an expert. But may be, it is only the small time tax evaders that store black money in local currency...So if someone has stashed away his lives savings in a stack of 1000 Rupee notes, this move will force them to pay taxes.
Nothing is still being done to deal with really big fishes. The ones who can really make a difference.
So as usual, it is the middle class and lower that are being forced to pay, while the upper and elite classes still given a pass and the government earns good name in the process..
Rich and powerful still wins. It is business as usual..
It is hardly going to fix the black money problem. Rich people have so many employees to do the bank run for them. Within the next month, you will see a huge spike in real estate market. People with black money will dump it in the real estate market. (If you are not an Indian, this is how it works. You buy an apartment/home/building for the amount X. But you declare it to the government that you bought it for X/10. The guy who sold it now has the black money which he can reinvest or based on his income level, can deposit in the bank. If he is a farmer, he can pretty much claim it as agricultural income and pay no taxes). So, basically, black money will trickle down rapidly in the next month or so.
I am not sure how that will work out if the denomination itself has been declared illegitimate. Why would anyone accept 'black money' of any kind if he can't spend it elsewhere?
If you are in the low income bracket or a farmer, you can accept the money and deposit in the bank without any ramifications. All this will happen before the deadline.
Yes, but unless you are finishing the deal tonight, all those note will become useless.
Nobody is going to accept the notes in a transaction except the bank - and if you go there with your undisclosed income, the income tax department will be right on your tails.
"Dumping in real estate" will require the seller to "convert" that money which isn't trivial, keep in mind the seller himself would be trying his best to get it converted. Will it completely solve the black money, probably not, but at least it is the biggest step towards any kind of a solution in future.
The government has become pretty smart - their standard rates have increased quite a bit (since they lose tax revenue)
Secondly, I don't think people are going to touch the old notes - just too much risk involved.
Infact, I would speculate that since a lot of black money is now worthless, we might see rates go down, especially for new constructions
I second this comment. Real estate in tier-1 India cities is fueled by black money. Now with people not having black money to invest in the market, I'm expecting to see the trend go downwards.
On the contrary, real estate market will stop for next couple of months. Cash is a big component of the price for the seller. And the current cash is useless as it has to be deposited in banks and declared, thus removing the whole rationale for taking cash. The seller is already paying tax on the non-cash portion.
Actually dumping into real estate, gold etc. is not bad because your govt will get taxes out of the transaction at the least. Problem with black money is not that some body hoarded it. Problem is some body hoarded it with out paying taxes.
Real estate? No. What builder/seller would want to stock up 500/1000 notes?
Same for gold. How much can one goldsmith/jeweller's revenue increase in a year? Same for agricultural income. Can you suddenly declare 500% increase? (Oh well, agriculture income could have been declared earlier too anyway).
Not really. Conversion to cash is limited to Rs.4000. Rest goes into your account. If you convert more than 2 Lakhs, that is notified to the IT authorities. You can't withdraw more than Rs.20000 per week or some such limit. Trickling down will take a long time, and even then most of it will be watched. If someone is withdrawing more cash than they ever did before, the govt., will probably question them beyond certain limits.
This is the boldest and probably most brilliant move by any Indian politician since liberalization of economy in 1990s.
Having said that, another way of understanding this is that as of today both old 500 Rs and 1000 Rs notes have been "probabilistically devalued". For anyone in middle class and below the value essentially remains the same (other than a small devaluation due to effort required to get them exchanged), however for anyone holding large number of notes, the value has been significantly lowered by approximately ~10 to 20% consider when the money gets deposited, there would be an income tax due on it.
Modi received a lot of flak not doing anything about black money and corruption after getting elected in spite of promises before the election. Bust as this move shows, he has taken the bold step, and can go for an election in 2019 without worrying.
To make it even simpler:
Assume that people in USA used 100$ notes (hard to hoard 20$ notes) to skip paying income tax (but mostly real estate transaction tax) and dealt in cash, by declaring 100$ notes as illegal tender and forcing them to be exchanged for new 50$ and 200$ notes. The government can ensure that this money is deposited or converted in banks. Ensuring that all "fake" 100$ notes are caught / lose value and people hoarding cash to skip paying income tax are forced to put the money in circulation. Otherwise come December 31st the value of the notes is same as piece of paper they are printed on.
I agree, this is a good first move to get black money that is stored as cash out and taxed. Some forms that still remain are:
* Gold
* Money funneled into "agricultural income" (which is tax free)
* Large properties in metros that are bought and left empty (which raises rates sky-high for ordinary middle class people trying to buy a house there)
However, this move is brilliant in that it removes cash as an intermediary for these transactions, i.e. if a builder is demanding Rs. 50,00,000 for a house "above the table" + Rs. 30,00,000 cash (which he won't declare), then that extra 30,00,000 becomes useless as of 31 Dec.
No, that's a legal fiction. It becomes useless as soon as there's no way to extract value from a briefcase of Rs.500 and Rs.1000 notes. Tomorrow, someone can trade it in to the Bank of India in exchange for new notes, it's just that this someone needs a plausible reason for holding the money - they have to have paid taxes on enough income that they could theoretically have legal reasons to possess the money. This does not have to be the current owner turning the money in, it can be anyone the current owner pays a premium to in exchange for clean bills.
So tomorrow, the money will need to be laundered in order to help the owner. But a few months down the line, the Bank of India stops taking deposits, and the money becomes actually useless.
If he (and by extension thousands more) pay tax, then there's no "get away" involved – the transaction has been done fairly and the Govt. got the requisite amount of tax.
The point is, if he has been doing this for 10 years and has a massive stack of cash which he tries to deposit now, that is going to bring him to the attention of the Income Tax authorities.
If one is buying gold then they need to pay tax for that amount. Because shopkeeper can't hide that money without tax. Shopkeepers knows this money is gonna be useless soon.
I think since India only has notes in {5,10,50,100,500,1000} denominations there might not be enough legal tender with just {5,10,50,100} to convert all {500,1000} notes, thus by introducing a new notes (bills) which look completely different than older 500 Rs, and 2000 Rs which are completely new, they can ensure that enough notes/bills are available.
2K notes are not just piece of paper, it does have NGC (Nano GPS Chip) by which income tax department can track the location and exact amount have stashed nearby that location. So sending that amount to some other country or keeping that money underground will be the most foolish thing one can do.
Call me up when our government stops doing idiotic things like sending billions in cash to Iran. Then I'll consider being concerned about income taxes.
This is totally unrelated to capitalism as a structure and paradigm for an economy.
Let's momentarily set aside the issue of whether the US owed Iran 1.7B dollars. There are arguments on both sides but I want to point something out:
The cash payment was made at the same time as the release of four Americans by Iran's regime. The Obama administration has admitted that the cash was used as leverage in negotiating their release.
If it looks like a duck, walks like a duck, and quacks like a duck...
as you said it was used as a LEVERAGE not a ransom. US had to pay this money anyway, by timing it right they had more LEVERAGE in the negotiations and 4 innocent people got out of prison.
What is wrong with that? painting this payments as ransom is wrong.
Ransom IS leverage. The payer is manipulating the captor's desire for money, in order to get an immediate release of prisoners that would otherwise not happen.
Equally true, taking hostages is a way to gain leverage by manipulating the payer's desire to protect the captives. Why do you think bank robbers and hijackers do it? Iran was unable to get that money for almost forty years, but by dangling four Americans in front of the Obama administration, they were able to collect a ten-figure cash payment out of America's coffers.
And you think there's nothing wrong with that?
The Americans are guilty of caving on their principles and giving tons of (borrowed btw) cash to hostage takers, and the Iranians are guilt of taking hostages in the first place.
Isn't this a trick that will only work once? Wont the people who are taking advantage of black money start using a different store of value that isn't controlled by the Indian government like foreign currency or high value commodities?
Indeed, they can, but it's difficult to get foreign currency without valid ID. But gold is an option, even though govt have even made it mandatory to flash your ID for gold purchases.
Depends on if you can find someone who's willing to take your new store of value. Part of the reason those people were able to get away with it was that those notes were regular legal tender, so I didn't have to worry about accepting them.
It was done once before also, IIRC. Around the late 1970s. Seems to have worked. I guess it'll work given a long enough time interval, since human memory is short.
A currency is useful only if you can buy products and services with it. In India, you buy things in Rupees. Tou can't buy Rupees with dollars without an ID at which point the government knows anyway it's probably just simpler to pay your taxes
Most people are only interested in Bitcoin insofar as it's convertible to a local currency. So if it's difficult to do that, it's difficult to use Bitcoin for most transactions.
Boils back to the same point - can you buy necessities of life in India today with Bitcoin in the short to medium term? No. So if you're accumulating black money (say you are a property developer) it will be difficult for people who buy houses to pay you.
Also remember that Bitcoin isn't really anonymous and it's fully traceable. So the police merely has to do some rubber hose type de-anonymization of which Bitcoin address was the payment made to you in and from there on, all your transactions can be back-traced.
Technically, yes. You can even just start using 100 rupee bills instead.
But what this does is adds cost to doing business secretly in cash. Also it increases the threat of government taking another bold move in the future to flush out more stores of black money. Basically, it increases the risk of operating outside official accounting, making that option more scary and less appealing.
Watch for real estate crash in New Delhi. On paper there wont be a crash but sharp growth, because the declared transaction value is about 40% of the real transactions, the remaining being in cash. With this move, declared values will move up, while actual values will move down.
Note that starting tomorrow, people will become progressively reluctant to accept those notes in retail transactions. It will become difficult for anyone with a hoard to exchange these notes for any other commodity.
The US is kind of funny, we've (as far as i know) never withdrawn backing for a bill. If you have a silver certificate, you can spend it on a pack of gum. If you have a $1000 bill, you can deposit it in the bank.
You might have some hassle getting the bank to believe you, of course, those bills are probably in pretty poor shape. But you should be able to exchange them for new currency. Although, it might be worth more to sell to a collector. there aren't that many around.
I think a private enterprises in the U.S. can refuse money, so your bank can refuse that 1000$ bill at their discretion (and pissing you off as a customer in the process).
However, the government probably is required to take that money to pay nay taxes, although I do not know how you can pay any taxes to the federal U.S. by cash. Maybe a customs duty at a border crossing?
You can't compare '54 and '78 with 2016. Removing 500 and 1000 rupee notes as legal tender in 2016 accounts to more than 80% of total cash circulation. This is huge.
This is slightly different. All 500 and 1000 rupee notes in circulation right now are being demonetized. In previous cases demonetization was done for older currency over a longer period of time.
> the value has been significantly lowered by approximately ~10 to 20% consider when the money gets deposited, there would be an income tax due on it.
How do you figure it's 10%-20%? AFAIK it's a 300% penalty now after the voluntary disclosure scheme has ended (for income that was gained before Sep 30). People are better off burning the money if they can't launder it somehow.
I am personally not sure about the impact of this. I am hoping it will bring some positive change, Indians do have a habit of hoarding huge amounts of cash. It's not something specific to "black money hoarders".
Anyway I pity the bank employees for the coming few weeks!
Interesting no mention about gold, land or other valuables. This hits hard on the middle class who were holding money. Then there are ultra rich, for whom may be they are holding anywhere between 0%~30% of their black money in cash, others in other investments. For them, this is not a big issue.
You have to deposit all these notes in your bank account, from which you can get new notes. Anyone hoarding huge amount of black money in cash can't go to bank with it, and his money will turn worthless. Diluting such money will easily erode 20-40% value. So definitely a bold move.
They'll probably buy houses above market value. The seller can declare the money and pay taxes on it. The houses can be sold again one by one over the next years and the money legalized. Basically an easy way of laundering it. Still good for the state as the money is taxed.
This is a strategy copied from China. They did same in 1970-80's. Funny part is this is trying to get money from within Indian economy and wasting on govt and pet projects. The promise to re-patriate black money stashed outside India nowhere in sight. China bring in fugitives and money back even from official who took US citizenship. Modi can just dream of it and take money from hardworking Indians living in India.
Populist measure to increase vote bank and divert attention from original promise to bring back black money from abroad to India.
I am originally from India, living in NYC for last 10 years.
Black money is a major problem in India, it's directly fueling This is an ingenious way to handle the problem at its root. I don't know how Government is going to handle this transition in a country as big and diverse as India. Personally, I prefer the rip-off-the-band-aid approach. The only thing I disagree with is the ATM daily/weekly withdrawal limit (10,000Rs/20,000Rs). I think this withdrawal limit is too low and would inconvenience lot of folks. I am not even sure what these low withdrawal limits are supposed to achieve.
You always have the option of cheques, plastic cards and electronic transfers. Anybody who wants larger amount of cash I am sure they have a bank account and can accept payments via that mode as well for the time being.
If they can't, then well boy, they were already defaulters.
Or use a credit card. When I had my back surgery a few years back, I just swiped for 1.2 lac. Of course, most people don't have a CC with that high a limit...
In India, it is mostly the poor who don't have CC. Every upper class person has multiple CCs and most of the middle class, specially those in the age of 20-40 have atleast one CC. People may keep just one debit card but they do keep multiple CCs. And now even the poor have bank accounts and many have debit cards.
Nobody has that kind of cash at home, if some emergency comes tomorrow they will have to go to the ATM which will won't work, or banks which will be closed. Tomorrow and day after will be a bad day for people having emergencies unless hospitals are free of cost.
Who says black money is a major problem in India ?
I keep hearing this, and then I see no proof. Right now I see people conflating the unorganized sector with black money - and these are two separate things.
Any ideas where I could find supporting data from a major economic body ?
The official number of millionnaires in India are ridiculously low. This is not due to tax exemptions, but due to income not being declared in the first place.
That's absurd though - if 1% pay income tax, the issue isn't black money, but the fact that the unorganized sector is far larger than the organized sector. And this again a known aspect of the Indian economy.
India has historically been an agrarian society, then a bureaucratically driven planned economy and only post 1990, has it been free market.
That means there's not been enough time for the economy to ensure a good distribution and generation of wealth. Is it unsurprising that wealth distribution is skewed ?
What if people just keep accepting it, just not through formal banks? Paper money is worth what people think it's worth. If some money/object moves outside the banks anyway, perhaps it won't be completely worthless.
The deadline to exchange the current currency is through March 2017. I am sure there will be folks who would accept the old currencies at discount if they think they can get it exchanged at the bank without getting Government scrutiny. However, this will only work if you have small amount of black money. There are rich folks in India who have millions of Rupees in black currency and there is no way they will be able convert all that cash without declaring it and paying tax on it.
Well, people won't be stupid enough to keep accepting it. They need to pay tax at the end of the day. They need to move along with the economy. Unless you can mobilize 1.2 billion people to not accept this, which probably breaks down the whole economy itself.
That's a reasonable question. It's possible the 500 and 1000 notes will be relegated to large, all-cash transactions where the goal is to avoid taxes. But I imagine that some amount of osmosis will _have_ to take place. You can't buy food or pay for gas with a 500 note after all; probably any businesses found accepting them would face charges.
And if you can't use them for anything except real-estate purchases and the like then their value is going to decrease over time. The number of 500/1000 notes will asymptotically approach zero over time as they get converted through official or unofficial channels.
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[ 3.1 ms ] story [ 291 ms ] threadUsing an arbitrary piece of paper for a transaction isn't illegal, is it? If two individuals in India agree to an exchange of goods, but with USD instead of INR, that isn't illegal, is it? It's just that whoever received that amount in USD can't deposit it in an Indian bank; not without converting it into INR in the first place, at which point they're effectively depositing INR.
Replace USD above with any paper currency, or non-currency paper for that matter. If you have someone willing to take a piece of paper from you in return for something, there, you have a transaction. It's just that, the other person would be unwise to accept a piece of paper they can't put to use.
A ₹1000 note being "not legal tender" simply means that no Indian bank will accept it being worth one thousand INR. If someone wants to accept such notes in return for anything, they can; they just can't deposit it in an Indian bank (after December 30).
A ₹1000 note being "illegal" would mean that it would be a crime to possess, offer, exchange, display, disperse, aerosolize, or apply some other action or combination of actions to it that isn't otherwise illegal already.
And that, is not the case.
Pulling current notes I can understand, but the problem is that the denomination allows people to move lots of money in a minimal amount of space, so replacing them isn't really solving the problem.
Also this will at once curb all the fake note issues.
Brilliant move.
These are not large denomination bills.
Yeah, no. Even a relatively small amount like 30k is a major pain in the ass to carry around in 100 euro notes.
30k is what one might pay for a car, for example.
Anyway, my point was that despite being rare the 200 and 500 euro notes are far from "absolutely useless".
PS: Denomination is face value and 500 and 1000 are the largest in Indian currency, so you are also wrong from use of the word.
Always think in terms of local currency or you will do much worse than getting down-voted. As my wife says about Chinese currency: "You have to respect the RMB!"
Isn't there a concern that those who were using these high denomination notes just switching to other currencies? Bhutan has a currency that is pegged 1:1 with the Indian Rupee and will (presumably) still issue Rs 500 and Rs 1000 notes. Sri Lanka is another possible candidate; and of course there are the standard global reserve currencies - the US dollar and the Euro - whose notes worth over Rs 1000 are relatively common place.
How on earth do you derive purchasing power from comparison of arbitrary units? ~Rs 1 does not have the purchasing power of 1 USD,. 1 Zimbabwean dollar does not have the purcahsing power of 1 GBP.
Things in the UK are a little more complicated with their multiple central banks, but the £100 note is still being printed and while uncommon, it is in circulation throughout the UK.
They almost certainly wouldn't be accepted anywhere except banks (many shops are suspicious of even low value non-standard notes), so I don't know if you can really call that "in circulation throughout the UK".
http://www.worldbanknotescoins.com/2012/02/the-royal-bank-of...
I still remember the first time I got paid with cash, and received a couple of £100 notes. Most money I'd physically held in my hands up until then.
The PPP is, in simple terms, the amount of money in each currency that can buy similar amounts of goods; so taking this PPP at face value, what 1 dollar can buy in the US, 17 rupees can buy in India. This is of course not entirely true, because it's an averaged value, and there's other complications, but it's at least a better starting point than assuming Rs 66 per dollar.
[1] https://stats.oecd.org/Index.aspx?DataSetCode=SNA_TABLE4
According to the Global Findex by the World Bank [1] 47% of the Indian population doesn't have a bank account. And only 22% of the population have debit cards.
I don't know, this seems too extreme to me. Certainly 500 euro notes or 100 dollar bills are very useful in dark markets, but the Rs 1000 note was just worth $15USD. This may end up being just a temporary recall and they will reissue 500/1000 notes in a couple of years.
[1] http://datatopics.worldbank.org/financialinclusion/country/i...
So, I think he agrees with you and is just pointing out without the 500 or 1000 note's the 100 is only worth $1.5USD.
Basically, they are no longer bills but checks with expiration dates.
Wont the funds be effectively destroyed and removed from circulation, for those who don't put their cash in the bank by the end of next month. Wont this have deflationary consequences?
I don't see why you wouldn't be able to exchange them at a money changer wherever you happen to be now, but for that amount it may well not be worth it.
[1] http://www.livemint.com/Money/xlZJZ0JJQ1xcx7792Vrt2O/DYK-You...
http://economictimes.indiatimes.com/news/politics-and-nation...
Can't wait to see how this unfolds.
The idea is if you have very large sums of money stashed away in cash, you're now forced to deposit it into a bank and reveal it. If you're not comfortable doing that, you're basically going to lose your money.
But I think it's well worth the benefits to society as a whole.
Nothing is still being done to deal with really big fishes. The ones who can really make a difference.
So as usual, it is the middle class and lower that are being forced to pay, while the upper and elite classes still given a pass and the government earns good name in the process..
Rich and powerful still wins. It is business as usual..
Nobody is going to accept the notes in a transaction except the bank - and if you go there with your undisclosed income, the income tax department will be right on your tails.
Infact, I would speculate that since a lot of black money is now worthless, we might see rates go down, especially for new constructions
No. Most likely money on paper << money changed hands.
Same for gold. How much can one goldsmith/jeweller's revenue increase in a year? Same for agricultural income. Can you suddenly declare 500% increase? (Oh well, agriculture income could have been declared earlier too anyway).
i) Indian Banks are being setup for a collapse.
ii) India is being setup as a prototype cashless big-brother-esque society (what with UIDAI and all).
Paranoia, yes, but well-worth it to keep in the back of the head.
Having said that, another way of understanding this is that as of today both old 500 Rs and 1000 Rs notes have been "probabilistically devalued". For anyone in middle class and below the value essentially remains the same (other than a small devaluation due to effort required to get them exchanged), however for anyone holding large number of notes, the value has been significantly lowered by approximately ~10 to 20% consider when the money gets deposited, there would be an income tax due on it.
Modi received a lot of flak not doing anything about black money and corruption after getting elected in spite of promises before the election. Bust as this move shows, he has taken the bold step, and can go for an election in 2019 without worrying.
To make it even simpler:
Assume that people in USA used 100$ notes (hard to hoard 20$ notes) to skip paying income tax (but mostly real estate transaction tax) and dealt in cash, by declaring 100$ notes as illegal tender and forcing them to be exchanged for new 50$ and 200$ notes. The government can ensure that this money is deposited or converted in banks. Ensuring that all "fake" 100$ notes are caught / lose value and people hoarding cash to skip paying income tax are forced to put the money in circulation. Otherwise come December 31st the value of the notes is same as piece of paper they are printed on.
* Gold
* Money funneled into "agricultural income" (which is tax free)
* Large properties in metros that are bought and left empty (which raises rates sky-high for ordinary middle class people trying to buy a house there)
However, this move is brilliant in that it removes cash as an intermediary for these transactions, i.e. if a builder is demanding Rs. 50,00,000 for a house "above the table" + Rs. 30,00,000 cash (which he won't declare), then that extra 30,00,000 becomes useless as of 31 Dec.
So tomorrow, the money will need to be laundered in order to help the owner. But a few months down the line, the Bank of India stops taking deposits, and the money becomes actually useless.
The point is, if he has been doing this for 10 years and has a massive stack of cash which he tries to deposit now, that is going to bring him to the attention of the Income Tax authorities.
I don't understand how you are capitalist until the other side is Iran.
Let's momentarily set aside the issue of whether the US owed Iran 1.7B dollars. There are arguments on both sides but I want to point something out:
The cash payment was made at the same time as the release of four Americans by Iran's regime. The Obama administration has admitted that the cash was used as leverage in negotiating their release.
If it looks like a duck, walks like a duck, and quacks like a duck...
What is wrong with that? painting this payments as ransom is wrong.
Equally true, taking hostages is a way to gain leverage by manipulating the payer's desire to protect the captives. Why do you think bank robbers and hijackers do it? Iran was unable to get that money for almost forty years, but by dangling four Americans in front of the Obama administration, they were able to collect a ten-figure cash payment out of America's coffers.
And you think there's nothing wrong with that?
The Americans are guilty of caving on their principles and giving tons of (borrowed btw) cash to hostage takers, and the Iranians are guilt of taking hostages in the first place.
Also remember that Bitcoin isn't really anonymous and it's fully traceable. So the police merely has to do some rubber hose type de-anonymization of which Bitcoin address was the payment made to you in and from there on, all your transactions can be back-traced.
But what this does is adds cost to doing business secretly in cash. Also it increases the threat of government taking another bold move in the future to flush out more stores of black money. Basically, it increases the risk of operating outside official accounting, making that option more scary and less appealing.
Watch for real estate crash in New Delhi. On paper there wont be a crash but sharp growth, because the declared transaction value is about 40% of the real transactions, the remaining being in cash. With this move, declared values will move up, while actual values will move down.
EDIT: fixed typo "tomorrows"
https://en.wikipedia.org/wiki/North_Korean_won#2009_revaluat...
And the US did it in 1969:
https://en.wikipedia.org/wiki/Large_denominations_of_United_...
In both cases it appears that the main goal was tax revenue. In NK, against private traders, and in the US, against organized crime.
https://twitter.com/d_jaishankar/status/796012168873320448
Not only replacing 80% of the value, but also added 220 Million bank accounts in a span of 15 months. 2/3 of the US population.
https://www.reddit.com/r/worldnews/comments/5btovy/indian_ru...
You might have some hassle getting the bank to believe you, of course, those bills are probably in pretty poor shape. But you should be able to exchange them for new currency. Although, it might be worth more to sell to a collector. there aren't that many around.
However, the government probably is required to take that money to pay nay taxes, although I do not know how you can pay any taxes to the federal U.S. by cash. Maybe a customs duty at a border crossing?
This is not the first time this has happened. It happened in March 2014.
https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=...
How do you figure it's 10%-20%? AFAIK it's a 300% penalty now after the voluntary disclosure scheme has ended (for income that was gained before Sep 30). People are better off burning the money if they can't launder it somehow.
Anyway I pity the bank employees for the coming few weeks!
But I'm not from India, so pure speculation.
Populist measure to increase vote bank and divert attention from original promise to bring back black money from abroad to India.
Citation needed.
Do this enough times and people will rightfully call the local currency "wooden", and switch to USD for any large transactions.
https://en.wikipedia.org/wiki/Monetary_reform_in_the_Soviet_...
Rouble also became worthless in the following years, Venezuela-style. Accompanied by Venezuela-like poverty.
Black money is a major problem in India, it's directly fueling This is an ingenious way to handle the problem at its root. I don't know how Government is going to handle this transition in a country as big and diverse as India. Personally, I prefer the rip-off-the-band-aid approach. The only thing I disagree with is the ATM daily/weekly withdrawal limit (10,000Rs/20,000Rs). I think this withdrawal limit is too low and would inconvenience lot of folks. I am not even sure what these low withdrawal limits are supposed to achieve.
If they can't, then well boy, they were already defaulters.
Yup. If someone needs to pay for medical emergencies, they will suddenly have to ask for help from lot of people.
In India, no body has a CC, even debit card is only 22%
I keep hearing this, and then I see no proof. Right now I see people conflating the unorganized sector with black money - and these are two separate things.
Any ideas where I could find supporting data from a major economic body ?
The official number of millionnaires in India are ridiculously low. This is not due to tax exemptions, but due to income not being declared in the first place.
India has historically been an agrarian society, then a bureaucratically driven planned economy and only post 1990, has it been free market.
That means there's not been enough time for the economy to ensure a good distribution and generation of wealth. Is it unsurprising that wealth distribution is skewed ?
And if you can't use them for anything except real-estate purchases and the like then their value is going to decrease over time. The number of 500/1000 notes will asymptotically approach zero over time as they get converted through official or unofficial channels.