Indian Economy Grinds To A Halt After Cash-Ban: "Faith In System Shaken"

Tyler Durden's picture

Amid scenes of panic across India, following PM Modi's shock decision to withdraw high-value bills in the middle of the sowing and wedding season, Reuters reports the move, aimed at cracking down on the shadow economy, has brought India's cash economy to a virtual standstill. With over 90% of all transactions done in cash, money flows in and out of the black-and-white system... until now, as Devangshu Datta exclaims, "The system works because everybody believes that those pieces of paper will be accepted by everybody else... This move has shaken that trust."

Farmers have been left stranded as traders have no cash to pay for their produce, while millions of Indians lined up outside banks and post offices for the ninth day to exchange old banknotes or withdraw rationed money from their accounts.

Many of India's 260 million farmers have no bank accounts and depend on local money lenders to fund sowing, which means those that have to borrow to sow winter crops like wheat or rapeseed could face debt trouble without a good harvest.

And so India's government on Thursday announced immediate steps to ease a cash crunch for farmers amid widespread criticism. In the latest in a series of ad hoc steps, Modi allowed farmers to withdraw up to 25,000 rupees ($368) a week against their crop loans to ensure that sowing of winter crops "takes place properly", a senior finance ministry official said.

But, as Devangshu Datta explains, the demonetisation of Rs 500 and Rs 1,000 currency notes came as a surprise to almost everyone. The details of re-monetisation are still to become entirely clear. What follows is a set of personal opinions of likely outcomes arising from this move to demonetise. Each of those opinions could be entirely wrong but they are all centred on subjects that are worth thinking about.

But, first, some basic statistics.

About 85% of all currency in circulation has just been turned into coupons that can only be exchanged in specific places. These notes can be converted into currency again only with identity proofs (which hundreds of millions don’t have) and the additional hardship of standing in many queues for many hours.

Over half of India’s population doesn’t have any sort of bank account at the moment and about 300 million don’t have basic ID such as Aadhaar either and hence, cannot access the banking system at all. About 130 million Indians have mobile wallets (about 25 million have credit cards) and there are maybe 550 million-600 million debit cards in circulation. So access to cash is very, very important for average Indians.

Liquidity in the economic system will be sucked out for several weeks at the very least, due to the very stringent restrictions on cash withdrawals from ATMs, and bank accounts. Plus there’s the sheer logistics of getting that massive volume of new notes into circulation. In addition there will be a cost to printing and distributing the new notes and taking the old currency out of circulation.

India is a cash economy. Well over 90% of all transactions are done in cash. Most of these transactions are legal, consisting of relatively small amounts, and frequently done by people who don’t make enough money to pay income tax. Your domestic worker pays for her bus ticket. You pay her husband, the plumber, for fixing your flush. The security guard at the bank ATM buys cigarettes.

Money flows in and out of the black-and-white system. The paan-wallah pays the fast-moving consumer goods companies for the cigarettes and chewing gum he sells, and keeps the retail margin. That’s white. He ploughs the surplus cash into buying paan leaves in undocumented transactions: the farmer who grows the paan pays no tax; the trader who sells paan under-reports the transactions. That’s black. The mechanic (who is outside the tax net) receives an (undocumented) tip for changing a flat tyre and buys a metro token (putting cash back into government coffers), or goes to see a movie (paying service tax).

Industries like fashion, retail, interior decoration, furniture, laundry and dry-cleaning services, hospitality, medical services, gems and jewellery, et cetera., are large conduits for these flows. We could call them black and white industries. Construction and real estate are totally built around black and white. Land is always sold with part of the price being paid in cash. The real-estate developer buys in black and white and he sells in black and white. The construction process is also black and white (carrying ghost workers on the construction rolls is one easy way to generate black money for example).

These are the facts.

Slowdown in growth

And now for some estimates and opinions.

By all estimates, the size of the black economy in India is large and the undocumented, informal but legal economy is also large. Estimates range from 20% of official Gross Domestic Product to 40% of official GDP. Many assets are held in the form of real estate and jewellery or assets stashed abroad in bank accounts or real estate, etc. However, political parties and religious bodies tend to hold trunkfuls of physical cash and some cash-intensive businesses also have large floats sitting around.

Now we come to the opinions.

The informal economy will be badly impacted. The non-cash assets will remain but those will be “frozen” for a while in that it will be difficult to convert those assets immediately. Cash assets will need to be laundered in some fashion (maybe by opening religious trusts and trustees “donating” notes to the trust, etc.) and will probably incur massive discounts in conversion. There will be blackmarket conversions to hard currencies and bullion, with rupee notes being accepted at massive discounts (anecdotal conversations suggest that the United States dollar is now trading at 15% premium to the Reserve Bank of India rate).

All the black and white and cash-intensive industries will be impacted for a while by the liquidity freeze. So will other industries with high cash turnovers (such as roadside vegetable sellers). This will show up in serious economic under-performance and in a slowdown in GDP growth.

The slowdown in GDP growth will not be completely captured in official statistics but there will be signs for sure in terms of consumption falling. Since consumption contributes much more than investment to India’s GDP growth, it will certainly hurt. Almost certainly, GDP growth estimates will be revised downwards (even if the government is reluctant to do so).

Who will it hurt?

This move will certainly hurt cash-intensive political parties, which have undeclared trunkfuls of cash. in fact, the conspiracy theorists will assume that this move is largely driven by tactical considerations about funding the upcoming assembly elections in Punjab, Gujarat and above all, Uttar Pradesh.

Political parties can now accept donations from abroad and the Bharatiya Janata Party has an obvious advantage, given its major outreach to non resident Indians. So the BJP could produce money from abroad which it can convert into rupees. The BJP is also aided by its links to a non-governmental organisation, the Rashtriya Swayamsevak Sangh, which can campaign on its behalf, with the tab for that campaigning not picked up by the BJP.

The move to demonetise will hurt the very rich in absolute terms but it will mean marginal damage to their assets. It will impact the middle class in terms of inconvenience for several months. It will gut the very poor and the lower income groups. These are people with little in the way of ID proof and they often keep cash stashed under the bed because they have no bank accounts.

Your domestic worker, whose ID (if she has one) says she lives in a village a 1000 km away. Your driver, who saves a chunk of his salary and sends it home to his family. The disabled flower seller/beggar at the traffic lights. The 12-year-old selling pirated books who ran away from an abusive home. The waiter-cum-delivery boy at the local dhaba. The massage parlour therapist. These are the people who will get really badly hurt. They all have high proportions of their income stashed in cash and they will have to pay large sums under the table to legitimise it.

What next?

The long-term impact of this move might be hard to assess. Once cash liquidity comes back to the economy, will there be reforms in the actual way that black and white business work? Or will people simply find new ways to game the system? I am cynical enough to suspect the latter will happen. It happened in 1978 when the Janata Party demonetised. While the Indian economy has changed considerably since 1978, Indians have also developed a global reputation for ingenuity and jugaad in the last 40 years. A lot of very smart people now have skin in the game when it comes to gaming the demonetisation.

There could be two types of political backlash as a result of this move. The rich trader class may move away from the BJP because many stand to lose large sums in absolute terms, and their assets will be frozen for a while. The second backlash will come in terms of voteshare shift from lower income groups, who will lose a large proportion of their savings and spend large quantities of time trying to convert hard-earned cash.

There are a couple of other points to ponder. The Income Tax and Excise Departments’ ability to gather data will increase exponentially. So will their discretionary powers, when they can query people who pay large sums in cash into their accounts. This might lead to an exponential rise in demands for under-the-table payoffs to officials in those departments in the next year. Also, India has no Privacy or Data Protection Laws. That data could be sold to all sorts of people and I cannot begin to guess what the consequences could be. Let us see.

A final philosophical point. Our entire monetary system depends on trust. A banknote is a piece of paper that says the RBI will give the bearer another similar piece of paper, or make an entry in an electronic ledger for that amount. The system works because everybody believes that those pieces of paper will be accepted by everybody else and therefore, money serves as an useful medium of exchange. This move has shaken that trust.

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the_narrator's picture

Why aren't they doing this in China?  Perhaps because China doesn't need negative interest rates to "grow"?

Yukon Cornholius's picture

Was over at the local fx/coin exchange earlier today and they were not doing any rupee exchanges. There are many Indian community members in this town and the woman behind the glass seemed pretty anxious about it when I asked a couple of questions. This is a very bad thing that's taking place. The word starts with C and ends in ollapse.

Modi will not make it through 2016 is my guess.

Draybin Deffercon III's picture
Draybin Deffercon III (not verified) Yukon Cornholius Nov 17, 2016 6:29 PM

If you like your fiats...

VonPumperDic's picture



Why aren't they burming down the Banks and hanging Bankers and Politicians?

BaBaBouy's picture

Riots Are Probably Near at hand ...

BaBaBouy's picture

Does Mowdy have a fueled-up jet loaded with GOLD sitting on the tarmac???

CHX's picture

Bcs of the devil horns... "no-touch-holy-cow"

TruthHunter's picture

"Why aren't they burming down"

They're eating too many vegetables and not enough sacred cows?

metastar's picture

Why aren't they burming down the Banks and hanging Bankers and Politicians?


Probably for the same reasons Americans did not take action when Nixon committed the greatest heist ever, ... the theft of the wealth of a nation by closing the gold window..

Nunya Bidness Gogl's picture

Ignorance? Apathy?

I think the former.

The (((globalist banking cartel))) have done a great job with their propaganda these last several decades, I must admit.

Dubaibanker's picture
As the average deaths every day in India continues to rise, the uselessness of this demonetization exercise keeps rising along with it.

Bloody sad to see people die for no reason.

Only reason this was done was to gain an advantage over the entire opposition in the forthcoming elections (because Modi has not done one thing yet in 2.5 years that he has been in power and lost all elections held ever since like Delhi, Bihar and this week minor elections where all 17 seats were lost by BJP) and another reason is to support the banks and in turn put massive capital controls inside the country where NO CITIZEN except the super wealthy have access to their bank accounts AT ALL for more than INR 2,000 which is just USD 30.

Comparing such deaths with accidents or farmer suicides or soldier deaths is beyond idiotic.

If that was the case, all Facebook users would be sitting inside their fridges while typing on Facebook just because soldiers stand on the cold freezing border! But the fact is that no one does that!


They are all sad cases but are not due to stress on the ENTIRE CITIZENRY who cannot take out their hard earned money from their OWN bank accounts except for a limit of 2,000 rupees that too after waiting 3-4 days in a line for over 12-18 hours every day while their wages have been frozen or their young children are sick without food at home or their family members are bed ridden or they cannot take care of their sick in hospitals or they cannot send children to schools or they cannot travel or buy food due to lack of low denomination notes or they cannot find low wage work or all traders and food wholesalers who are shut for days now etc.

The frustration and sadness pervading this entire situation is beyond the scope of any words when it impacts every single of the 1,250,000,000 citizens, young and old, sick and healthy.

The workers in the informal sector are the worst hit which is pretty much 70%-80% of ALL employment in India.


Day 9: Demonetisation Death Toll Rises To 55


This demonetization train wreck is heading straight for disaster!

Demonetization has had more frequent updates than Adobe!

That says something! :) :)

Better shut it down while the Govt still has control.


Once they lose control, it will not be possible to bring it on track easily before thousands die and billions of dollars worth of property is burnt!

Perhaps creating an Emergency like situation was indeed the purpose of this completely unplanned scheme. now every day a meeting is being done by the PM and rules being changed on an hourly basis.

Hope Modi Govt does not get thrown out of power in the next 2-3 months which will also destabilize the country massively.

Already, the diplomats have warned all tourists as well as medical tourists to to avoid coming to India due to non availability of cash and the general chaos caused thereof.

13 times Modi sarkar tried getting back on track the demonetisation train wreck 
wildbad's picture

the money in the banks belongs to the bankers..not the depositors

BaBaBouy's picture

He Should Reverse this failed plan immediately...
It may already be too late.

Of course if we take OmabaCare as an example, they will stick with the Shit until it sinks...

J S Bach's picture

First, the Indians lose the World Series... now they're losing their fiat currency!  What next?

JackT's picture

They aren't losing fiat. They are going to be taxed. The govt is issuing 2000 rupee notes. I just don't understand why the rush. Should have given a year or more to convert. Knuckleheads.

Ploutos74's picture

I logged in to upvote this

bobbbny's picture

I'm not pissing on you, it's raining.

GreatUncle's picture

India has been in trouble economically for a while but nobody talks about it.

They play the liquidity game?

Prevent rampant inflation like Zimbabwe?

Slow the real money cycle?


Raffie's picture

Beta testing my friend......

The shadow gooberments seeing what happens when you do this.

To stop crime is total BS.

Get the world in digital currencies and then NIRP them hard.

When all the banks are in NIRP where you gonna go? You are locked into the system.

Not sure about Credit Unions and how that will unfold.

To soon to tell right now I think.

Hobbleknee's picture

Where are you gonna go? Go gold and silver!

GreatUncle's picture

Prepping for the helicopter drop.

IcarusOnFire's picture

Why arent they doing this in China?  They have been doing this in China.  China's largest note is worth just $8.50  (India's now is worth $1.40).  China was the first to do away with big notes ($10 or greater).


qomolangma's picture

"China's largest note is worth just $8.50"


Icarus, you're wrong.

The biggest renminbi note is 100, at USD/CNY ~6.90, China's biggest denomination note equals to USD 14.50.

Impoverished Psychologist's picture

Fiat currencies eh?? 

WTFUD's picture

There's no country in the World who could adapt there current Fiat system to trading in Gold than India. 1/5 Indians buy, sell, trade or gift small quantities of Gold every week; that's about the population of the US.

Draybin Deffercon III's picture
Draybin Deffercon III (not verified) WTFUD Nov 17, 2016 6:38 PM

Yep. And doubt many people are going to part with their Ag/Au for purely digital-statist fiat.

Nobodys Home's picture

An ounce in India yesterday was around $2500 US. I wonder what it is today?


Hmm 1000 rupees is $15 ... $2500/15=166...166x1000=166,000 x15% black market US dollar premium=24,900

166,000 -24900=141,100 rupees an ounce yesterday if you used us dollars

TruthHunter's picture

For Indians, .18 mg per Rupee is more relevant

Ignatius's picture

Wow.  Didn't see that coming.


HRH of Aquitaine's picture
HRH of Aquitaine (not verified) Ignatius Nov 18, 2016 2:32 AM

How many people even know this is news? Other than Zerohedge I haven't seen this story on Fox Business or Bloomberg. Sometimes I want to slap myself up aside the head to make sure I am alive and not imagining things.

I mean, WTF.! Screw CNBC but Bloomberg and Fox Business have zero coverage of this? Nothing? No fucking analysis? No live video feed of people flipping out?

Great work ZH. If I had to rely on the MSM or the MSFM for news I would have considered myself to be nothing more than a mushroom living on BS.

Jeezus how many people read ZH? Like .01 percent of the US population? If there is a number that freaks me out the most, it is the number of ignorant people in the US (and other parts of the world). Terrifying.

buzzkillb's picture

ZH was probably closer to the funny money on the whole D Bank thing than anyone realizes. Someone in that industry asked me how I knew what was going on and pointed them to this site and a few others. Said they had some reading to do to prepare for something. Realized this place is so close to the truth no wonder its being called fake news. Once again no one will ever have seen it coming, except the supposed fringe sites.

Cruel Aid's picture

talking heads are cfr members and are secretly pushing global gov. This is the trial balloon and a major step for that. Hence the secrecy or lack of interest. Actually they are very interested, just dont want you to put it together, after all its abt undeclared taxable income, sure!

DosZap's picture

STOP paying taxes and providing farm goods see how fast the Gubmint shats.

Cluster_Frak's picture

but Goldman Sachs Top Trade #4 says: Long EM equities with insulated exposures to growth: Long India, FX un-hedged

sixsigma cygnusatratus's picture

Oh, they can try to ban cash all they want.  Prehistoric man also lived in a cashless society.  

See where I'm going with this...?

Ignatius's picture

Sure, but it's hard to root for nuclear war.

I find I've developed some affection for hot showers and heated car seats among other modern contrivances.

Wilcox1's picture

I've gotten used to hot water, but never had a car with reliable heated seats. Been managing to get by.

Golden Phoenix's picture

Just fart. The end result is the same.

spdrdr's picture

Hmmm...  I'll have to think about that!  Both our cars have heated seats - never used them.  That being said, we have a column oil heater contraption that hasn't been used in anger for about ten years.  The home a/c has a reverse cycle that is supposed to be very efficient if you use the a/c to space heat, but have never used it.

This Global Warmening stuff is the duck's guts! 

buzzsaw99's picture

a cash recall. a total recall. i am kuato, open your mind.

buzzsaw99's picture

you'll notice the billionaires with bond holdings and bank accounts didn't miss a minute's sleep. just the poor got fucked over.

kralizec's picture

I did notice.

But did the billion porked people in India notice...and are they moving on the PTB's yet?

It's all just pissing and moaning...

Arnold's picture

What is next?

Killing the fatted cow, no doubt.

Fish Gone Bad's picture

Cattle have been getting a free ride for waaaaaaaay too long.  Time to make them pay their fair share.

Arnold's picture

California Cattle Cause Climate Carnage.

India's Innovative Initiative Indicates Pollution Solution.