"Brace For Economic Disruption" SocGen Sees "Sharp Rise In Gold" As India Plans Cap On Cash Holdings

Tyler Durden's picture

India's 'de-monetization' scheme has caused chaos across the nation, and while SocGen says the government's plan may have some short-term success in curbing so-called 'black-money', investors should "brace for economic disruption" as Bloomberg reports the Indian government is considering a cap on cash holdings for individuals. As SocGen concludes, "people will now be more inclined to park their black income in gold rather than in currency."

The daily images of utter chaos in India that has brought the conutry's economy to a standstill since they unleashed their war on cash...

Are perhaps about to get worse, as Bloomberg reports, India is set to consider a cap on cash holdings for individuals...

Measure planned to prevent people from hoarding cash and generating income that could evade taxes, according to government officials with direct knowledge of the matter.


Planned measures include limit on large cash withdrawals from bank, the officials said, asking not to be identified citing rules on speaking to media.


Budget, due in February, may have steps to encourage use of checks, credit and debit cards.


Purchase of gold jewelry said to be made more stringent to prevent switching of asset from cash.


Finance Ministry spokesman D. S. Malik couldn’t be reached for comment.

But, as SocGen's Kunal Kumar Kundu writes, the demonetisation scheme (banning the use of old high-denomination banknotes – INR500 and INR1000) announced by India’s PM Modi on 8 November is likely to have only a short-term impact on corruption and black money, unless it is followed by multiple other moves aimed at curbing these issues.

However, we do expect short-term disruption to the economy, especially in rural areas, due to a sharp drop in consumption as the cash crunch hits. The extent of the disruption will depend on how soon new banknotes come into the system. If this takes place over the next three to four weeks (as promised by the government) the damage should be limited. Otherwise, the disruption could be prolonged. At the same time, there is also a possibility of a short-term increase in tax revenue collection which could enable the government to keep its deficit within target and continue with all its desired expenditure (including capex) which we earlier feared may have to be curtailed as deficit challenges manifested. In the interim, sectors that are heavily dependent on cash transactions (essentially because these are gateways to parking black income), i.e. construction, real estate and gems & jewellery, are likely to be adversely affected over the short term.

On the macro front, weaker consumption could mean lower inflation, thereby opening up the possibility of an earlier rate cut by RBI. Additionally, with people being forced to deposit large quantities of high-value notes, banks are seeing a surge in low-cost deposits which should lower cost of funds and result in faster transmission of monetary policy action through the interest rate channel. However, given the current weak credit environment, we see a spike in credit growth as unlikely. The only potential long-term effect of this move could be deterioration in India’s current account deficit (CAD), as people will now be more inclined to park their black income in gold rather than in currency, thereby leading to sharp rise in gold imports.

India’s fight against black money – the end has corrupted the means

At around 8pm on 8 November, India’s PM Modi announced, in a broadcast to the nation, that India’s INR500 and INR1000 banknotes would no longer be recognised as legal tender from midnight and that citizens would be able to exchange their existing notes of these denominations for other available (and legal) tender until 31 December 2016. The aim of the action was to counter tax evasion, counterfeiting and corruption. The idea of eliminating large denominations is that it makes it harder to hide large amounts of cash.

The problem with the move is that, in one fell swoop, just over 86% of all banknotes in circulation became just paper. Fact is, high percentage of transactions take place in cash in India, especially in the rural areas. The potential fallout from such a nationwide measure could have been averted if the government had been better prepared to handle the contingencies. However, the need for the government to keep the move a secret — so that tax evaders wouldn’t be alerted before the demonetisation took place — affected preparedness. Even Finance Minister Jaitley admitted that it would take two to three weeks to reconfigure the ATMs to handle the newer and larger notes. Given that India currently has about 202,801 ATMs all over the country, it could potentially take longer.

Existing loopholes have provided an escape hatch

Before discussing the economic impact of the move, it is important to understand the potential impact it could have on the existing block of black money in the economy and its ability to stop generation of further black money in the economy in the future. We think that while the existing stock of black money will be negatively impacted, only part of it will actually come to the fore. There are still many loopholes in the system through which a large portion of black money is able to enter the formal banking channel without the government’s knowledge. While the country is receiving virtually one notification per day from the RBI to plug loopholes that are coming to light (another indication of lack of preparedness), this process looks set to continue. Thus, only part of the black money will actually be reported and experts think that some of it will never come back.

Black money represents only a small fraction of black wealth

The problem is that black money forms only a small portion of the black wealth held in the economy. In the past five years, income tax raids have found that only 5-6% of black money is kept in hard cash. Moreover, those who have amassed a sizable amount of black money are equipped at finding ways around demonetisation by converting their existing cash into bullion, gold jewellery, real estate and foreign currencies through middle men. To that extent the demonetisation scheme will only impact part of the overall stock of black wealth in the economy.

The important thing is, however, to remember that black income is a flow concept and not a stock concept. Hence, the impact will only be temporary, and black money will eventually begin to be generated again as the move will have no impact on the generation of black income itself. This is because there are a large number of mechanisms by which such incomes are generated, and these may or may not depend on cash circulation. Normally, black income is generated by manipulating the books of accounts of businesses — revenues are understated while costs are overstated. Black income becomes a stock when it is parked – be it through property, gold, currency, etc. This scheme will only impact the black income that is parked in the form of currency. Given that only around 6% of black wealth is parked in currency form and only a part of that will be impacted, the overall impact of the measure is likely to be limited and of short duration.

Demonetisation is not enough to fight the black money menace

For a sustained crackdown on black money, multiple other attendant measures need to be taken to rein in black wealth generation. These include:

  • Direct tax reforms – While much discussion has taken place over the last decade, no action has been taken so far. There are indications that the government may want to implement reform in this area – widening the tax base, lowering tax rates and removing exemptions. If an announcement in this regard is indeed made during the forthcoming budget could be positive for the economy in the long term.
  • Transparency in political funding – In India, the process of political funding remains very opaque and has evolved into a major end-use for black money. Unfortunately, we are yet to see any concrete action to tackle this menace.
  • Agriculture income tax – Agricultural income is not taxed at all in India. For a country with such a poor direct-tax to GDP ratio, it is incomprehensible how virtually 15% of the economy remains untaxed. In fact, this has emerged as a significant conduit for tax evasion as a large chunk of income is shown as agricultural income and hence there is no incidence of tax.
  • Investment through the Participatory Notes route – Participatory Notes (commonly known as P-Notes or PNs) are instruments issued by registered foreign institutional investors (FII) to overseas investors who wish to invest in the Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India - SEBI. This anonymity allows many individuals with illbegotten wealth to invest in the Indian stock markets. Stricter measures need to be imposed to control the flow of such funds into the market.

Like the expected impact on black money, we believe the impact on counterfeit currency will also be temporary. For sure, the existing stock of such banknotes will be extinguished, but it will only be a matter of time before the counterfeiters get back into action.

Economic impact

In the short term, the effect is likely to be negative on balance. However, we do not expect any long-term impact from this policy alone.


We feel this move could be negative for consumption in the short term. In India, especially in the rural areas, cash transactions account for the largest share of overall transactions in the economy. In urban areas, it is less. However, the challenges are multiple. According to data from the finance ministry, only about 32% of India’s population has access to financial institutions like banks and post offices. Moreover, the distribution of banks is highly skewed, with around a third of all bank branches being concentrated in only 60 Tier 1 and Tier 2 cities/towns. More importantly, close to 60% of workers earn their wages in cash, of which more than half are daily wage earners. The majority of small mom-and-pop shops deal only in cash, especially in rural areas. With 86% of banknotes moving out of circulation at just a few hours’ notice and with a limited amount of cash being made available in lieu, the effect has so far has been quite disruptive. This is no surprise given that as per an estimate by the Fletcher School at the Tufts University, in India 86.6% of transactions by value were carried out in cash in 2012. While this figure would have come down since then, it will still be very high. The fact is that India remains largely a cash economy. According to the same Fletcher School study, the ratio of currency to GDP in India (12.2%) is higher than for countries like Russia (11.9%), Brazil (4.1%) and Mexico (5.7%). Changing age-old habits is a long-term process and the demonetisation will have caught a lot of people on the wrong foot. Also, as mentioned earlier, in an effort to keep the decision secret, the actual implementation fell short of expectations. Even the banks, which were responsible for implementing this enormous project, were kept in the dark, thereby affecting their preparedness. Whether normalcy will return in another month’s time, will depend on the government’s ability to make new cash available based on its stated timeline. Having said that we think that the stress in rural areas will persist for some time.

Overall, we expect consumption in urban areas to be lower, at least until December, while the impact on rural areas could continue for longer. Nevertheless, we will keep tracking the situation and by mid-January we should have a better sense of the level of demand


As some black wealth gets tracked, we expect a short-term spike in tax (and penal) revenue collection. This should allow the government to plug the gaping hole in the overall revenue collection budgeted for the year. Hence it should be able to maintain its fiscal deficit target for the year and continue with its overall expenditure plan (including capex), which we felt would be compromised by a build-up of revenue pressures. This benefit, however, will be a transitory in nature unless the move is followed by the tax reforms mentioned above. In the event that reforms do take place simultaneously, we would likely see a long-term structural improvement in the economy as government capex would continue unhindered resulting in more job creation.

Overall macro impact

GDP growth: The short-term demand destruction could be partly offset by continued government capex, which we previously expected to peter out. At this point we have limited visibility on the extent of the demand destruction that is likely to take place. On balance though, we see potential downside risks to our existing growth forecast. And the longer the disruption lasts, the greater the impact it will have.

Inflation: In the short term, we see potential downside risks to our inflation forecast given the demand destruction.

Monetary policy: With inflation likely to ease more than expected, there is a possibility of RBI opting for a rate cut at its December 2016 meeting as compared to our expectation of a rate cut at the April 2017 meeting. Also, with the vast amount of low-cost deposits flowing into the banking system, the banks are able to pass on the benefits of lower costs to lending rates, thereby improving the pace monetary policy transmission. However, we do not expect this to translate into higher credit growth. With credit growth currently at its weakest level, credit remains a demand issue and not a supply issue. Fiscal deficit: We believe the government will be able to meet its fiscal deficit target for the year (@ 3.5% of GDP) without having to compromise on its expenditure including capex. We had feared earlier that expenditure would be curtailed given that India’ fiscal deficit was already at 84% of the budget in the first half of FY17.

Current account deficit: The monetisation scheme could potentially lead to a higher deficit in the longer term as many of the people who generate black income could seek to park their income in gold rather than cash in anticipation of periodic repeats of the demonetisation scheme.

For now, the Rupee is in freefall...

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abyssinian's picture

How about investing in Curry? 

kliguy38's picture

sharp rise in gold......you really mean where bullshit meets reality bitchez

JimT's picture

Isn't it just possible that this is providing at least a small catalyst to the surging dollar?

Stuck on Zero's picture

What a crock, calling a natural economy a "black market." Only governments could come up with that.

Dame Ednas Possum's picture

I bought three beautiful PAMP bars yesterday. 1 x 100g and 2 x 50g. AED 29,100. About 1.8% above spot.

I asked the Indian chap in the gold store if the current cash situation in India was affecting local prices here in Dubai.

He just wobbled his head back and forth... as they do. It's the typical way for these wallahs to give you an answer without giving you an answer. Depending upon circumstance I've interpreted the head wobble to be one or more of the following at any given point in time: yes; no; no idea; chai with sugar; get stuffed; no fucking idea whatsoever; that Goan fish curry needed more coconut milk; I like Cobra beer.

Just keep stacking bitchez.

Still no progress on the return of stolen funds from gold.ae

SoilMyselfRotten's picture

more inclined to park their black income in gold rather than in currency, thereby leading to sharp rise in gold imports.


IMPORTS is what SocGen said would see a sharp rise, not gold itself, HLs a lil misleading

Dame Ednas Possum's picture

Mark Fuckanerd would put a stop to such fiction peddling.

Anyway... 'Demand is demand by any other name.' - Billy 'the gold bug' Shakespeare.

Herodotus's picture

Can't the gold mining companies sell their production directly to Indian gold wholesalers or Indian gold refiners?  Why would they continue to sell it to the COMEX?

auricle's picture

Something big is about to happen. You don't get this desperate as a government unless you are economically on the ropes. The people need to reject this repression, boycot the banks and demand real money. 

A. Boaty's picture

Sadly, I lost three PAMP bars in an unfortunate boating accident.

SoDamnMad's picture

Dats raccist. We be ned to protest deems use of "black" word. Dey no black, we be black N proud.  Where be Al Sharpton?

Socratic Dog's picture

Stuck on Zero:

The government, and the author.  The "black money menace" indeed.  Fuck you!

max2205's picture

Sounds like moar 7 11's and dunking donuts will be built 

Kirk2NCC1701's picture

The only place that AU prices will rise dramatically, is in India. Because Demand will outpace Supply to India.

TPTB (Club Fed) will simply choke the supply to India. When Indians see prices rise only in India, they will eventually stop buying AU. Which means that the Banksters will have won, when the demoralized Indians cave and submit to small denominations and electronic payments.

India is a testbed for other countries. Never forget that the Banksters are exactly like the Borg: they never quit, and they keep coming back with new and clever solutions, until you've been defeated and assimilated.

Playing Defense  (stacking AU and Pb) is NOT ENOUGH. The ONLY Rx is "No more Central Banksters".

rejected's picture

"Playing Defense  (stacking AU and Pb) is NOT ENOUGH. The ONLY Rx is "No more Central Banksters".


That needed to be in bold print,,,,

SoilMyselfRotten's picture

Kirk, they've done a shitload of smuggling in the past to satisfy their gold appetite. I'd look at that to increase dramatically.

Dame Ednas Possum's picture

Long curry-scented cavity searches.

mosfet's picture

I forsee a big spike in tourists visiting India wearing copious anounts of gold jewlry - not so much on the return flight.

AmandaFawndel's picture

How much gold can be smuggled in a 'Prison Wallet'?...I mean on average....just hypothetically...well I guess it's rhetorical somewhat.

matermaker's picture

safron man... safron.   can make more money per square foot of table space than you can pot.   must harvest each individual stamen for it's pollen

WillyGroper's picture

very easy to grow if goles & mophers don't get it.

i'm mad about saffron.

balz's picture

Crazy game Indians are playing.

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) balz Nov 19, 2016 9:45 PM

It is a way for central banks to beta test their schemes. Creepy.

Socratic Dog's picture

Looks like that to me too.  Act accordingly.  If you like to keep cash outside the banking system, this is what can happen to it: worthless overnight, by government decree.  Worth considering, that the same can happen to cash kept inside the system.

If this isn't the greatest heads up in the history of man I don't know what it is.  On top of "it's not your money, it's an unsecured loan to the bank".  The red lights are flashing, the klaxons are blaring.  But the sheeple are oblivious to it all, and will soon be shorn to the bone.

If Trump doesn't kill the Fed, we are fucked. 

August's picture

One thing Simon Black has been saying of late, and with which I agree:  the bulk of any cash folding money you may be holding should be in 20's, not 100's.

By the way, anyone here have experience with exchanging US 100's in Argentina?  Are they a problem?  Or preferred?  A friend just returned from visiting BA, and says the standard local real estate purchase still involves suitcases of USD....



gmak123's picture

This could happen here

11b40's picture

Yes, and much easier in here than in India.  Everyone has credit cards, or EBT cards, or both.


gmak123's picture

Indians are stupid curry asses. Some Indians think this is good for the nation

Socratic Dog's picture

Mercans are far too intelligent and well-informed for that, right.

August's picture

My take on Asian behavior:  they will often express their full support of government policies and demands, but their actual behavior may be quite "wild west" in terms of compliance with the law.   

Americans IMHO tend to be the opposite:  they'll publicly state a vehement anti-government opinion, but tend to be law-abiding anyway.  Up to a point....

Mass_hysteria's picture
Mass_hysteria (not verified) Nov 19, 2016 9:25 PM

The state controls you peon, of course you don't have any rights! Don't speak unless it's okay with us!


You do as we say! Got it? Sit down, and careful what you think of! When we get our mindreading software up and running you better not be thinking negative thoughts about our big government!



PTR's picture

No, it's if we get chipped that "We better not be thinking negative thoughts about our big government!"

Ignorance is bliss's picture

How long before gold is banned as the investment choice of corruption?

0hedgehog's picture

Tell most people they can't have something and they will want it all the more! The more the people want it, the more it costs to obtain and there will be no shortage of buyers. Prohibition has never worked the way it was supposed to work, always unintended consequences. The war on drugs, same thing, a losing battle.

HenryHall's picture

Chits make a comeback. in India.

You want vegetables at the vegetable market?

Then take your metal (gold, silver copper or steel) to the chit wallah, he weighs your metal and gives you a chit in exchange.

Then you take your chit to the vegetable seller who takes your chit and gives you vegetables in exchange.

At the end of the day the vegetable seller takes his chits to the chit wallah and exchanges them for something of real value. Such as gold.


Someone should invent money - coins made of copper, silver or gold according to value. Non debased metal coins.

matermaker's picture

I've said for a while.  In this nation, one form of money is still in existance.  Coins, the only form of currency printed by the federal government.  The mint of the United States Government.  Those places are fine.  You could turn a quarter or dollar back in to silver in less than 24 hours.   Tons of print plates still in the vaults. I'd like to see Kennedy on the first to roll out..

Socratic Dog's picture

After a while, that chit wallah will realize he can issue more chits than he has gold, and get away with it, until he can't.  Fractional reserve chit wallah.  Sometimes known as a banker.

I have no doubt a certain ethnic group will move into that business fast.

Econogeek's picture

Check out Gresham's Law.  Money or paper, impossible for the little guys to preserve their bankable, fungible wealth long-term.  

Kirk2NCC1701's picture

Sic Semper Tyrannys et Banksterus.

Dame Ednas Possum's picture

The powder puff snowflakes will see acts like this as persecution f the LGBTXYPFQZ community and blatant homophobia... just look at the limp wrist of the fella second from the right...

Yen Cross's picture

 I see a sharp rise in Metals, because central banks are full of shit<

   Does anyone want some 3-x copper ETFS's?

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) Nov 19, 2016 9:48 PM

I don't care if the price of PMs goes up, or down, I am still buying. The life span of a fiat currency is limited. In the end fiat always go to zero.

bugs_'s picture

It is amazing.  The one thing that "they" have is the confidence in their fiat.

Why in the world would "they" put the confidence in their fiat at risk before its time?

Unless its time.

fattail's picture

It is sure starting to seem like it's time.  Lets see how many FED rate increases we have in the next 12 months.  That will probably tell us.  

matermaker's picture

It just might work as it was intended to.  The Indians are far more than one generation away from accepting fiat.  They are not a young people.  You will hear a great sucking noise coming from over there... the "hoover'n" of assets.

kuro_neko's picture

if you want to quote, quote entirely

"Sharp rise in Gold" imports in India

I thought they were talking about Sharp rise in gold prices all over the world