It appears the social unrest, economic collapse, and currency crisis sparked by Indian PM Modi's decision to demonetize "corrupt" high-denomination bank-notes was not enough.
As the Rupee crashed to a record low overnight, officials announced a suspension of the exchange of 'old notes' as of tomorrow to, in their words, "encourage people to deposit old notes in their bank accounts." With as much 60% of banknotes still un-exchanged, we suspect chaos will be the operative word for the immediate future.
Those with old notes will still be allowed to deposit them into their bank accounts until Dec. 31, but not permitted to do outright exchanges.
As Bloomberg reports, the Indian government had observed a declining trend in exchange of old notes over the counter, according to a statement from the state-run Press Information Bureau.
And so the decision to end OTC exchange of notes was to encourage people to deposit old notes in their bank accounts.
Government allows certain exemptions for use of old notes until Dec. 15, with only 500 rupee denomination currency notes accepted for such transaction:
- Old 500-rupee notes can be used for payment of school fees with limit; utility dues; payment of road toll fees
- Foreigners permitted to exchange foreign currency up to 5,000 rupees/week
Furthermore, as CNBC reports, the Indian government is set to impose a 45% tax (haircut) on any suspicious deposits.
This is a major problem as only 40% of banknotes have been exchanged according to local reports.
We suspect the sudden urge to force citizens to deposit/exchange their old banknotes is due to the increasing prevalance of "illegal workarounds" across the nation... (as The Wall Street Journal reports)
Unable to spend or deposit their sackfuls of large bank notes amid India’s crackdown on hoarding cash, business owners across the country are paying employees months of salary in advance, ringing up bogus sales and even buying gold they can smuggle overseas to get rid of stashed money or conceal its source.
Such illegal workarounds are threatening to undercut Prime Minister Narendra Modi’s move this month to cancel India’s highest-denomination rupee bills, which was meant to punish tax evaders and other criminals and bring more of the nation’s $2 trillion economy out of the shadows.
If Mr. Modi’s unprecedented social-engineering project fails to net too many of the biggest tax cheats, he risks further incurring the wrath of Indians already frustrated with the pain and economic dislocation the experiment has brought about in its first two weeks.
Requiring Indians to exchange their big bills at banks for newly created ones—or suffer a quiet, potentially catastrophic financial loss—was Mr. Modi’s way of forcing hidden riches to the surface. There, authorities would be watching, ready to examine large cash deposits.
Millions of Indians have heeded the call. Since Mr. Modi’s Nov. 8 announcement more than $80 billion in old bills has been exchanged or deposited. That is around 40% of the value of all large rupee bills in circulation. The deadline for turning in canceled bills was Dec. 30.
Meanwhile capital flight is very evident...
Sending the Rupee crashing to a record low against the dollar.
“Continued outflows along with dollar strength have undermined the rupee,” said Gao Qi, a Singapore-based foreign-exchange strategist at Scotiabank. “The rupee may outperform some regional currencies such as the Malaysian ringgit and Indonesian rupiah on account of the central bank’s intervention and low foreign position in Indian financial assets.” Bloomberg reports that the central bank will take appropriate action to deal with the currency’s decline, a government official said earlier Thursday, asking not to be identified, citing rules. State-run lenders sold dollars, probably on behalf of the central bank, as the rupee approached its record low, three Mumbai-based traders said, asking not to be named. The RBI has maintained that it doesn’t target a specific rupee level and intervenes only to curb undue volatility in the currency market.
But, as WSJ adds, India has to do more than void notes if it wants to wean itself off cash. It also has to target the underlying reasons for which businesses amass paper money, such as the need to pay officials who demand bribes.
Politics in India is another big cash business. Because the country’s electoral rules don’t require political parties to disclose the sources of small donations, companies regularly use cash to buy influence. Parties then use the cash to buy votes ahead of elections.
The currency replacement is just “a spring-cleaning exercise,” said Jagdeep Chhokar, co-founder of the New Delhi-based Association for Democratic Reforms, which advocates for greater transparency in party financing. “Unless we change our way of living, our house is not going to be clean. It is going to get dirty again every year.”
There has been widespread condemnation of Modi's actions. As former PM Manmohan Singh exclaimed, "Those who say demonetisation is good in the long run should recall quote "In the long run we are all dead". Singh tore into his successor Narendra Modi's clampdown on the cash economy, calling it an "organized loot and legalized plunder" of the country. Singh - the architect of economic reforms that led to years of rapid growth - dubbed Modi's shock move to scrap 500 and 1,000 rupee banknotes a "monumental mismanagement" that could shave at least 2 percentage points off economic growth.
"I do not disagree with the objectives of taking steps against terrorism and black money.
In the process of demonetisation, monumental mismanagement has taken place. What has been done can weaken and erode our people's confidence in the currency and banking system. I say so with all responsibility that we do not know what will be the full outcome.
This will hurt agriculture, small industry and everyone in the unorganised sector. My view is that GDP growth can fall by 2 per cent and that is an underestimate."
And from our soruce in India, the problems are escalating: ATMs lines are building once again.
But as the following image shows, there are no lines at The State Bank of India ATM, as these only have INR2000 notes:
As former PM Manmohan Singh raged today in the Rajya Sabha, "50 days is a short period but for those who are poor, even 50 days can bring about disastrous effects."