Finance and Economics > Economic News, the Global Economy and all Things Monetary

Chaos as India eliminates two largest banknotes without warning

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surfivor:

 Did people who had large amounts of money in cash like $50,000, $100,000 or more lose their money because those notes where no longer valid and if they went to a bank they would be exposed for laundering money ? If so, that could be an interesting way to destroy wealth ..

Cedar:

--- Quote from: David in MN on November 11, 2016, 07:58:39 AM ---There's got to be more to this story than meets the eye right now.

--- End quote ---

Yup.

Cedar

Smurf Hunter:

--- Quote from: FreeLancer on November 11, 2016, 08:51:18 AM ---I was talking to a guy from India and he said that you can't use the exchange rate with the USD to get an accurate idea of who this policy is targeting. These rupee notes function like the $100 note does here and is similarly used by the rich to transfer wealth under the table to avoid taxation, which is apparently a national pastime that favors the haves far out of proportion to the have nots.  Think suitcase full of stacked Benjamins, not mason jar in the cupboard with rumpled twenties and tens.

Apparently there are white and black pools of money and it's common for purchases of high value items, like BMWs and gold jewelry, to be made with both, with a portion of the purchase price reported on the official books as a white money transaction, while the remainder is paid in black money under the table.

This guy said that this is an attempt to reduce the epidemic of under the table transactions by rendering the necessary stack of money too high to fit under the table.  He's also confident that the black money will find a work around, eventually.

--- End quote ---

I had a similar conversation.  No shortage of people from India in my line of work.
Though the fellow I was chatting with was strongly in favor of this, as even small shop keepers commonly don't declare cash revenue.

I was polite about it, but India lacks competent government institutions (yes, USA has top shelf .gov agencies in contrast).  There are protection rackets, and tip-offs from insiders.
Imagine if you owned a coffee shop, for $100/year an IRS insider will alert you if you are ever under investigation.

Beyond that, there's no inventory control, chain of custody for materials, etc. 

In the USA, Bob is a cabinet maker and buys his wood from someplace.  If Bob attempts to embezzle from his company, perhaps claiming his sales were way down, all while pocketing the revenue off the books,  upon investigation auditors would surely ask where all the raw materials (lumber) went.   If Bob falsified receipts, the lumber yard might be subpoenaed, etc.

Since most of the supply chain in a place like India is gray market at best, this sort of investigation is nearly impossible.

David in MN:

--- Quote from: FreeLancer on November 11, 2016, 08:51:18 AM ---I was talking to a guy from India and he said that you can't use the exchange rate with the USD to get an accurate idea of who this policy is targeting. These rupee notes function like the $100 note does here and is similarly used by the rich to transfer wealth under the table to avoid taxation, which is apparently a national pastime that favors the haves far out of proportion to the have nots.  Think suitcase full of stacked Benjamins, not mason jar in the cupboard with rumpled twenties and tens.

Apparently there are white and black pools of money and it's common for purchases of high value items, like BMWs and gold jewelry, to be made with both, with a portion of the purchase price reported on the official books as a white money transaction, while the remainder is paid in black money under the table.

This guy said that this is an attempt to reduce the epidemic of under the table transactions by rendering the necessary stack of money too high to fit under the table.  He's also confident that the black money will find a work around, eventually.

--- End quote ---

Not to contradict any of this, the black market could just switch to dollars, Euros, gold, etc. overnight and be even more off the books when the government doesn't have any currency data. If the stated goal is correct this is a move in the wrong direction.

I still think there's something missing from this story.

FreeLancer:
That's why the change was implemented so abruptly, to decrease the chances of a billion people all successfully moving large numbers of black notes into other untraceable assets at the same time, before being forced into declaring them to the banking system before they're worthless. 

But, I agree, going forward, the black market will switch to something else.  Where there's a will there's a way.

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