Chaos as India eliminates two largest banknotes without warning

[Mr. Bill]

WSJ: India to Replace Largest Bank Notes

In a surprise announcement Tuesday night, Prime Minister Narendra Modi said India will replace its largest-denomination bank notes with newly designed ones, a move aimed at curbing corruption, thwarting counterfeiters and dredging up what could be billions of dollars of taxable income currently stashed in the underground economy. ...

According to India’s central bank, 86.4% of the value of all rupee bills in circulation was in 500- and 1,000-rupee notes as of March. ...

The affected currency is the 500 rupee (US$7.50) and 1000 rupee (US$15) notes.

So:

• 86.4% of all cash in India can't be used anywhere (except at airports, railway stations, hospitals, crematoria, milk vendors, and possibly petrol stations for only the next 3 days).  Only the 100 rupee ($1.50) note and smaller are legal tender, until the new 500s and 2000s get distributed.
• Banks are closed for the next 1 or possibly 2 days.
• The old bills can be deposited at the bank, but cash withdrawals will be extremely limited.

More articles:

BBC: India scraps 500 and 1,000 rupee bank notes overnight

Times of India: ATMs run dry as people rush to draw Rs 100 notes; many decline banned notes

[endurance]

Man, that is absolutely nuts. It's not like they're getting rid of the $500 bill. This is a country with a $6000 GDP/person average with a huge percentage living well below the poverty line. This seems like the kind of thing that could create a substantial disruption in civil order.

[archer]

wow.... talk about sticking your hand into a hornets nest.

[mountainmoma]

please keep us updated, something to watch, what if similar were to happen to Japan where many people are storing cash in house to keep from negative interest rates.... what if it were to happen here in the not to distant future ?

Are they going to limit how much can be exchanged ? Are they going to say you can exchange xx amount, no questions asked, and anything over, you need to prove you earned from declared income or we are going to assume under the table and tax ( effectively exchange at a discounted rate) ?

[FreeLancer]

I saw the headline earlier today and figured it was equivalent to banning USD $100 and $50 bills, not like $20's and $5's.

A very large country has turned its economy into a monetary experiment and it will be very interesting to see how it turns out.  If it works there, we're probably all screwed. 



Wonder what this does for crypto and PM's?  China currency controls tend to send BTC prices up, but India wears its wealth in the form of 24k gold jewelry.

[Morning Sunshine]

weird to think that no one - NO ONE - knew this was coming.  Where are the people who make the new money?  The banks got new bills in and didn't notice?
And what about the bills you have lost in old jackets that you won't find until the first big snow?  Or in that suit jacket you wore to your great-aunt's funeral 3 years ago?  I bet there is a LOT of misplaced cash that will be permanently lost (stolen?) with this.

[mountainmoma]

weird to think that no one - NO ONE - knew this was coming.  Where are the people who make the new money?  The banks got new bills in and didn't notice?
And what about the bills you have lost in old jackets that you won't find until the first big snow?  Or in that suit jacket you wore to your great-aunt's funeral 3 years ago?  I bet there is a LOT of misplaced cash that will be permanently lost (stolen?) with this.

I bet alot will be effectively stolen as it will be above the allowed no-questions-asked turn in amount, given that most low income people there likely dont keep records to prove it was legally gotten

[Mr. Bill]

Here's what appears to be a collection of official propaganda (i.e. incompletely informative posters prominently featuring a photo of Prime Minister Modi):

Black money: Modi govt's move to bring in new notes explained in 8 graphics

[mountainmoma]

ok, so maybe it isn't black market, but counterfeit money ? Makes sense to exchange for currancy that cant be easiy counterfieted

[endurance]

This isn't about counterfeit, it's about getting their hands in the pockets of the middle class and rich. This is a nation that doesn't trust its backs and most transactions are face to face for cash. People store their entire life savings in cash. If you have a few thousand roupees, no problem. You'll be able to exchange them for the new money in a few days. If you have a few million, the government is going to come knocking and will likely seize their 60% or take it all since the tax amnesty period is over.

I suspect this will lead to the storing of foreign currencies in the future. You're safer exchanging for dollars and storing them than waiting for this to happen again.

[mountainmoma]

This isn't about counterfeit, it's about getting their hands in the pockets of the middle class and rich. This is a nation that doesn't trust its backs and most transactions are face to face for cash. People store their entire life savings in cash. If you have a few thousand roupees, no problem. You'll be able to exchange them for the new money in a few days. If you have a few million, the government is going to come knocking and will likely seize their 60% or take it all since the tax amnesty period is over.

I suspect this will lead to the storing of foreign currencies in the future. You're safer exchanging for dollars and storing them than waiting for this to happen again.

This was my first thought about it as well, but then trying t read the popaganda posters, seems the propaganda posters are talking about conterfiet.

Yeah, I was am thinking they are going to take assets if you cant "prove" it was from income that was already taxed, and who keeps that kind of records ?

ANd, what if this becomes a trend in other countries. Think about it coming here. Here the rich may not have millions at home, they can always have offshore accounts, but the middle class and lower class likes to have some cash around, at least I have noticed this, and how are they going to prove where it came from ? Her, the government is going to say, as they already do, that it must be from drug trade, prove that it isnt.

[surfivor]

Some BS from the NY times and other notes

http://www.nytimes.com/2016/11/09/business/india-bans-largest-currency-bills-for-now-n-bid-to-cut-corruption.html

"The new policy puts India at the “leading edge of countries restricting the use of high-denomination currency notes that are now seen as mostly fueling illegal activities rather than legitimate commerce,” said Eswar S. Prasad, a trade policy professor at Cornell."

...

For the next two weeks, people will be able to exchange only 4,000 rupees a day, or about $60. People holding vast sums of unaccounted for cash will find it hard to exchange the money at banks because they will need to explain where they got it, risking tax investigations, experts said.

“If I walk in with two crores,” Mr. Kejriwal said, using the Indian term for 20 million rupees, or about $300,000, “people will be worried that the government will be tracking my name and address.”

[surfivor]

 I don't quite understand it but I get the impression that the people in India all support the currency ban very enthusiastically. The claim seems to be everything is done in cash and people don't pay any taxes .. Here is an article and I posted some of the comments below which there are numerous. I did not really see any negative comments and have not come across criticism regarding what was done 

http://timesofindia.indiatimes.com/india/Ban-on-currency-How-it-was-kept-a-secret-how-its-hurting-ministers/articleshow/55345737.cms

"amazing PM and a true governance.. what a move to curb hoarders.. never heard in 30 years at least of a PM who works so hard in national interest.. India is blessed to have NaMo as PM!! "

..

" NAMO knows how to keep secrets...great leader he. India is fortunate to have him at helm to stear India'' s destiny to prosperity. Long live Modi..long live India"

..

"Modiji did the entire operation even better than any armed forces operational move
This is efficiency par excellence
It''s a lesson for one and all "

..

"Hats off to Mr. MODI
His style of working is remarkable.
JAI HIND !! "

[David in MN]

I've avoided commenting because none of this makes any sense to me. How will India's massive rural and small town population comply with this? It's not rare to find communities where people will have to walk miles just to get to a bank.

There's got to be more to this story than meets the eye right now.

[FreeLancer]

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.

[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]

There's got to be more to this story than meets the eye right now.

Yup.

Cedar

[Smurf Hunter]

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.

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]

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.

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.

[Smurf Hunter]

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.

True, but we are assuming the motives here.  In the US, this policy would (publicly at least) be implemented to starve illicit drug trade, prostitution, bribes, etc.

In reality, India is a cash economy to a massive degree and as such the .gov there has a difficult time collecting their tax revenue.  That's the majority of the problem, not the criminal underworld as we might think.

[FreeLancer]

In reality, India is a cash economy to a massive degree and as such the .gov there has a difficult time collecting their tax revenue.  That's the majority of the problem, not the criminal underworld as we might think.

I used the term black market without the proper specificity. You are right, this guy said the black pool of money they're targeting in India is used predominantly for tax evasion by non criminals when buying legal products, which disproportionately benefits the rich. But he and the Pakistani guy we were with were already speculating on ways to get around it in the future, albeit with much more time and effort.

The vast majority of Indians rarely ever see this many rupees in a single bill, their transactions are typically in the much smaller denominations, which India is not targeting with this move. Again, I got led astray by applying our USD exchange rate to these bills, but this apparently puts us off base by at least a factor of 10.

Admittedly, the guy is most likely considered rich back home, so his opinion might not be representative of the other classes.

[Smurf Hunter]

I used the term black market without the proper specificity. You are right, this guy said the black pool of money they're targeting in India is used predominantly for tax evasion by non criminals when buying legal products, which disproportionately benefits the rich. But he and the Pakistani guy we were with were already speculating on ways to get around it in the future, albeit with much more time and effort.

The vast majority of Indians rarely ever see this many rupees in a single bill, their transactions are typically in the much smaller denominations, which India is not targeting with this move. Again, I got led astray by applying our USD exchange rate to these bills, but this apparently puts us off base by at least a factor of 10.

Admittedly, the guy is most likely considered rich back home, so his opinion might not be representative of the other classes.

I think you're right on.

For a domestic analogy, suppose you're a hotdog cart vendor, accepting only cash with no intent on paying taxes.

All day long people pay you in $1, $5, $10 and the occasional $20.  The .gov bans $50 and $100 bills.
This won't impact your customers hardly at all, but previously you had a process of changing out to larger bills after close of business, and those $100 got stashed in your safe for future uses.

[osubuckeye4]

This is an interesting story.

I'm with David on this, as there has to be something more that isn't being let out.

The fact that it changed so abruptly, and the fact that they put no limitation on depositing, but did put a limitation on how much you can convert/withdraw per day... makes me think that they weren't trying to make counterfeiting more difficult, but, that it's possible that rampant counterfeiting was going on (successfully) and the government had to take immediate action.

It's possible that they are still looking for a means of identifying the counterfeit currency, and that's why the restrictions have been put in place. Once they figure out that way to identify, they could lift the restrictions and only allow "genuine" money.


NOTE: This is all rampant speculation on my part. I don't know what the heck is going on, trying to brainstorm a reason why/how this makes any sense.

[Cedar]

French media on it
http://observers.france24.com/en/20161111-chaos-india-banks-illegal-tender

Cedar

[FreeLancer]

French media on it
http://observers.france24.com/en/20161111-chaos-india-banks-illegal-tender

This quote from the article seems to contradict the idea that this doesn't have an effect on the unbanked poor.

Since the measure to ban 500 and 1000 rupee notes came into effect, many Indians earning lower incomes found themselves with cash they couldn’t use and were unable to buy basic household goods, or food for their family. Local media reported that some people were given their day’s wages in 500 rupee notes – effectively useless until they manage to convert it. Meanwhile, stay-at-home mothers who had saved for years suddenly found themselves with piles of worthless cash that needed to be quickly converted.

But this article makes it sounds like there's a bunch of middle class people with the off the books notes scrambling to figure out how keep it off the books or split it up between several people so that they're not hit with a tax penalty for depositing too much into their bank accounts.  Apparently travel and weddings are a popular way to try and get rid of the large quantities of black money, which the article admits is a rampant problem. 

Apparently the large quantities of these notes held in Pakistan and China will be effectively flushed from the system, as it will be very difficult to get that much paper back into India, let alone figure out where to dump it.  Terror funded by counterfeiting also is mentioned.

It's an interesting experiment.

[David in MN]

Apparently the large quantities of these notes held in Pakistan and China will be effectively flushed from the system, as it will be very difficult to get that much paper back into India, let alone figure out where to dump it.  Terror funded by counterfeiting also is mentioned.

Oh, it's a currency default. Now I get it.

[surfivor]

Currency default disguised and sold as something else ?

[Mr. Bill]

I don't quite understand it but I get the impression that the people in India all support the currency ban very enthusiastically. ...

My brother and his wife are on their way home from India right now, so I'm looking forward to hearing some first-hand reports.  What I heard so far is that (in their circle of acquaintances, which is a very tiny sample) there is a lot of support for the currency change.

They also told me that they thought of a way to get around the ban in just a few minutes, but this didn't change anyone's mind.

But as for online newspapers and comments, it's sorta obvious to me that some sources are EXTREMELY biased, and are basically printing government propaganda without question.  I would guess that the comments are filtered to comply with this bias also.

India is such an incredibly heterogeneous country, I expect that the currency change will work just fine in some neighborhoods and be a complete disaster in others.  The best-connected corrupt people will emerge with their wealth undamaged.

[surfivor]

My brother and his wife are on their way home from India right now

 What did they do there or what area did they go to ? I find it an interesting country