De-Lurking on the Net

November 9, 2016

Sledge Hammer strike by India’s PM Modi on black economy and terrorism funding

Today, Mr Modi went bold. Perhaps not of his own volition but on behest of what all the economic advisors he could muster in last few months, advised him. He struck the  big denomination Indian currency notes void(Rs 500, Rs 1000). Some say these large notes amount to 86% of economy. Indians have guessed that economy is as much in black as it has been in legal/legitimate or white economy. So, given that both 86% is a guess and dividing line between black and white as at 50% of guess, then Mr Modi is writing off 43% of GDP in one hit. No matter what % is hit, the impact will be to usher the huge deflation in its black economy. It comes on the heel of his visit to Japan, a country staying in deflation since its hay days of 1993, before which it had seen any boom. Perhaps, it is just a coincidence.


His intentions can not be construed as wrong as he wanted to hit the most, two sets of people – 1) terrorists 2) Black economy peddlers who have refused to come out in open in spite of the amnesty to convert their black money into white(The scheme was not failed but could hardly be called a successful scheme).

So, what happens now – he introduces two type of notes – Rs 500 and Rs 2000 . These are not Plastic polymer notes as recently got introduced in number of countries (Australia, Canada, UK, New Zealand, Vietnam, Maldives etc) but it has new security features. Some say , Rs 2000 note has NGC technology . Details of the NGC has not emerged from Govt sources but social media rumors are fueling this. The NGC introduced in Philippines did not have any nano GPS chip as people are talking of Rs 2000 will have one. Without introducing a fool proof arrangement of  temper prevention or making it tough for some people or countries to stay in printing duplicate currency  and sending it to India, this whole exercise achieves nothing but brings pain to India. You merely burn your own notes.

There are terrorists using Hawala market, an arrangement where someone who wishes to send money into India does not go to banks or use legitimate companies. They use individuals who disburse Indian rupees from their black money in India to the recipient and get paid in return in foreign currency in a foreign country abroad. Such transactions were major source for black marketers to convert their money into white, money launderers to launder money, terrorists to get funded for new terrorist acts, drug pushers, smugglers etc . The cinema(Bollywood) largely depended on black money for funding. The Real estate particularly in north India had a big share of black money in it. All the political parties virtually live on black money. There is a domestic currency based trade between Iran and India. India’s currency is also used and particularly popular in Gulf  countries and in a country like Zimbabwe who are in the process of re-introducing their own currency again after a hiatus of several years. So, will all these people or even diaspora spread around the world will have all their money in bank or would be in position to change these notes in time?

So, immediate impact would be less housing activity, less Bollywood Cinema films, less terrorism (at least for now), less smuggling(all the smugglers money is never fully invested in metals like gold or other commodities but also remains in hard currency), less drug trafficking. There will be less activity in air travel and luxury living. There will be suffering for both poor and rich people. Poor people hardly have bank accounts, so will be impacted  a great deal. There are remote , rural areas where there can never, ever be a bank.  Even if such people have notes with honest earning or sent by their relations or kids, they will never know how to go inside a bank and convert it. There will be people not been able to pay to private hospitals. Govt hospitals rarely exist  for most in the country. There will be people who hide the money and unable to return in time to the places where they hid it to convert it or have anyone to access their money to convert it. Virtually all sectors in India have humongous corruption from ISRO scientists to judges, from North to South, West to East India. So, what happens when people suddenly have less financial muscle. Well it means, that their economic activity goes down including expenses on exorbitant weddings. So, hoteliers, caterers, etc all will have impact. It is like dropping a bomb on your own economy or helping your enemies who may all want your GDP to come down to a very low level or to see  your purchasing capacity substantially reduced.

The notes  can be converted in next 50 days . But beyond a threshold  of converting Rs 4000 in cash of new notes, conversion is allowed only by the bank accounts. If someone does not have their own bank account, then they have to use some one else’s bank account by giving them consent to receive his/her money into their accounts. Later on,  such people can withdraw their money in new notes from the account for which they consented. So, this particular activity will make the menace of already accumulated black money  in the economy to reduce substantially and it will become trackable until it stays in bank. It may stay long term in bank accounts but chances of its  staying in bank accounts long term are remote as people are used to cash transactions.  This declaration by Mr Modi, therefore, will not make the economy to become overnight controlled by banks. The networks of black economy generation, terrorists funding or drug peddling mules, duplicate currency circulators, smugglers, betting, bribe givers, bribe takers  are not going to disappear overnight. They are part of the system just like political parties or corrupt judges.  So, a new black economy will start growing as soon as one ends. Yes, there will be  people who will suffer massively and a few may even commit suicides or may even die of heart attacks when they find themselves  ruined totally. Incremental changes like Jan Aadhar Yojana etc would have achieved Mr Modi’s dream of having a economy fully running via banks etc. in few years.

Misery awaits India in short term and this will have impact on  the growth of the world economy too. Perhaps, it will teach a lesson to the other leaders to be patient.

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