On the late evening of November 8th, around 9.30 pm IST, when the entire country was preparing to call it a day, Prime Minister Modi announced a stunning decision which caught everyone in the country and almost everyone in his own government unawares and by surprise. The PM himself came live on National Television and announced that Rs.500 & Rs.1000 currency notes will be abolished permanently.
Let us try to gauge and understand what exactly is happening.
Ground reality before the move:
86% of currency printed by the government and in circulation were of Rs.500 & Rs.1000 denominations. Before this decision was taken, a total of Rs.16.42 lakh crore ($240 Billion) of Currency notes were in circulation. Out of which, roughly 86% which amounts to Rs.14.18 Lakh ($210 Billion) were of Rs.500 & Rs.1000 denominations.
As explained by the RBI Governor in a Press Conference after the announcement, while all other denominations saw an increase in supply of 40% (all officially printed) between 2011-2016, the increase in 500 Rs notes was 76% (almost double than that of other notes of Rs.100 and below) and Rs.1000 was 109% (almost 260% more than that of notes of Rs 100 and below). Thereby indicating that, a massive forgery of Rs.500 & Rs.1000 denominations were being undertaken.
Reasons the government gave:
- The colossal forgery of Rs.500 & Rs.1000 denominations was cited as the main reason for bringing in this law. The utilization of these forged notes was directly proportional to the instability and chaos unleashed against the Indian State.
- Black Money hoarders mainly comprise of Businessmen, Politicians, Real Estate Mafia, Hawala traders, Private Education Mafia, etc. Black money was being hoarded and accumulated by demanding payments in cash for various transactions and by not disclosing the income to the government. This was causing huge losses to the Government.
Steps the government took:
- Announced cancellation and use of the Rs.500 & Rs.1000 denominations with immediate effect
- Fixed a deadline till the 30th of December 2016 to deposit all the Old Bank Notes in any Bank
- Allowing across the counter spot exchange of up to Rs.4, 500.00 of the cancelled old notes with new notes of other denominations in any bank or branch.
- Allowing cash withdrawals up to a maximum of Rs.24, 000.00 (which would come in other denominations) per week for a single account.
What was the effect in the first 6 days of the announcement?
- A total of 2 Lakh Crore ($30 Billion) of Rs.500 & Rs.1000 denominations were deposited by various depositors across the country within the first 6 days of the announcement. Making it almost $5 Billion/day in various Banks and branches across the country.
- Same time a total of Rs.7,000 crore ($ 1 Billion) was withdrawn by people across the Nation, which is less than 5% of the amount deposited.
Forecast for December 30, 2016 Deadline:
- Optimistic Forecast suggests that all $210 Billion worth of Rs.500 & Rs.1000 denominations will be back in the banks. This currently stands at roughly 15% ($30 Billion)
- Realistic Forecast suggests that the government won’t be able to call back $60-75 Billion by 30th
- This still leaves a massive gap of $ 150 Billion of 500 & 1000 denominations which will never be brought back into the system.
What will happen to this $ 150 Billion of old notes??
- Most likely destroyed by their owners since they have been rendered worthless from the night of November 8th.
Who are the main depositors of the $30 Billion of old notes?
- As per the FM Arun Jaitley, SBI alone carried a total of almost 9 crore transactions till the 1st Saturday, which is the first 4 days. It achieved a total deposits of 47,868 crores ($ 7.50 Billion). Making it 50-50 ratio of deposits vs withdrawal transactions, the total deposits transactions would be around 4.5 crore. This makes it an average deposit of Rs.10,000 per depositor. Even if the ratio of deposits to withdrawals is 25-75, the average deposits per depositor would be around Rs.20,000.00. Thereby meaning almost 100% of depositors have been Middle Class and Lower Middle Class.
What can one make out of these figures??
- These figures tell us that, the Upper Middle Class, Middle Class, Lower Middle Class and Lower Class people have been least affected with this rule. This rule has been a Super Hit with them.
What could be the flip side of this rule?
- A bit of chaos and confusion to exchange the old notes and for withdrawing new cash to carry on with their lives.
So, who are those who have been affected?
- The people who have been really affected are the ones who have accumulated the $150 Billion in legally printed notes in cash form and maybe many times more in forged format. Going by the figures conveyed by the RBI Governor Urjit Patel, the total of the Legally Printed 500 & 1000 Rs notes which might not come back into the system along with the total forged notes could be roughly $ 500 Billion ($150 Billion-legal bills + $ 250 Billion-forged bills). This effectively means $0.50 Trillion of Legally Printed and forged notes being rendered as worthless.
What is the Opposition Charge?
- The opposition’s counter specifically of that of an acidic Kejriwal is that, specific Businessmen close to the BJP knew about this decision of the government beforehand and who took advantage of this scheme. Kejriwal of course as usual is not specific on how advantage can be taken off by these businessmen if they had prior knowledge? But let us play Devil’s Advocate and try to analyze the options of an ‘X’ Businessman who has let’s say 1000 crores of Black Money with him, and he had prior knowledge of this acute Government decision.
What are the benefits of the Businessman with prior knowledge?
- Can he somehow convert his Black Money into White so as to not get stuck with worthless paper? If yes, then I take it as a positive development. 1000 crores of unaccounted money has been brought into the system. And, the Businessman is likely to be taxed immediately once the money comes into the system. This was precisely the reason this decision was made.
- Can he make more money with this new rule? How? I have tried to acutely understand any manner by which an existing Black Money Hoarder can convert his ‘A’ amount of Black Money into ‘B’ amount (where B > A) by having prior knowledge of this decision. And concluded that this is virtually impossible.
- In case of prior knowledge, Can he send his money abroad through Hawala and convert it into foreign currency and stash it in foreign banks?
For those who are not completely aware, allow me to explain how ‘Hawala’ works. Hawala works both ways.
- To bring money into India at a slightly higher rate. Person ‘X’ has 1000 dollars with him and wants to send the same to India. He has 2 choices. Send them through legal exchange companies in the country he resides. Or send them through Hawala at a slightly higher rate than what he gets at the legal exchange.
- Other way which Hawala works is flight of money away from India. Any Politician or Black Money Hoarder who has loads of cash stashed with him would like to convert his money into foreign money and stash the same in foreign banks. So, he approaches a Hawala Operator to help him with the same. Let us say a Politician ‘X’ has 1000 crores of Black Money and wants to move the entire value abroad. He will approach Hawala Operator ‘Y’ to help him out. Operator ‘Y’ will charge him anywhere from 10-20% (100-200 crores) as commission and pay him 800-900 crores equivalent in foreign currency in the nation of his choice. Easier said than done.
If things were so easy there would not be $ 150 Billion of Black Money floating in the country.
Why is it ‘easier said than done’?
- It is not easy to get 800-900 crores equivalent of Foreign Currency (mainly Dollars or Euros) in cash at any time. This is the main reason why a Hawala Operator work in a limit for a single transaction not exceeding a few Hundred Thousand Dollars in each transaction. Usually a transaction of 1000 crores might take more than a year to execute. In some cases even a couple of years.
This effectively means, no Hawala Operator has the liquid resources to help the flight of money of more than a few hundred crores in a space of 6 months. roughly, assuming again that someone had prior knowledge on the day Modi became PM which is in May 2014 (2 and ½ years back) that Modi took this decision on November 8th 2016, the maximum amount he could have sent away through Hawala cannot exceed more than a 1000 crores. This is equivalent to change to what is actually happening now.
Secondly the most important point. A Hawala Operator who takes the Indian currency (mostly 500 & 1000 Bills) from the Politician ‘X’ will keep with him the Indian Currency to circulate the same in India. Now all this money with him would have turned useless. What will he do with that money? He is not a legitimate businessman to accept his disaster easily. He will most likely approach Politician ‘X’ to pay back his loss. Effectively meaning that we could be a potential trouble for both the Operator and his service seeker.
Unless the Opposition (specifically the loud mouthed Arvind Kejriwal) comes with more concrete proof of their allegations, I believe the government should at best ignore his diatribe or file a law suit against him challenging him to prove his allegations.
Otherwise, this decision in all likelihood is a landmark achievement of Government which will harbor good for the Nation in years to come.
