This is the boldest and probably most brilliant move by any Indian politician since liberalization of economy in 1990s.
Having said that, another way of understanding this is that as of today both old 500 Rs and 1000 Rs notes have been "probabilistically devalued". For anyone in middle class and below the value essentially remains the same (other than a small devaluation due to effort required to get them exchanged), however for anyone holding large number of notes, the value has been significantly lowered by approximately ~10 to 20% consider when the money gets deposited, there would be an income tax due on it.
Modi received a lot of flak not doing anything about black money and corruption after getting elected in spite of promises before the election. Bust as this move shows, he has taken the bold step, and can go for an election in 2019 without worrying.
To make it even simpler:
Assume that people in USA used 100$ notes (hard to hoard 20$ notes) to skip paying income tax (but mostly real estate transaction tax) and dealt in cash, by declaring 100$ notes as illegal tender and forcing them to be exchanged for new 50$ and 200$ notes. The government can ensure that this money is deposited or converted in banks. Ensuring that all "fake" 100$ notes are caught / lose value and people hoarding cash to skip paying income tax are forced to put the money in circulation. Otherwise come December 31st the value of the notes is same as piece of paper they are printed on.
The US is kind of funny, we've (as far as i know) never withdrawn backing for a bill. If you have a silver certificate, you can spend it on a pack of gum. If you have a $1000 bill, you can deposit it in the bank.
You might have some hassle getting the bank to believe you, of course, those bills are probably in pretty poor shape. But you should be able to exchange them for new currency. Although, it might be worth more to sell to a collector. there aren't that many around.
I think a private enterprises in the U.S. can refuse money, so your bank can refuse that 1000$ bill at their discretion (and pissing you off as a customer in the process).
However, the government probably is required to take that money to pay nay taxes, although I do not know how you can pay any taxes to the federal U.S. by cash. Maybe a customs duty at a border crossing?
Isn't this a trick that will only work once? Wont the people who are taking advantage of black money start using a different store of value that isn't controlled by the Indian government like foreign currency or high value commodities?
Technically, yes. You can even just start using 100 rupee bills instead.
But what this does is adds cost to doing business secretly in cash. Also it increases the threat of government taking another bold move in the future to flush out more stores of black money. Basically, it increases the risk of operating outside official accounting, making that option more scary and less appealing.
Watch for real estate crash in New Delhi. On paper there wont be a crash but sharp growth, because the declared transaction value is about 40% of the real transactions, the remaining being in cash. With this move, declared values will move up, while actual values will move down.
A currency is useful only if you can buy products and services with it. In India, you buy things in Rupees. Tou can't buy Rupees with dollars without an ID at which point the government knows anyway it's probably just simpler to pay your taxes
Boils back to the same point - can you buy necessities of life in India today with Bitcoin in the short to medium term? No. So if you're accumulating black money (say you are a property developer) it will be difficult for people who buy houses to pay you.
Also remember that Bitcoin isn't really anonymous and it's fully traceable. So the police merely has to do some rubber hose type de-anonymization of which Bitcoin address was the payment made to you in and from there on, all your transactions can be back-traced.
Most people are only interested in Bitcoin insofar as it's convertible to a local currency. So if it's difficult to do that, it's difficult to use Bitcoin for most transactions.
Indeed, they can, but it's difficult to get foreign currency without valid ID. But gold is an option, even though govt have even made it mandatory to flash your ID for gold purchases.
Note that starting tomorrow, people will become progressively reluctant to accept those notes in retail transactions. It will become difficult for anyone with a hoard to exchange these notes for any other commodity.
It was done once before also, IIRC. Around the late 1970s. Seems to have worked. I guess it'll work given a long enough time interval, since human memory is short.
Depends on if you can find someone who's willing to take your new store of value. Part of the reason those people were able to get away with it was that those notes were regular legal tender, so I didn't have to worry about accepting them.
I agree, this is a good first move to get black money that is stored as cash out and taxed. Some forms that still remain are:
* Gold
* Money funneled into "agricultural income" (which is tax free)
* Large properties in metros that are bought and left empty (which raises rates sky-high for ordinary middle class people trying to buy a house there)
However, this move is brilliant in that it removes cash as an intermediary for these transactions, i.e. if a builder is demanding Rs. 50,00,000 for a house "above the table" + Rs. 30,00,000 cash (which he won't declare), then that extra 30,00,000 becomes useless as of 31 Dec.
If one is buying gold then they need to pay tax for that amount. Because shopkeeper can't hide that money without tax. Shopkeepers knows this money is gonna be useless soon.
No, that's a legal fiction. It becomes useless as soon as there's no way to extract value from a briefcase of Rs.500 and Rs.1000 notes. Tomorrow, someone can trade it in to the Bank of India in exchange for new notes, it's just that this someone needs a plausible reason for holding the money - they have to have paid taxes on enough income that they could theoretically have legal reasons to possess the money. This does not have to be the current owner turning the money in, it can be anyone the current owner pays a premium to in exchange for clean bills.
So tomorrow, the money will need to be laundered in order to help the owner. But a few months down the line, the Bank of India stops taking deposits, and the money becomes actually useless.
If he (and by extension thousands more) pay tax, then there's no "get away" involved – the transaction has been done fairly and the Govt. got the requisite amount of tax.
The point is, if he has been doing this for 10 years and has a massive stack of cash which he tries to deposit now, that is going to bring him to the attention of the Income Tax authorities.
I think since India only has notes in {5,10,50,100,500,1000} denominations there might not be enough legal tender with just {5,10,50,100} to convert all {500,1000} notes, thus by introducing a new notes (bills) which look completely different than older 500 Rs, and 2000 Rs which are completely new, they can ensure that enough notes/bills are available.
2K notes are not just piece of paper, it does have NGC (Nano GPS Chip) by which income tax department can track the location and exact amount have stashed nearby that location. So sending that amount to some other country or keeping that money underground will be the most foolish thing one can do.
> the value has been significantly lowered by approximately ~10 to 20% consider when the money gets deposited, there would be an income tax due on it.
How do you figure it's 10%-20%? AFAIK it's a 300% penalty now after the voluntary disclosure scheme has ended (for income that was gained before Sep 30). People are better off burning the money if they can't launder it somehow.
This is slightly different. All 500 and 1000 rupee notes in circulation right now are being demonetized. In previous cases demonetization was done for older currency over a longer period of time.
You can't compare '54 and '78 with 2016. Removing 500 and 1000 rupee notes as legal tender in 2016 accounts to more than 80% of total cash circulation. This is huge.
Call me up when our government stops doing idiotic things like sending billions in cash to Iran. Then I'll consider being concerned about income taxes.
This is totally unrelated to capitalism as a structure and paradigm for an economy.
Let's momentarily set aside the issue of whether the US owed Iran 1.7B dollars. There are arguments on both sides but I want to point something out:
The cash payment was made at the same time as the release of four Americans by Iran's regime. The Obama administration has admitted that the cash was used as leverage in negotiating their release.
If it looks like a duck, walks like a duck, and quacks like a duck...
as you said it was used as a LEVERAGE not a ransom. US had to pay this money anyway, by timing it right they had more LEVERAGE in the negotiations and 4 innocent people got out of prison.
What is wrong with that? painting this payments as ransom is wrong.
Ransom IS leverage. The payer is manipulating the captor's desire for money, in order to get an immediate release of prisoners that would otherwise not happen.
Equally true, taking hostages is a way to gain leverage by manipulating the payer's desire to protect the captives. Why do you think bank robbers and hijackers do it? Iran was unable to get that money for almost forty years, but by dangling four Americans in front of the Obama administration, they were able to collect a ten-figure cash payment out of America's coffers.
And you think there's nothing wrong with that?
The Americans are guilty of caving on their principles and giving tons of (borrowed btw) cash to hostage takers, and the Iranians are guilt of taking hostages in the first place.
For international readers:
Rs 500 and Rs 1000 are the highest denominations notes in India. Other available denominations are Rs 100, 50, 20, 10.
This is such a major move to curb black money in the history of Indian Politics and Economy
1 USD is ~Rs 66. That is a staggering difference in purchasing power! I would guess that the only note in the US with a similar reputation which is still issued would be the $100. Notes larger than this ($500, $1000, $5000, and $10 000) have been discontinued since 1946 and actively destroyed by the Federal Reserve since 1969.
Isn't there a concern that those who were using these high denomination notes just switching to other currencies? Bhutan has a currency that is pegged 1:1 with the Indian Rupee and will (presumably) still issue Rs 500 and Rs 1000 notes. Sri Lanka is another possible candidate; and of course there are the standard global reserve currencies - the US dollar and the Euro - whose notes worth over Rs 1000 are relatively common place.
> 1 USD is ~Rs 66. That is a staggering difference in purchasing power!
How on earth do you derive purchasing power from comparison of arbitrary units? ~Rs 1 does not have the purchasing power of 1 USD,. 1 Zimbabwean dollar does not have the purcahsing power of 1 GBP.
To add some data to this discussion: the Purchasing Power Parity (PPP) was ~17 rupees to 1 dollar as of 2015, as per "The Organisation for Economic Co-operation and Development (OECD)".
The PPP is, in simple terms, the amount of money in each currency that can buy similar amounts of goods; so taking this PPP at face value, what 1 dollar can buy in the US, 17 rupees can buy in India. This is of course not entirely true, because it's an averaged value, and there's other complications, but it's at least a better starting point than assuming Rs 66 per dollar.
The grandparent comment wasn't comparing arbitrary units, they were comparing the units of each country's currency denominations. The largest active legal tender in the US is worth $100 while the largest in India was worth $15 (now will be $30). I think it is a fair assumption that those numbers aren't arbitrary and that some thought went into choosing those denominations. That gives you insight into the economies of each country.
I wasn't particurarly supporting the argument that it is a foolproof way to measure buying power. Just that the decisions central banks make about their currency denominations aren't arbitrary and they do lend insight into the economies that they manage. The €500 probably isn't about buying power but it does tell something about the motivations for easing a transition to the Euro. In fact, now that the transition has been completed, the bill is being phased out. I wouldn't be surprised if that was the plan from the beginning.
Things in the UK are a little more complicated with their multiple central banks, but the £100 note is still being printed and while uncommon, it is in circulation throughout the UK.
Some £100 notes are circulated by some Scottish and Northern Irish banks (which are allowed to print their own currency), but given how rare the £50 note is, I'd expect the £100s be very rare even locally, and almost non-existent anywhere in England.
They almost certainly wouldn't be accepted anywhere except banks (many shops are suspicious of even low value non-standard notes), so I don't know if you can really call that "in circulation throughout the UK".
I don't see how that makes the argument of the grandgrandparent post. If some thought had been put into the denominations then what you'd assume to be normalized is purchasing power (since the smallest denominations should correspond to "a fraction of the cheapest thing I could buy" [if we include change] and the biggest should correspond to "more money than is reasonable to carry around for buying stuff"). Following that logic and combining it with yours the conclusion is "100$ in the US has similar purchase power to 15$ in India" or "things are cheaper in India", which really doesn't say much to me.
Since the current Rs 500 and Rs 1000 notes themselves are no longer considered valid legal tender, they'd have to be exchanged for legal tender before they can be exchanged for foreign currency, even the Bhutan ngultrum (it's pegged to the Indian rupee, but that's irrelevant if the Rs 500 and Rs 1000 notes aren't legal tender representing rupees anymore). This exchange process from no-longer-legal-tender to legal tender is what provides the government visibility (and taxability) into any currently hoarded cash pile. You're correct that future hoarding can be done in a foreign currency where the same maneuver can't be pulled off again, but that doesn't provide an escape from disclosing currently-hoarded cash piles. It's also not nearly as easy to hoard large amounts of foreign currency undetected, since large transactions would be visible via the regulated institution that does the exchange (either when converting local -> foreign or foreign -> local)
The circulation of new notes will have to be controlled because there will be a limited notes in circulation for some time. The distribution problem has to be solved to ensure everybody have enough notes for daily activities.
It would be interesting to see how the notes make it to all the bank branches and ATMs in the next two days and beyond. ATMs are unavailable for 2 days, bank branches for 1 day.
A better comparison would be on the basis of PPP instead of nominal value. Given that India's nominal and PPP GDP are $2B and $8B respectively, $1 ~ Rs.15 PPP.
The consumption market is India. The terrorism target and hawala money laundering targets are India. You destroy the market...the support structure will fall in line.
Just to add to your comment, the highest denomination note in India is worth just $1.5USD.
According to the Global Findex by the World Bank [1] 47% of the Indian population doesn't have a bank account. And only 22% of the population have debit cards.
I don't know, this seems too extreme to me. Certainly 500 euro notes or 100 dollar bills are very useful in dark markets, but the Rs 1000 note was just worth $15USD. This may end up being just a temporary recall and they will reissue 500/1000 notes in a couple of years.
The new bills have yet to hit the streets, and the old bills don't count as long term stores of value. So, for a little while India is arguably 'without' Rs 500 and Rs 2000 notes.
Basically, they are no longer bills but checks with expiration dates.
So I spoke to economists friends asap - and while I share your views, the point added was that wealth is not stored as cash by most people, but as jewelry, assets, cattle and so on.
(I'm watching the news live in New Delhi right now). The move is being pitched as an attack against 'black money' and terrorist/criminal activities and counterfeit .
The idea is if you have very large sums of money stashed away in cash, you're now forced to deposit it into a bank and reveal it. If you're not comfortable doing that, you're basically going to lose your money.
There is always some rationale that involves bad actors. Then you peel back the layers of the onion and find out the government just wants to screw regular people out of whatever.
I don't disagree with your premise, but in this case, how can this screw regular people? If someone has chosen to store a lot of their money as cash instead of in a bank and doesn't know about this, I can see that. Am I missing something else?
I am not an expert. But may be, it is only the small time tax evaders that store black money in local currency...So if someone has stashed away his lives savings in a stack of 1000 Rupee notes, this move will force them to pay taxes.
Nothing is still being done to deal with really big fishes. The ones who can really make a difference.
So as usual, it is the middle class and lower that are being forced to pay, while the upper and elite classes still given a pass and the government earns good name in the process..
Rich and powerful still wins. It is business as usual..
Not sure if they will do this during the exchange, but technically you can attach your Aadhaar ID to the exchanged sums. That means in one swoop they know who has how much money...
It is hardly going to fix the black money problem. Rich people have so many employees to do the bank run for them. Within the next month, you will see a huge spike in real estate market. People with black money will dump it in the real estate market. (If you are not an Indian, this is how it works. You buy an apartment/home/building for the amount X. But you declare it to the government that you bought it for X/10. The guy who sold it now has the black money which he can reinvest or based on his income level, can deposit in the bank. If he is a farmer, he can pretty much claim it as agricultural income and pay no taxes). So, basically, black money will trickle down rapidly in the next month or so.
The government has become pretty smart - their standard rates have increased quite a bit (since they lose tax revenue)
Secondly, I don't think people are going to touch the old notes - just too much risk involved.
Infact, I would speculate that since a lot of black money is now worthless, we might see rates go down, especially for new constructions
I second this comment. Real estate in tier-1 India cities is fueled by black money. Now with people not having black money to invest in the market, I'm expecting to see the trend go downwards.
"Dumping in real estate" will require the seller to "convert" that money which isn't trivial, keep in mind the seller himself would be trying his best to get it converted. Will it completely solve the black money, probably not, but at least it is the biggest step towards any kind of a solution in future.
On the contrary, real estate market will stop for next couple of months. Cash is a big component of the price for the seller. And the current cash is useless as it has to be deposited in banks and declared, thus removing the whole rationale for taking cash. The seller is already paying tax on the non-cash portion.
Actually dumping into real estate, gold etc. is not bad because your govt will get taxes out of the transaction at the least. Problem with black money is not that some body hoarded it. Problem is some body hoarded it with out paying taxes.
Not really. Conversion to cash is limited to Rs.4000. Rest goes into your account. If you convert more than 2 Lakhs, that is notified to the IT authorities. You can't withdraw more than Rs.20000 per week or some such limit. Trickling down will take a long time, and even then most of it will be watched. If someone is withdrawing more cash than they ever did before, the govt., will probably question them beyond certain limits.
Real estate? No. What builder/seller would want to stock up 500/1000 notes?
Same for gold. How much can one goldsmith/jeweller's revenue increase in a year? Same for agricultural income. Can you suddenly declare 500% increase? (Oh well, agriculture income could have been declared earlier too anyway).
I am not sure how that will work out if the denomination itself has been declared illegitimate. Why would anyone accept 'black money' of any kind if he can't spend it elsewhere?
If you are in the low income bracket or a farmer, you can accept the money and deposit in the bank without any ramifications. All this will happen before the deadline.
I grew up in a tier-2 city in India, and the amount of black money rich people hoard around here is of ginormous proportions. Easily > 50% of the income for most rich folks.
Cash, money-laundering, sketchy real estate transactions (Benami- transactions under fake names), informal banking (hawala), the same as in most places in the world. Think early mafiosi in the US. The most significant legislative actions for curbing these are: Benami and Hawala legislations, computerization of land records in the late 90s and early 2000s, PAN numbers in the 90s and Aadhar in the last few years (a bit like SSN in the US), and the OP.
While this sounds great on face value, I doubt this'll solve the root of the problem. Why did we have so much black money in India? Coz people didn't want to pay taxes. Why didn't people want to pay taxes? Because they got nothing in return. Governments (esp Indian) have been historically self serving and power hungry. Tax money is usually either lost by PSUs loaning to the Mallyas of the world or other corrupt bullshit (overpaying for public infra, raw materials - contracts going to the highest briber etc.)
So unless that changes (more difficult than logistically declaring pieces of paper illegal), maybe people will start hoarding other stores of value in the future and figure out other ways to evade taxes. Am I being too cynical?
That's a catch-22, and most often just an excuse used by people to self-justify.
> lost by PSUs loaning to the Mallyas of the world
That's at least loads better than the money never reaching the government as tax and thus never becoming a matter of public record. Such publicly recorded "corrupt bullshit" are significantly easier to fight than the silent menace of black money.
> Governments (esp Indian) have been historically self serving and power hungry.
Projecting past governments' performance onto the current one and keeping your money hoarded, means that this govt doesn't have enough money to do significant good, which in turn helps such people justify to themselves that "the government doesn't do anything with it anyway". Thus the catch-22.
While the Modi government is nowhere near some "Ram Rajya" (said phrase being part of the problem), it's at least taking several steps in the right direction, and placing a little trust in it to spend the tax money reasonably well seems like a gamble with pretty good odds at this point.
> Why did we have so much black money in India? Coz people didn't want to pay taxes. Why didn't people want to pay taxes? Because they got nothing in return.
Sorry, I don't buy this argument. People in every country, regardless of how good their government is, want to personally pay as little taxes as possible. If people in XYZ-Amazing-Country knew that they could reduce their personal tax bill by 30% in a way that's guaranteed to be safe, a huge portion of the population would take advantage of it too. It's a class Economics tragedy-of-the-commons problem.
So ? Are you saying we should pay taxes even if governement is wasting most of it ?
You know what would motivate me to pay taxes ? Crystal clear development plans with additional gurantees that It would not be used to support bloated bureaucracy and subsidies.
Also who said governements are the only one who has to develop infrastructres ?
Which can be classified under "fix your government" but had we done that, we would not even be here.
Up until now governments have been in the background in exploiting its people. But today this has changed. I hope/expect this would pave way for small-limited-government movement in India.
It's a card you can play once and will only work against small businesses like restaurants and other stores that deal in cash. The big fish will get away as they most likely already have their money laundered and converted to other assets. They wouldn't be holding all their cash in a garage somewhere like Walter White :)
I think the one of the big reasons (if not the only one) of doing this is to be able to introduce notes of higher denominations as an anti-corruption measure without having to answer the critics about the sorry state of the economy.
Nonetheless, a good one time move against the small time tax evader. This is not going to work long term obviously.
What the government needs to do is to give incentives to tax payers and considerably lower the taxes. Only then people will start paying them. I know it is a bit of a chicken and egg problem but it's the government that has to initiate the process.
I think Indians are among one of the highest taxed citizens in the world if you count direct+indirect taxes vs social welfare offered by the state.
> They wouldn't be holding all their cash in a garage somewhere like Walter White :)
True but someone will get money in return. He will be the sucker.
> I think Indians are among one of the highest taxed citizens in the world if you count direct+indirect taxes vs social welfare offered by the state.
True only for salaried class. Business men and self employed virtually walk away paying negligible taxes. I have friends who pay negligible taxes as compared to I, yet they maintain a lifestyle well beyond what I can dream to afford and I am payed decently even by UK standards.
These is mainly real estate assets.
A lot of this black money is laundered to the builders who in turn do not declare a large part of it. Thus my hypothesis that it is the builders that will be hit the most. I'm expecting a real estate market crash.
Hey it's you! there's quite a bit that has been achieved by successive Indian govts on shoe string budgets.
We've had the green and white revolutions, the IITs and other edu programs, large medical programs, ISRO (and the sensing tech that comes with it).
This is from a once impoverished country which later had to deal with the fallout of weaker institutions, brain drain and corruption/dacoity/booth capturing and a whole host of problems that include terrorism and war.
Post 1991, once the economy improved there's been significant improvement in out fortunes/tax kitty allowing for many other improvements (not to mention economic freedom).
This argument comes up very often, even in other countries and its spurious on the facts (Indian facts above), and on the logic - taxation is not a choice.
Don't forget it's a chicken and egg issue as well - without funding you don't get services, which makes you blame the govt and not want to give them more funding.
> Don't forget it's a chicken and egg issue as well - without funding you don't get services, which makes you blame the govt and not want to give them more funding.
Tell me how the taxes government already has, doing ?
> We've had the green and white revolutions, the IITs and other edu programs, large medical programs, ISRO (and the sensing tech that comes with it).
Correct me If I am wrong, this does not even account for 1% of tax spending.
> This is from a once impoverished country which later had to deal with the fallout of weaker institutions, brain drain and corruption/dacoity/booth capturing and a whole host of problems that include terrorism and war.
No this is from 60 years governments who still havnt stop exploiting its people.
> taxation is not a choice.
The issue is not taxation. Its where its being spent. If I had more say, I will gladly pay more. But I hope you understand why I would avoid paying (as much as I can, and ofc legally) taxes if its not even being spent on me.
Indian governments (current & previous) has failed its people and its most undeserving of taxes.
> this does not even account for 1% of tax spending.
Yes, but there are a few other areas that take a major portion of the take spending which we forget to acknowledge in such discussions because it does not affect us muddle-class / affluent people directly - Defense, subsidy of urea and other rural benefits programs (yes, agriculture is in a mess and a lot more can be done but with the introduction of Aadhaar and Jan Dhan, things are looking up)
> Indian governments (current & previous) has failed its people and its most undeserving of taxes.
Yes the previous government had really fucked up (I tend to think UPA did a decent job in it's first term, it's the second term that they really got greedy and hence their state now), but we should give credit to the Modi government for a lot of the economic reforms of the past couple years.
Please note, I'm pretty neutral on politics and do not stick to one or the other camp. This govt. has messed up on a lot of the social issues (Beef bans and communal tensions, JNU student protest situation, Kashmir violence and many more).
However, on the economic front, India is really moving in the right direction - Focusing on Startups and business friendly policy changes, making brand India attractive to the world (FDI), passing the GST (massive task and looking to be implemented pretty quickly come April), introduction of UPI [1] (this will definitely move the country forward to a more cashless economy), integration of all the digital services (Aadhaar, Digital Locker, etc), black money declaration schemes and prosecutions (The situation on the ground is actually changing, people are much more scared of hoarding black money now) - These are just some of the things off the top of my head (Credit to both the Govt and the RBI).
Don't also forget the aggressive change in stance on how to deal with issues coming from across the border.
Again, there's always going to be a million other things that can be done better. But you have to admit this government is doing a much better job than a lot of previous ones
> However, on the economic front, India is really moving in the right direction - Focusing on Startups and business friendly policy changes, making brand India attractive to the world (FDI),
The red tapes that should not have exist in first place but yes step in right direction.
> passing the GST (massive task and looking to be implemented pretty quickly come April),
Its reduction in tax burden (allegedly).
> introduction of UPI [1] (this will definitely move the country forward to a more cashless economy), integration of all the digital services (Aadhaar, Digital Locker, etc),
More surveillance ? That will only be used for good, right ?
> black money declaration schemes and prosecutions (The situation on the ground is actually changing, people are much more scared of hoarding black money now)
Depends on who is hoarding. If its your local shop, government has no right to interfere unless what they get from the government is more than what they pay in taxes.
You misunderstand my previous comment. I am saying government is like a mob that extort money in return for not f__king your shit up (and that is puttign it lightly). And Indian Governments (from 1950-today) are the biggest the world has ever seen, actively exploiting billion people.
I dont think government has inherent right/duty to tax its people or to assume the duty of developing infrastructure etc. In my opinion government has only two task 1. Defend its people. 2. Maximizing profit for its natural resources. Everything else should be left at competing private companies.
From another perspective, the Rs 1000 note was demonetized in 1978 as well to curb unaccounted money. More than 30 years later, we've had to do it again because the underlying problem wasn't solved.
You can't compare 1978 with 2016. Removing 500 and 1000 rupee notes as legal tender in 2016 accounts to more than 80% of total cash circulation. This is huge. 1000 Rupee note was a very small percentage of cash circulation in 1978.
It will work for the current undeclared income. Soon people will begin hoarding the new currency notes. Or become wise and not stash money in currency.
Under the recent tax amnesty scheme if somebody had declared rental income, or business income, they will have to continue declaring it for years to come.
I personally believe that the bigger players in undeclared income are not keeping it in cash, they have assets bought in the names of trusted people, be it cars or properties.
And that is the difference here. Corruption is big players. Undeclared income was for avoiding taxes by mostly regular people.
Corruption had already found a work-around. And even if not, it was free money when they got it; they might not miss it. Regular people were trying to save 30 paise to a rupee that they earned, they will now have to pay it.
The current method is a way to fight black money. For corruption there are other ways, and maybe some will be taken.
> The current method is a way to fight black money. For corruption there are other ways, and maybe some will be taken.
"Black money" term is so misplaced, it should be untaxed ruppes. It wont affect untaxed assets (overeseas and here).
And guess who has most untaxed ruppes and who cant afford to lose any more ? Low/Middle Class. Good job Modi. You just alienated they very people who voted you in the office.
I too do not think this move alone would solve "Black Money" problem in long term, but it certainly will go a long way in setting a better trend.
> You just alienated they very people who voted you in the office.
All govts till now have been doing politically right thing, rather than morally right. If a Govt., for once, tries to go beyond the vote-politics and do what's right, shouldn't that be a welcome change?
> I too do not think this move alone would solve "Black Money" problem in long term, but it certainly will go a long way in setting a better trend.
Only if the problem is inadequate tax revenue, which is not the problem IMHO. Its tax spending.
> All govts till now have been doing politically right thing, rather than morally right. If a Govt., for once, tries to go beyond the vote-politics and do what's right, shouldn't that be a welcome change?
Not before coming up with better tax spending plan. I have never gotten my taxes worth nor I expect It now, irregardless of how much they take my money.
Brilliant. We need to introduce more Indians to the ideas of individual liberty and conservatism as it exists in the United States. By that I mean personal responsibility, limited government, free markets, individual liberty. The governments in India at every level (starts from municipality all the way to the Center) have been so deep rooted in their corruption that its imperative people understand there are alternates to Big Government.
> We need to introduce more Indians to the ideas of individual liberty and conservatism as it exists in the United States.
I would not describe USG as such. No government exploit small businesses like USG. Its the government that first adopted income tax in its current form and motivated other governments. But I digress.
In my observation only wars and natural calamities bring social changes. So the whole structure must fall down on its weight for people of India to see the light, despite it being delayed, it will come. Seeing the reponses here and in /r/india we are in full exploitation mode.
I for one not going to hang around. I have stopped thinking of myself as a citizen of a country but as a global citizen. If one country does not appreciate/respect me, I will move to another. See Flag Theory [1].
You really think that the Low/Middle class is the target here? Are the people hoarding crores in cash low/middle class?
Low/Middle class is indeed saving 30p per rupee. But they aren't storing them in 1000 rs notes, they are spending that to better their lives. This is really against Medium to big businesses, and rich people like jewellers, goldsmiths and builders.
> You really think that the Low/Middle class is the target here? Are the people hoarding crores in cash low/middle class?
Earning Rs 21,000/mo even in 2nd-tier cities are not uncommon. Your local small nookad shop (mom & pop shop) can easily clear that in one month. And most of them are not in system. So guess who just had their saving (hoarding? lol) evaporated ?
Those who have too much money, has money to hire tax experts. So IDK this really looks like anus-f__king at scale.
I think the intended target doesn't matter, because the collateral damage is much larger.
I am genuinely unsure as to how this will play out - I see the good intentions and the executional hazards.
Facts about the economy - it's largely unorganized. Meaning builders and jeweler are not as large as the people doing labor and other mom/pop transactions.
Being unorganized they don't have bank accounts (also ,exams that wealth is stored in assets like gold).
M1 money, is 27 trillion. If 60% of that is in 500/1000s that's 16 trillion. Which has become useless over night, and will disproportionately affect those unorganized people who aren't on the Internet or HN.
The other effect is that yes, people are going to be unable to do black real estate transactions. But this has happened before and it didn't end those particular transactions.
I'm guessing this will be a windfall gain for PSU banks and the exchequer.
> Why didn't people want to pay taxes? Because they got nothing in return.
No, they didn't pay taxes because there was no repercussions in evading them. Humans work as Nash equilibirium, and anyone would skip taxes if they could.
After 60 odd years of corrupt rule by various Governments anyone would be cynical. So no there is nothing wrong with being cynical.
However, India has formally asked Britain, through an official letter, to extradite 60 fugitives (including Mallya/Lalit Modi) during the bilateral talk held between Mr. Modi and Mrs. May yesterday: http://www.financialexpress.com/india-news/narendra-modi-the...
A formal extradition request wasn't even sent (for the 60 fugitives) during the UPA rule. So I definitely feel that things are now changing for the better.
500 and 1000 Ruppee note cease to be legal tender as of today midnight. Everyone who has them can get it exchanged for 100 ruppee notes in banks,post offices etc until Dec 31. You need to provide a valid id to do an exchange, which means that the transaction will be traceable and Income Tax department (Indian version of IRS) will be matching them to declared income. ATM and banks are closed for the next couple of days.
Essentially people hoarding black money in 500 and 1000 ruppee denomination will be stuck with this money as they can't exchange them. (money obtained via undeclared/not-taxed transactions. One common method is show a lower amount in the legal documents. For example show that land/house is being purchased for 100K$ on documents while paying say 300K $ thereby evading tax on 200K $, but with the side effect making 200K$ black money). This is also slow down spread of fake currency in the country. (Only temporarily until fake of the new notes are created).
Having lived in India for most of my life makes me take a slightly pessimistic view of this measure
+ Small scale hoarders of black money will be affected by this move.
+ Once you cross a certain wealth, hoarding cash is impractical, so you start investing in land,gold etc. Those people will not be affected by this measure.
+ Average citizen will be inconvenienced. I can see the long lines forming at the banks for the new few days as people scramble to get the notes changed. Not to mention people who are travelling etc, who might be having no money except for the discontinued notes and no way to get more money for the next two days.
+ There will be attempts to circumvent this. I guess there will offers of "exchange x amount and get y % of it" given to middle to low income people in the coming days. But it is hard to scale this, so it wont affect the efficacy of the measure.
+ I have a hard time believing that the people close to the current Prime Minister / Government didn't know this was going to happen. (If this measure wasn't carefully planned not to affect "friends" of the current administration(look up Adani Group), I would be greatly surprised and will change my opinion about the current Prime Minister)
> (If this measure wasn't carefully planned not to affect "friends" of the current administration(look up Adani Group), I would be greatly surprised and will change my opinion about the current Prime Minister) - I agree with you , but nobody knows the truth.
I would imagine that most of the wealthy Indian tax evaders have their money in Swiss bank accounts rather than large stacks of rupee banknotes hidden in their basement.
Most wealthy tax evaders have long since brought their money back and laundered it already.
Tax Windows have been open for a long while, people seem to forget that there's been multiple amnesty Windows, the oldest being in the 90s iirc (could be late 80s).
I hope this move is successful, it is one of the few ways in which a government can force cash out from under the mattress[1] and back into the system. It is also why the US government gets really twitchy around systems of currency that it can't easily monitor, whether it is bitcoin or detergent[2].
It is a temporary fix of course, the question of why the market forces allow the black market trade to exist are the real questions that need to be answered.
[1] "Under the mattress" being the euphemism for holding on to your cash instead of putting it into a bank.
I am originally from India, living in NYC for last 10 years.
Black money is a major problem in India, it's directly fueling This is an ingenious way to handle the problem at its root. I don't know how Government is going to handle this transition in a country as big and diverse as India. Personally, I prefer the rip-off-the-band-aid approach. The only thing I disagree with is the ATM daily/weekly withdrawal limit (10,000Rs/20,000Rs). I think this withdrawal limit is too low and would inconvenience lot of folks. I am not even sure what these low withdrawal limits are supposed to achieve.
Or use a credit card. When I had my back surgery a few years back, I just swiped for 1.2 lac. Of course, most people don't have a CC with that high a limit...
In India, it is mostly the poor who don't have CC. Every upper class person has multiple CCs and most of the middle class, specially those in the age of 20-40 have atleast one CC. People may keep just one debit card but they do keep multiple CCs. And now even the poor have bank accounts and many have debit cards.
Nobody has that kind of cash at home, if some emergency comes tomorrow they will have to go to the ATM which will won't work, or banks which will be closed. Tomorrow and day after will be a bad day for people having emergencies unless hospitals are free of cost.
Who says black money is a major problem in India ?
I keep hearing this, and then I see no proof. Right now I see people conflating the unorganized sector with black money - and these are two separate things.
Any ideas where I could find supporting data from a major economic body ?
The official number of millionnaires in India are ridiculously low. This is not due to tax exemptions, but due to income not being declared in the first place.
That's absurd though - if 1% pay income tax, the issue isn't black money, but the fact that the unorganized sector is far larger than the organized sector. And this again a known aspect of the Indian economy.
India has historically been an agrarian society, then a bureaucratically driven planned economy and only post 1990, has it been free market.
That means there's not been enough time for the economy to ensure a good distribution and generation of wealth. Is it unsurprising that wealth distribution is skewed ?
You always have the option of cheques, plastic cards and electronic transfers. Anybody who wants larger amount of cash I am sure they have a bank account and can accept payments via that mode as well for the time being.
If they can't, then well boy, they were already defaulters.
Burma (Myanmar) has done this several times for the same declared reason, but with a batshit insane dictator with a predilection for numerology, so their demonetisations went like this:
1985: 50 and 100 kyat notes demonetized, replaced by 15, 35 and 75 kyat notes.
1987: 25, 35 and 75 kyat noted demonetized, replaced by 45 and 90 kyat notes.
Strange part about this is that they are going to issue new 500 and 2000 notes as per
> 8:32 pm: A new series of Rs. 500 currency notes and Rs. 2000 currency notes will be brought into circulation.
Pulling current notes I can understand, but the problem is that the denomination allows people to move lots of money in a minimal amount of space, so replacing them isn't really solving the problem.
It is. To get new notes, you will have to submit the old notes to the bank. In that case, you will have to declare the money to the Income Tax department. And if the sum is huge, a criminal enquiry will be started by IT department.
Also this will at once curb all the fake note issues.
Isn't this exactly the issue addressed by money laundering? Would this not simply force a large number of people into dealing with organisations or individuals who can convert their existing stockpile of (no longer valuable) cash into a smaller pile of cash that still has buying power? A naive approach would be to 'hire' a large number of people to cash in amounts of notes that would be just under the level considered suspect by promising them a cut of the exchanged money. I'm sure there are existing criminal networks that could achieve such schemes (or better thought out ones) within the window of Nov 10 to Dec 30.
No one will be willing to do that work. And its difficult to scale such operations. They may convert some small amount (probably upto 50k), but anytihng more than that, it'll be getting tougher
The duplication is a minor concern the major concern is lost income tax revenue due to an underground cash economy. By restricting numbet of 500 and 2000 notes and forcing owner declare assets it put massive pressure on the black money.
Meanwhile you only need three 500€ bills to make up for the average European income.
(And 500€ is 36651 rupees.) Those 500 and 1000 rupees are the largest denomination bills in India, but you need almost 10 times more of them to make up for the respective average income.
In fact, the same is said in Europe about the absolute uselessness of 200 and 500 euro bills. I have only held a 200 euro bill once, and never a 500, but also thanks to the Schengen area it is trivial to (illegally) being insane amounts of money to Switzerland. This is why the EU was pressuring Switzerland to abolish bank secrecy.
If you're spending 30k, paying an extra 20 for a banker's draft is insignificant. And it's not like you buy a car every week. (I also can't imagine feeling safe carrying anything like that much cash around. What if you lost it?)
Banker's drafts can be an even bigger pain in the ass in the EU, with some banks charging percentages for them... And losing one of those tends to be a Bad Thing too.
Anyway, my point was that despite being rare the 200 and 500 euro notes are far from "absolutely useless".
I really struggle to see how it's useful to an ordinary person. You maybe save a little money, sure, but for a non-1%er the risk just seems completely disproportionate. I mean any dealer/business would accept a bank transfer, right? So it only makes sense in the first place for buying a car person-to-person (and for friends/family a bank transfer would work too). Carrying 30k to meet a more-or-less stranger who knows you're going to be carrying 30k? Sheesh.
Are banker's drafts the same thing as money orders? That's how I paid my cars; they are worthless if stolen (though if you lose them, the money's gone) because only the recipient can convert them back. Banks give them out for the same cost as withdrawing cash, which is a few euros.
Currency conversions are largely irrelevant to most people's daily life. What matters more is how much you get paid, the cost of house, food, and transportation.
Always think in terms of local currency or you will do much worse than getting down-voted. As my wife says about Chinese currency: "You have to respect the RMB!"
This is quite big. An expert says that 87 percent of all of India's cash reserve is in 500 and 1000 Rupee notes. It might reduce black money. In any case, the next few weeks are going to be interesting. Almost an emergency atmosphere right now in front of ATMs at 11 pm in the night.
To throw the startup scene into the mix: FinTech companies are celebrating this right now:
>Keep the money digital. Superb step by our dear PM @narendramodi
From a bit inconvenience to incredible bold step ! #win # - Vijay Shekhar, founder paytm.
Being seen as a strong move towards cashless India.
Master stroke by the government by introducing 2000 Rupee note without even talking about the inflation and an economy that is in ruins. Good one time move against a subset of corruption and counterfeiting while getting away with not having to answer any questions about bad economic conditions.
I for one hope this leads more people paying taxes even if in the short term so the Government can consider lowering taxes for the middle class.
What about people not in India with a few 1000 rupee notes lying around, those are valueless for good? I have 2 notes.
Wont the funds be effectively destroyed and removed from circulation, for those who don't put their cash in the bank by the end of next month. Wont this have deflationary consequences?
I don't see why you wouldn't be able to exchange them at a money changer wherever you happen to be now, but for that amount it may well not be worth it.
Same problem! I always hold some rupee notes so I have some cash on hand until I get to my hotel. My plan is to find a co-worker travelling there over the holidays and give them a good exchange rate to cash them in.
It'd not be unusual even for a resident to be out of the country for a few months. They now need to figure whether it makes more sense to let the cash lying turn worthless or make a trip to "exchange" it!
500 and 1000 rupees case is very welcome and in this most of them will get caught particularly 1)corruption 2)cricket players & bookies 3)celebrities & politicians 4)Black money & Fake moneys & 7) jewelry shop
Not only this in every government office they should stick the phone number of vigilance ,if any one is asks for the bribe immediate action should be taken. Only then in next couple of years we can proudly say that India is a developed country. Finally I appreciate that Prime Minister of India Narendra Modi for the great job and brilliant move.(Jai Hind)
I feel this just taxes the common man, who maybe through a sale of land or house does hold some money that hasn't been taxed. The Ambanis and Birlas and Adanis have front companies that definitely will be used to launder money. And they hold shares as well, which aids to money launder using their foreign companies...anyways..the Govt didn't bring a Paisa back from the big fish holding lacs of crores in Swiss accounts..now this!!! Property prices and all asset values will now how down like crazy!!!
This is a great move. Though I only hope that depositing whatever money you have is easy because all I can imagine now is kilometer long lines at every bank
I am not sure if it takes care of corruption completely to be true. Most of ministers and big business people, they have Swiss bank accounts. Though with UP elections coming, it may affect the heat. But again, the ministers are most corrupt and not sure how things will play there. At common man level, I am wondering how much will it help with inflation. Already in last year, the taxes are raised to such a high level that the investments there are already looking waste. With this move, when property prices will be high on paper, but lower in actual, it will also effect the property prices that were paid in full and I am including most of properties purchased by service class people or NRIs, with no black money. Not sure, but just going with words I am trying to draw a full picture here. My investments in India were devalued in last year because of taxes, properties prices are also highly affected. At least as one of one year, this will affect the property prices further. Will it even help common people to a large extent or is it uprooting old Indians while making foundation for lower classes.
I'm not sure why people are not focusing as much on the other major issue this step was taken for - Terrorism funding and economic destabilization attempts from across the border.
It is known that massive amounts of fake currency is circulating in the economy that have been brought in from Pakistan (kind of like a silent proxy war). Even though the current currency had measures to be distinguished from the fake ones, it was difficult to do so by the common person on the street. The RBI chief has mentioned that the new notes would make it much more difficult to replicate and should be easier to distinguish by a layman.
The above, along with the other massive benefits of addressing the black money issue, this move is definitely a winner. The introduction of UPI (Unified Payments Interface) [1] earlier this year and the heavier black money scrutiny will definitely help India move to a relatively more cashless economy.
Strange, in Pakistan it's the opposite Govt issued Rs. 5000 note which is equal to INR 3171 because otherwise people were using USD 100 bills .... and only making USD stronger locally.. I still don't get how they are going to keep big guys from keeping USD $100 ... I would keep an eye on USD vs INR in coming weeks
In India USD is worthless. I don't know why people would use other country's money unless their own economy is under heavy stress like Zimbabwe or Colombia.
This isn't true at all. You can't buy an auto ride, but USD and Euro are used as reserve currencies. If nothing else, inflation is significantly lower than for rs.
A surprising number of people have asked me if they could change their black money with me for dollars at favorable rates.
You can't buy regular items (e.g. a dosa) with USD except maybe at the airport. From what I'm told, USD is sometimes on the table as currency in black money transactions. I don't know the specific mechanics of it - I'm a firang with no black money.
Black money and such a large parallel economy had become a big problem. And like it or not, we were being forced to stay a part of it while trying to get out of it.
This sudden demonetisation has not curbed the problem, but it has hit a RESET switch on the parallel economy (black money). That is great news. First, people will not want to lose their money and this will result in huge tax-inflows. Second, some people will get prosecuted for tax evasion - sending a strong signal. High tax rates will still drive a small percentage of people to evade taxes. But upgraded technology will delay recurrence of large scale black money problem, probably for decades to come.
Long queues at ATMs and petrol(gas)-stations. I thought it could turn into an anarchy kind of situation. But most people feel happy about this inconvenient but necessary decision.
I am personally not sure about the impact of this. I am hoping it will bring some positive change, Indians do have a habit of hoarding huge amounts of cash. It's not something specific to "black money hoarders".
Anyway I pity the bank employees for the coming few weeks!
Interesting no mention about gold, land or other valuables. This hits hard on the middle class who were holding money. Then there are ultra rich, for whom may be they are holding anywhere between 0%~30% of their black money in cash, others in other investments. For them, this is not a big issue.
As luck would have it, I've recently started work on https://tillbill.in - kept thinking it would be great to have an easy way for individuals and small businesses to run the work cashless.
I think the notes have some sort of unique digital ID.unique ID's are not new(we had serial numbers before),but they were difficult to keep track of(bankers can't keep noting serial number of every big note they take or give).but the bank counting machines can now track these numbers in real time,and catch if they find a unique ID is not unique anymore(duplicate).
This will mainly help with the counterfeit notes problem.
The black money problem will be helped because they will have to declare or lose their black money during the exchange.
500 and 1000 rupees case is very welcome and in this most of them will get caught particularly
1)corruption
2)cricket players & bookies
3)celebrities & politicians
4)Black money & Fake moneys
not only this in every office they should stick the phone number of vigilance if any one is asks for the bribe immediate action should be taken only then in next couple of years we can proudly say that India is a developed country. Finally I appreciate that Prime Minister of India Narendra Modi for a great job.
I never thought any politician can make such decision. Modi just made something really big announcement for making India much better than we guys can imagine. I love this move.
Can somebody help me here? I am outside India with some cash in 500 and 1000 notes which I keep for immediate use when I arrive in India. What should I do in this case?
Unless you can reach a bank, or postoffice in India, it would be difficult to exchange your cash at full value. If you have a debit card with you, you can simply withdraw from ATM upon your arrival in India. In this case you can forget your cash for now, you can exchange it once you are in India. You can do so after Dec 31st too.
If you do not have a debit card with you, I guess you could call a friend to pick you up at Airport. You could also try your luck with a local Currency Exchanger where ever you are, and ask for a change into 100 rupee notes. It will be costly, but it might work.
The timing is also appears to be aimed at significantly reducing cash availability for elections in the big states of Uttar Pradesh and Punjab which should come in Jan-Feb.
During elections, there is massive voter etc bribery with currency that tends to happen and political party workers tend to intimidate merchants into funding them. Undoubtedly the key political parties have already stashed cash for the elections and all of a sudden, the cash is useless.
Fighting illegal black economy is fine, but withdrawal of notes is not for that. There are other hidden agenda to this. RBI cannot go back from its promise of providing the value of the currency. This is psychological experimentation. Today Rs. 500 is withdrawn, tomorrow all currency could be withdrawn. This trying to deploy state power but without bearing any fair cost
The fun has began. Suddenly there are more vehicles roaming around late night than usual. Big Bazars are open even past 11:00 PM which used to close at 9:00 PM daily. Tried withdrawing Rs 100 Notes from all the ATMs in the neighborhood but other people got there first. Now ATMs are left with only Rs 500 and Rs 1000 denominations. :D
reminded about demonetization in 1991 of the 2 top bank notes of USSR - 50 and 100 rubles notes. Similar purpose - supposedly only dishonest corrupted officials, thieves and black market people had significant amount of money stored using those notes. Also USSR government claimed that a lot of those banknotes were brought into the country from outside(!) - supposedly as economic operation against USSR (sounded back then like propaganda crap, so i never even tried to research into it). USSR was already on its way out and that shock (in particular causing significant ruble inflation acceleration) to the already dying economy, was basically the last - half year later USSR de-facto disappeared :) (hi! to everybody who remembers those "exchange money" guys hanging near subway stations back then)
You have to deposit all these notes in your bank account, from which you can get new notes. Anyone hoarding huge amount of black money in cash can't go to bank with it, and his money will turn worthless. Diluting such money will easily erode 20-40% value. So definitely a bold move.
They'll probably buy houses above market value. The seller can declare the money and pay taxes on it. The houses can be sold again one by one over the next years and the money legalized. Basically an easy way of laundering it. Still good for the state as the money is taxed.
Maybe not the right forum to ask, but given the expertise on India here it's worth a shot. I exchanged euro to INR (cash to cash) about 50K INR. I did not keep the receipt. What would be the easiest way to get the money exchanged or transferred to my (Irish) bank account?
Though it sounds like a bold move, it will not be a Richs to Rags story, most of undeclared wealth is already invested in Gold and Property (in proxy names).
A lot of people having undeclared wealth are going to lose 1% to 5% their wealth (which had held as cash for liquidity), no big deal.
I presume this will not be the right forum to ask. But I'm a foreigner and I exchanged euros to INR for about 50K INR (cash to cash). I didn't keep the receipt for this. How could I get my money exchanged or transferred back to my (Irish) bank account.
No, to whoever thinks that one will be able to buy gold or property with their black money because the seller will have declare where the money came from even if he pays taxes and will lead to the guy with the stash who won't be able to explain it.
This has nothing to do with paying taxes. I paid all my taxes and I bought Indian Rupee to take a trip to India and now my trip is a waste. I cannot go because my Rupee is no good and I cannot exchange it at Chase Bank where I bought the currency.
Regardless of how this might help with "black money" (which seems to be a bit of an overhyped political bogeyman), any attempt to decrease the value or purview of cash is bad news for human rights. When all legal money is in government-controlled banks, you open up the door to all sorts of nastiness including political account freezes, government theft of funds, forced negative interest rates, etc. I personally have had my account frozen and had money taken by lien due to a paperwork mistake at the state comptroller's office. It took a few days for them to fix, and Wells Fargo charged me "legal fees" I never got back, so I have a dim view of any government action that makes the use of cash less convenient, less liquid, or less legal. In light of this news, I imagine many Indians will stop trusting Rupees as much and might just start preferring to transact in USD or something.
Yes, I've done some (admittedly shallow) research on the prevalence and effect of black money, and the impression I got was that it's like "money laundering" in America; actually not that significant or deleterious, but a convenient political talking point.
> The government will introduce new 500 and 2000 Rs notes.
Arbitrarily downgrading existing notes makes the currency both less convenient and less liquid (and, I forgot, less fungible).
> How is it forced? You can still keep cash under your matress.
For now, yes. I was referring to the war on cash in general.
> What? This is way too far fetched.
We now have reason to believe they might pull this trick again in the future with the new notes. A rational person would therefore assign a lower value to the new notes than their nominal "face value" before the government devalued the old notes.
>actually not that significant or deleterious, but a convenient political talking point.
This is not true. This is a problem that significantly impacts the economy and visibly changes the equation for the middle class. Real estate, cars, and other things you'd consider somewhat essential to an average household are artificially priced because of the purchasing power of people with "Black money". It is more than a political talking point.
As opposed to the "impression" you got that this was a convenient political talking point?
I've bought real estate in India and visibly saw the effects in the last decade - inflation without commensurate change in infrastructure.
As to your question of studies, here are some starting points (some dating as far back as 1995).
The problem is serious enough for the government to have set up 10+ independent commissions to investigate the issue (which are cited in the paper by the Ministry of Finance) - the net cost of the black economy is estimated to be ~12-20% of the GDP, which in my books counts as a serious issue
> inflation without commensurate change in infrastructure.
Inflation isn't tied to infrastructure growth, so not sure why you would expect this In fact, if the government pulls this kind of stuff, one should expect to see inflation without any benefit attached. As I said, messing with money's fungibility makes it less valuable.
> The problem is serious enough for the government
Yes, for the government; it hurts their tax revenue. That doesn't mean it's bad for the economy. I'll read those links when I get home.
>the net cost of the black economy is estimated to be ~12-20% of the GDP,
Black markets almost always increase production. People use them because they're more efficient than government-controlled markets. When they say "costs" they probably mean "the government loses access to".
Having said that, another way of understanding this is that as of today both old 500 Rs and 1000 Rs notes have been "probabilistically devalued". For anyone in middle class and below the value essentially remains the same (other than a small devaluation due to effort required to get them exchanged), however for anyone holding large number of notes, the value has been significantly lowered by approximately ~10 to 20% consider when the money gets deposited, there would be an income tax due on it.
Modi received a lot of flak not doing anything about black money and corruption after getting elected in spite of promises before the election. Bust as this move shows, he has taken the bold step, and can go for an election in 2019 without worrying.
To make it even simpler:
Assume that people in USA used 100$ notes (hard to hoard 20$ notes) to skip paying income tax (but mostly real estate transaction tax) and dealt in cash, by declaring 100$ notes as illegal tender and forcing them to be exchanged for new 50$ and 200$ notes. The government can ensure that this money is deposited or converted in banks. Ensuring that all "fake" 100$ notes are caught / lose value and people hoarding cash to skip paying income tax are forced to put the money in circulation. Otherwise come December 31st the value of the notes is same as piece of paper they are printed on.