India’s Cash Crisis May Take Months, Not Weeks To Resolve

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends most of her time in Asia researching a book about textile artisans. She also writes regularly about legal, political economy, and regulatory topics for various consulting clients and publications, as well as scribbles occasional travel pieces for The National.

Economic chaos in India continues, as further details emerge concerning the government’s inadequate planning for implementing its plan to demonetize all Rupees (Rs) 500 and 1000 notes in an anti-corruption effort. Prime Minister Narendra Modi in a November 8 speech announced that these notes– accounting for more than 85% of cash outstanding– would no longer be legal tender as of midnight that night. I outlined the plan in this post last week.

[Jerri-Lynn here: To make it easier for those who don’t know  the rupee’s current value offhand and don’t want to look it up to understand this post, Rs 500 is today roughly equivalent to $7.34, while Rs 1000 is about $14.68.]

Demonetization has sparked widespread economic suffering, especially among the poorest Indians, as I discussed in this post from earlier this week. I also examined how the government seriously underestimated the technical challenges that accompany making a currency changeover of this magnitude, and only appointed a task force on Sunday to address one of these challenges, the tricky technical task of recalibrating ATMs.

Since I published that post, additional information has come to light, suggesting that the Modi government–  including the Finance Ministry and the Reserve Bank of India (RBI), the central bank– is far behind the curve in implementing demonetization, especially in producing the necessary new currency to supply demand. There remains an acute shortage of cash for day-to-day transactions– a shortage that is now expected to take months to resolve– rather than the weeks that the government  previously estimated.

This short video of an English language interview with former Finance Minister Palaniappan Chindambaram discusses  the Modi government’s miscalculation:

The key takeaways:

“They have blundered,” says Chidambaram. “They have blundered hopelessly. They are trying to race against time.”

2,100 crore in currency notes must be replaced [Jerri-Lynn here: under the Indian numeric system, a crore is equivalent to 10,000,000].

The capacity of existing printing presses is 300 crore notes per month.

If the government wants to replace (and print) 2,100 crore notes, by equivalent  denomination notes to those made non-legal tender by demonetization, it  would take them seven months simply to print the notes, which is why Rs 2000 notes are instead being printed.

There is no economic justification for the higher value notes. If the government is demonetizing Rs 500 and Rs 1000 notes, why is it introducing Rs 2000 notes? His answer: only to reduce the number of notes that must be printed.

It will still take 5 to 6 months to print the necessary currency notes to replace the value of the notes withdrawn.

To print sufficient Rs 100 notes [Jerri-Lynn here: a far more usable denomination for ordinary Indian cash transactions] would take five times as long.

Now I should mention a few facts for non-Indian readers. Chidambaram is far from a disinterested observer, having served as Finance Minister in the previous Congress Party-led government.  There’s no reason to conclude, however, that he’s ill-infomed or what he says is inaccurate when he discusses the present government’s inadequate planning for demonetization. And I should note that his claims have been backed by other reporting. (He also has a reputation for being intellectually astute.)

(For those readers who have greater interest in the issues that Chidambaram raises, I include a link to a longer, thirty-minute interview with him (also in English), conducted by M.K. Venu, founding editor of The Wire, an online news source committed to being financially and editorially independent.)

As LiveMint reported on Thursday,

A week after the government withdrew high-denomination notes, it is struggling to meet replacement demand with smaller-denomination currency bills.

While the new Rs 2,000 note has started circulating in the banking system, far fewer new Rs 500 currency pieces are ready.

The Security Printing and Minting Corp. of India Ltd (SPMCIL), the government agency that produces notes and coins, has printed only 15 million pieces of the new Rs 500 note, said two people aware of the matter.

The order for the new Rs 500 note was 400 million pieces by November, but the presses at Dewas (Madhya Pradesh) and Nashik (Maharashtra) are running below capacity, leading to a delay in the release of this note.

Printing policy was apparently set to produce the highest replacement value of currency, rather than based on any detailed understanding of how currency typically circulates, and in what denominations, in the Indian economy. Again, according to LiveMint:

“We planned to first bring the 2,000 rupee notes as the focus was to create high-value notes to ensure the smooth replacement of the old 500 and 1,000 rupee notes. We would have to print four 500 rupee notes for every one 2,000 rupee note. If we would have focused on printing the 500 rupee notes, the entire printing exercise would have taken much longer,” said an official who didn’t want to be named.

I am currently visiting Kolkata, India’s second-larger city, which has a population of more than 13 million people. New Rs 500 notes continue to be unavailable (as of November 18). Although Rs 2000 notes are available, these are not useful for conducting most day-to-day transactions.  From first-hand experience I can also say that it is virtually impossible to get change for the new Rs 2000 notes. Smaller denomination notes–  Rs 100, 50, 20, or 10– have remained legal tender throughout the demonetization exercise. But the supply of these is insufficient to meet overall demand for cash, leading many to opt instead for informal credit transactions. To give some sense of how outsize the Rs 2000 notes are, “[A] week’s worth of vegetables for one person costs no more than Rs 150, a takeaway order of a full tandoori chicken costs Rs 280 (with a further Rs 80 for two orders of naan bread), most taxi rides around central Kolkata don’t even top Rs 100, and ten tablets of aspirin cost Rs 3,” as I noted in an earlier post.

Inconsistent RBI Policy

The circulars issued by the RBI and the Finance Ministry convey the impression of ad hoc, reactive policy, rather than a comprehensive, well-considered plan. For example, as of Tuesday, a customer with proper identification could exchange up to Rs 4000 in old Rs 500 and Rs 1000 notes for new currency, or smaller denomination notes (which, as I have mentioned, was legal tender). Old notes beyond that threshold could be deposited into a bank account, and sums later withdrawn in legal tender currency, subject to daily and weekly caps.

On Wednesday, the Finance Ministry increased the value of old notes that could be exchanged to Rs 4500. But on Thursday, the Finance Ministry abruptly reversed course, and reduced the exchange limitation to Rs 2000, effective on Friday. At the same time, the Finance Ministry introduced several exemptions as summarised by The Hindu (the full article reproduces the circular’s exact text):

Based on representations, farmers will now be allowed to withdraw up to Rs 25,000 each week against loans sanctioned to them or payment received through cheque or RTGS.

To enable smooth procurement, traders registered with the APMC market will be allowed to withdraw Rs 50,000 per week.

For those preparing for a marriage in the family, the father, mother, bride or bridegroom will be permitted to withdraw up to Rs 2.5 lakh in cash. Only one such withdrawal will be permitted per marriage. [Jerri-Lynn here: Under the Indian numeric system, one lakh is quals 100,000].

Central government employees up to grade C will also have the option of getting up to Rs 10,000 advance salary in cash.

What next?

The real economy has obviously slowed down significantly, due to a lack of sufficient legal tender currency to conduct ordinary economic transactions.  But this is a problem that cannot be immediately alleviated, according to  Clive, an expert in bulk cash management, and with whom I have exchanged several recent emails  (which he has given me permission to quote freely). Now, to be sure, Chindambaram’s assessment of the time required to fix the problem may be unduly pessimistic. Crucially, he doesn’t consider whether there is worldwide capacity for quickly producing necessary replacement currency notes.

Over to Clive:

There’s a finite capacity limit for a bank note producer to get the notes ready for distribution. While bulk note manufacturing is done at a fairly high output rate, it’s not that fast (as you’d guess, the end product has to be absolutely perfect and it has to be checked and checked again — and the notes’ security features need separate checking processes).

Bottom line:  if existing indian printing arrangements are insufficient  to supply necessary notes in a timely fashion, it appears there’s insufficient worldwide capacity to supply India’s bank note needs.  India’s  problem doesn’t seem to be one that can be solved in a few weeks– the government’s estimates notwithstanding.

Unfortunately, even that unduly optimistic time frame may be too late for alleviating the considerable negative real economic impact demonetization is having, as already reports are surfacing that key Indian distribution channels may be shutting down, due to lack of sufficient currency to conduct day-to-day transactions. The cash shortage is further expected to slow India’s rate of growth. The Economic Times reports that:

[B]rokerages and economists [are] revising their GDP growth estimates sharply downward as a result of the cash squeeze created in the economy.

Till the other day, the domestic economy was projected to grow at above 7.5 per cent in FY17, with the International Monetary Fund (IMF) itself raising its projections by 0.2 percentage points this October to 7.6 per cent for 2016-17 and also for 2017-18.

In July, World Bank projected India to grow at 7.6 per cent in 2016-17. Rating agency Fitch earlier this year had projected India’s real GDP to accelerate to 7.7 per cent in 2016-17 and 7.9 per cent in 2017-18.

The economy expanded at 7.6 per cent in financial year 2015-16, outpacing China for the second year in a row.

Post-demonetisation, GDP growth projections for the Indian economy for FY17 has slipped to as low as 3.5 per cent.

Sadly, it is the poorest Indians who will be hurt the most by this growth slowdown.

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  1. diptherio

    Sounds like an opening for some alternative, locally controlled currencies to step into the gap…or other creative systems of doing without gov’t currency.

    OT, while you’re in SEA, make sure to visit Nepal. Their traditional textiles are sweet.

    1. bob

      It’s an invitation for anything but cash to be used.

      Modi’s aiming for a banking system like what existed in 1800’s US. Runs and failures every week, to the advantage of a few big guys

      I’m just catching up on this story. Completely insane.

  2. Jerri-Lynn Scofield Post author

    Have visited Nepal several times, and enjoyed their textiles, but IMHO, even the best of them don’t really compare that well to India’s best.

    1. Tinky

      have you ever trekked in the Annapurna region? I still have deeply embedded, very fond memories of such a trek…

      1. Jerri-Lynn Scofield Post author

        Nepal’s indeed a beautiful place. I’ve spent a total of maybe 6 weeks there, total, over a couple of visits, but no, I’ve never trekked in the Annapurna region.

        1. Yadu

          Can you recommend where one can have a look and buy some of the best textiles products? Also, can you please cite more sources from where you got your information?

          1. Jerri-Lynn Scofield Post author

            I’ve mentioned FabIndia in a previous post I did on fast fashion. They have stores throughout India, including in the major metros.

            1. Jerri-Lynn Scofield Post author

              As for sourcing, a good starting point would be to click on the links I’ve included in each of my three posts on this topic. I’ve included several in each post.

  3. visitor

    I thought that Modi was a shrewd politician, but with the demonetization he has managed to irritate profoundly three major constituencies:

    1) Poorer people without access to banking services can no longer carry out economic transactions normally because of the lack of banknotes.

    2) Wealthier people hiding “black money” are at risk of losing their unreported, untaxed hoards, because the exchange of old banknotes is severely restricted.

    3) Firms see business drying out because of the deflationary effect of a sudden, unprepared demonetization that in one fell swoop destroyed a substantial part of the money in a largely cash-based economy.

    Basically, everybody in India must be thoroughly p!ssed off by the chaos.

    Are there any major elections pending in India? How does Modi expect to maintain political support for his government?

    Seriously: he “only appointed a task force on Sunday to address one of these challenges, the tricky technical task of recalibrating ATMs“. What the hell?

    1. uncle tungsten

      Good, so he will be destroyed for being an absolute fool as well as a hindu supremacist. This unremarkable man has had blood on his hands now for decades. And no one to blame but his own ineptitude.

    2. flora

      One wonders how he came to this idea. Who were his advisors? Who advised the advisors? Were there conflicts of interest? There is a chain of fools here.

      So much needless suffering caused by Modi and his govt.

      1. Jerri-Lynn Scofield Post author

        One problem, which I mentioned in my post of Nov 16 and which I linked to above, is that Modi replaced the well-regarded governor of the RBI (central bank) Raghuram Rajam earlier this year. I think there’s a general consensus that if Rajam were still in that post, implementation would have been better managed (although I should mention that he wouldn’t necessarily have been able to thwart the underlying policy, for the decision to take that was a political one). For more on this issue, please see:

  4. Harry

    “Bottom line: if existing indian printing arrangements are insufficient to supply necessary notes in a timely fashion, it appears there’s insufficient worldwide capacity to supply India’s bank note needs. India’s problem doesn’t seem to be one that can be solved in a few weeks– the government’s estimates notwithstanding.”

    Fantastic! Apart from the wonderous idiocy of the civil service and politicians I think we have just found a textbook experiment in inflation – if inflation is too much money is chasing too few goods, what is it when you have two few global printing presses to satisfy the demand for currency in one big currency?

  5. Maverick

    Long time NC reader from India. Appreciate the work you are doing to highlight the issues here, I’ve always felt that India gets almost zero coverage on NC. The commentators aren’t too educated either on the issues here.

    Your analysis of de-monetization and all is fine, but quoting Chidambaram again and again only hurts your credibility as a writer. The guy is a crook. He and his son ran the biggest insider trading scheme the country has seen since independence and the empire of their ill gotten wealth stretches from US to New Zealand. It’s just that unlike many other uneducated crooks in India he was sophisticated enough to launder his money through shell companies spread out across the world.

    On the whole de-monetization thing, yes it’s a mess and the govt is deservedly getting criticized for poor planning, but even now the move enjoys popular support among masses. That might not continue for long though if this mess persists. I’d suggest that you give it two weeks and then check back on how things are.

    1. Yves Smith

      Your remarks about Chidambaram are a classic form of ad hominem fallacy, and ad hominem attacks are a violation of this site’s written policies. You’ve done nothing to establish that the content of his remarks is inaccurate. Your failure to do so suggests you are unable to do so and are resorting to bogus methods of argumentation to support your position.

      1. bob

        I dunno. I was watching his video after checking into this crazy story. He’s definitely got his own agenda, IMO.

        I’d put him on the same universe Sheila Bair, although I imagine he’s got more upside.

        1. Mit


          (Un)Fortunately, Maverick’s assertion re: MAC is well grounded in facts. Not that this is relevant to Ms.Scofield’s post, but (of course) the opposition parties have battle axes to grind, what with critical state elections around the corner.

          The first, second and third round of after effects would have been apparent to the even most rookie of economists/analysts even before the ball was kicked, so to speak (apologies,I’m a football fan) for an economy with ~40% of reported GDP being estimated to be accounted for by the “Informal Sector.” So, the null hypothesis that Modi’s coterie of “Advisors” might not have thought this through looks trifle suspect, methinks.

          Mr. Modi could be a lot of things, but he is no fool.

          So the question that really needs to be asked is: What is he/his party really playing at?

          If you believe I have flouted any of your policies in my maiden post, do feel free to chide, but I’d request you to publish this comment

          1. Yves Smith

            First, you are straw manning what Maverick said, and I find it curious that you are putting words in his mouth to take up an argument with me. He was only criticizing Jerri-Lynn for using a source he didn’t like.

            Second, you assumptions are incorrect. When we were covered the Greek/Troika negotiations on virtually a daily basis in 2015, economists and pundits repeatedly urged Greece to tell the creditors to take a hike and do a Grexit, which would have been more than an order of magnitude more complicated than what Modi has attempted. We published at least eight, maybe ten posts on the operational issues, and had to argue down quite a few self proclaimed experts who in fact knew nothing and refused to believe that the operational details mattered, much the less could be binding constraints. In particular, we were literally, thanks to Clive, the only place on the Web you could find any detail about why stocking (merely stocking!) ATMs with new currency would likely take months. And despite this clearly being a theoretical option for Greece, and Greece having some savvy outside advisors as well as many sympathizers, the various media accounts over time showed that the Greek government gave only in passing consideration to how it might go about launching a new currency.

            The Greek negotiations were a front page story in the MSM in Europe, and front page of the financial press in the US, for the better part of six months. Yet that intensity of coverage failed to elicit one iota of informed discussion of what it would actually take to relaunch the drachma and why the vast lead times and number of moving parts (including, most importantly, numerous parties over which the Greek government had no influence) meant it was not an option for Greece.

            Third, the Indian government is not known for its operational competence. Never attribute to malice that which can be explained by incompetence, particularly when incompetence is normal.

            1. VR

              Been reading this site and lurking for the past many years (>5) but I am now moved to comment on Yves observations here….SPOT ON, m’lady, well done !!!…especially this is priceless –

              “Third, the Indian government is not known for its operational competence. Never attribute to malice that which can be explained by incompetence, particularly when incompetence is normal.”

      2. milind sohoni

        This is pompous beyond reason.

        2100 crore notes is the stock of notes which is out there. it could be converted into electronic cash or into actual notes or it could be left to die. The flow required to run the economy could be say 10% of the stock.

        Maveric is right and J-L Scofield is wrong in her conservation law.

        Also Y, as a regular reader, I am shocked at your language. A narration by a leader of an opposition party is taken as something worth taking at face value, and not doing the basic analysis above, is not expected. And your giving Maveric some latin is totally uncool.

        Bye bye, NC. you are only good for american narratives.

        1. Jerri-Lynn Scofield Post author

          I think you seriously underestimate the problems of making conversions “into actual notes”, when the procedure for doing this runs requires all conversions above what’s now a Rs 2000 threshold be run through bank accounts and half the Indian population has no bank account.

          Also, The LiveMint article quoted above discusses the shortage of new currency– again making conversion “into actual notes” difficult– hence the huge queues at banks and the widespread shortage of small notes necessary to conduct most ordinary day-to-day transactions. As I explained above and in a previous post that I linked to, the Rs 2000 notes are too large to be useful for such transactions– they’re just too large. And also, Rs 500 notes aren’t yet available in Kolkata.

          On the use of electronic cash, I was going to include information on why this is problematic, but didn’t, due to lack of space. That you raise this as potential panacea means I should debunk this solution in a future post.

          Finally, I think I made it quite clear that Chidambaram is far from a disinterested observer. Perhaps you missed this warning in the text of my post. So I’ll make it easy for you and quote the relevant text from my post above again here:

          “Now I should mention a few facts for non-Indian readers. Chidambaram is far from a disinterested observer, having served as Finance Minister in the previous Congress Party-led government. There’s no reason to conclude, however, that he’s ill-infomed or what he says is inaccurate when he discusses the present government’s inadequate planning for demonetization. And I should note that his claims have been backed by other reporting. (He also has a reputation for being intellectually astute.)”

          Perhaps I should have underlined that Congress is part of the Opposition, but I think NC readers are generally astute and realize that Modi’s party is the BJP, and identifying Chidambaram as “Finance Minister in the previous Congress Party-led government” means he’s anything but.

        2. flora

          um, ah,…. about electronic cash. It requires at the very minimum,….reliable electricity.

          From 2013:
          “Electrification was central to how early nationalists and planners conceptualized Indian development, and huge sums were spent on the project from independence until now,” says Sunila S. Kale, assistant professor of international studies. “Yet despite all this, nearly 400 million Indians have no access to electricity. Although India has less than a fifth of the world’s population, it has close to 40 percent of the world’s population without access to electricity.

          Going to electronic cash would be worse that the current demonitization fiasco. Not that the obvious problems would stop some bright thing from proposing the idea to govt.

          1. flora

            adding: that’s just the first, basic, general infrastructure obstacle. It’s somewhat telling that you ignore or dismiss 400 million people being without electricity. Electronic cash also has plenty of problems beyond basic electric infrastructure.

        3. Harry

          Why would anyone with huge stocks of ‘black money’ cash want to risk going to the bank? I think that’s an underlying assumption with your calculations.

      3. Hemang

        Brilliant reply! Thank you. English speaking Indians bluff a lot and they have a conceited attitude that is even reflected in that post. Not for nothing that Sir Naipual has no patience with the type and brushes Indians aside by saying ” they cant think”. I am an Indian myself and find it difficult to disagree with Naipaul. Btw Naipaul among other things, can formulate problems at a speed hundred times more than a band of World Bank Economists.

  6. bob

    This story in completely without logic, unless Modi actually is the pissed off ghost of Hayek.

    Without knowing much more than what I’ve been able to gather in an hour, and without much background.

    This is treason. He pushed a pen and killed a currency.

    Big banks and big criminals wind up the winners- They already know how to wash cash. It’ll only cost everyone else a few points….

  7. bob


    I appreciate the numbers on simply producing the cash. But how is it going to be distributed? Mint to where? Big bank? Then onto smaller banks?

    Trickle down doesn’t work here either. There is no incentive, at all, for banks to release new cash once they get it. None.

    This whole scheme is a recipe for graft.

    1. Jerri-Lynn Scofield Post author

      Distribution is certainly another key issue, some of the physical difficulties of which Clive weighed in on in our email correspondence. Space reasons precluded discussing this in this post. Perhaps as this saga continues, I’ll devote some further attention to this topic. Or Clive may jump in if he sees this comment

        1. aab

          I didn’t read this post (I read your first one on this subject, J-L, I swear); I only popped in because I enjoy late night Lambert snark, so I’m following his comments around.

          But couldn’t some of this be viewed as failure of rule by symbol manipulators? That doesn’t fit Modi, I realize. But it seems relevant to both Obama with Obamacare and Clinton with ADA; it’s relevant to the stranglehold over Greece, too. People like Obama and Clinton seem to view technology as magic. They don’t understand anything about how it actually works, and they don’t think they need to know. People that actually make things — whether it’s omelettes or ATMs — are lesser. They are to be ordered about as needed. So many managerial levels are filled with people who don’t know how to physically DO anything that they don’t even know to ask questions, or set up a process whereby the doers can offer them counsel.

          I worked with an ATM company years and years ago, and I didn’t know a lot of what Clive was explaining about paper grade differences and such. But I’d like to think if I was in power, I’d know to check in with people who do the making and the ACTUAL managing, not the meetings. I taught myself how to cook as an adult, and it never ceases to fascinate me the simple things I didn’t know that any Italian grandma could have taught me as a child that make a big difference in producing delicious food. I learned the hard way that I can’t just figure it all out on the fly.

          In other words, despite how they like to proclaim how smart they are, this seems like a Dunning-Kruger variant: never having learned to make physical things, they don’t know enough to know that they don’t know enough about making ANYTHING.

          The great thing about writing is you can erase it or tear it up and start again, easily and cheaply. It is sort of like magic. You can’t do that with an assembly line — especially when you’re dealing with multiple vendors across multiple countries. Our global ruling class has built an incredibly complex system without having any firsthand experience at all with how it works. They just expect their underlings to make it work. Computer programming is easy. Teenagers do it. So why should the President worry his magnificent mind checking in on a web site? What’s the big deal changing currency? It’s paper, after all. It’s just paper.

          Except, of course, it’s not.

      1. bob

        I was reading what I could and saw that bankers hours are even shorter in India than in the US. They haven’t gotten any longer, with cues very long.

        This IS a bank run. Ducks and all that…

        Great stuff. Thanks again.

        1. Jerri-Lynn Scofield Post author

          Banks in Kolkata were open last Sunday (or at least some were), which is not the norm. Not this Sunday, however.

  8. Lambert Strether

    Getting rid of cash isn’t easy, as it turns out. Excellent post!

    Modi only now is convening a task force to figure out how to make sure the new bills fit in the ATM bins? This is a level of fecklessness that approaches the ObamaCare rollout, where apparently nobody bothered to tell Obama the site was a technical clusterf*ck, and Obama never bothered to check.

    Meanwhile the people who run the food carts and the millions who eat there are making change with what? Cigarettes? Postage stamps? Bulk commodities like spices, nuts, or rice? Candy, like the Italians? This is demented. And it seems that the United States is not the only country with an elite disconnect!

    1. Jerri-Lynn Scofield Post author

      And trying to force the exchange of the now non-valid notes for legal tender currency through bank accounts (as per details first set out in my Nov 10 post and now somewhat amended as the gov’t tries to manage the chaos it has unleashed) is particularly difficult when half the population has no bank account and only 4% have wages paid into bank accts (as per World Bank figures from my Nov 16 post).

      1. Yadu

        Yes! And to think with that level of basic financial penetration and the above report just a click away, this government thought this would not hurt the lower income classes. Like Yves mentioned above, incompetence…

        As an aside, isnt this a typical right wing ‘show your muscles,be paternal, suffering is temporary and for the better’ showing by the PM? Doesnt this provide an insight into the thinking of the current government? After all ‘ personnel is policy’ .

  9. Sam Bierwagen

    I’ve read every post in this series so far, and the definition of lakh and crore has fled my mind immediately after reading them, probably because I’m completely uninterested in memorizing terminology of the Indian numeral system. You might want to just convert them to normal numbers in the text.

  10. Ken Ward

    It is worth mentioning that Modi paid a three-day visit to Japan from 10 November, just two days after announcing the withdrawal of Rp 500 and Rp 1,000 notes. This suggests either he had no idea what the immediate impact of his policy would be or that he was indifferent.

    1. Jerri-Lynn Scofield Post author

      This fact was widely noted in the Indian press– and people discussed this when I was queueing for cash the day the ATMs re-opened.

  11. Rohit Iyer

    This is a totally one sided article presenting the negative impact of Demonetization in India. I feel compelled to present the other side of the story.

    One of Modi’s important campaign promises was to put an end to black money – non-bank cash tracked by M3 rose from around 2.2Trillion INR in 2006 to 12.5 Trillion INR in 2016. This was evident in the real estate boom which has defied all economic experts opinions and has led to India being one of the most expensive real estate markets. Has the government benefited? NO since official rates are a fraction and taxes are paid on the fractional official rate. The rest of the transaction is carried on by cash – yes – 500 & 1000 currency notes which account for about 87% of M3. And therefore RBI has limited control with its monetary tools which has caused India to have one of the highest interest rates in the world – 2X-4X more than the rates of countries with which it competes for exports. On top of it, you have counterfeit currency coming into the country from Pakistan which has fueled the recent Kashmir unrest , the every growing influence of Maoist Naxals who run a parallel all-cash economy and cross-border smuggling between Bangladesh. Not to mention the Hawala market and gold/drug smuggling market which are all cash based.

    I am not an economist but with so many experts here, most who appear to be cynical and critical of this step – I am sure most of you will appreciate the steps taken by Modi:

    1. He expanded the PMJDY program – launched in 2011 by the UPA govt ( and opened 255.1 million bank account. He has made it his mission to ensure every Indian has access to banking channel. Each PMJDY account has a Aadhar number – unique identification number that allows Govt cash benefits to be paid directly to these account holders cutting down graft. 74000 villages with population over 2000 are today covered with banking facilities. Here is example of its success at Akodara – India’s first digital village.

    2. Each of PMJDY bank account has been enabled with RuPay debit card using Aadhar Enabled Payment System and also has insurance cover at zero cost to account holder ( So each of these 255 million account holders can have access to mainstream banking – mostly driven by a mobile phone. There is mobile data coverage in every nook and corner of India. In 2011, there were 246 million households in the country – so you can say that most Indians have access to banking channel. (

    3. Modi has expanded international agreements to help prosecute money laundering. Signing of FATCA with US; Amendment of Mauritius Treaty; Initiative for signing of Automatic Exchange of Information Treaty with all
    major countries including Switzerland, Initiatives under BEPS (Based Erosion and Profit Sharing) such as country by country reporting, PoEM ( Place of Effective Management) etc.

    4. He then gave one last chance to the defaulters to come clean with voluntary Undisclosed income declaration scheme with one-time tax of 45% which had about $10 billion of income and assets declared which ended on Sep-30-2016. This was supplemented by passing a much more stringent Benami Properties Act-2016 with an aim to prohibit Benami transactions, meaning, all real estate transactions shall be in the name of the actual owner who is paying the consideration from his known sources. This is because black money in India is hidden in real estate. And further this together with Goods and Services Act (GST), Real Estate Regulation Act (RERA) and Land Digitization is expected to have a good impact on the menace of black money, tax collection and economy on the whole from April 2017.

    5. And finally the Demonetization Drive launched on 11/8 up to 12/31 is the final axe to fall in the grand plan. And guess what – in the 9+ days so far, Based on State Bank Of India (SBI) data of 1.34 INR trillion deposited till 11/18 with 2016-March demand deposit market share of 17.6%, we can say about 5-6 INR Trillion has been deposited in Indian banking system. This is close to $100 billion dollars! This has led to a big drop in Bond Rates and they are now at 6.4% and heading lower.

    6. Kashmir is back to normal after 4 months of unrest which proved that it was a paid for campaign. Real Estate prices have begun to drop and are expected to fall down. Smuggling , Hawala and other activities are now severely curtailed. Illicit economy has come to a standstill and in most urban areas ATM queues are reaching normal business hours -(can be verified by twitter).

    7. With upcoming polls in India’s biggest state Uttar Pradesh and richest- Punjab – Modi is setting up the stage for a clean election and hopes to reap its dividends.

    I understand that this move will cause a big spike in Q4-GDP as lots of companies will now report higher sales ( more white instead of black register) and this is corroborated by many reports of last minute scramble by businesses to adjust their cash hoard to deposit by showing it as back-dated sales. RBI expects about 20-25% tax collection on these higher deposits. Overall there will be about 5 Trillion INR in RBI’s kitty and the deposits will shore up the Indian banks to cover the 90$ billion needed for BASEL-III. Most feedback from public is that they have supported short term inconvenience for long term gain and this is setting up the stage for record India GDP growth and economic miracle in years to come.

    So to conclude, it does not appear Modi is foolish but a genius and this will fast-track conversion to a digital economy.

    1. bala

      The irony of the whole thing is .. people have died due to complete lack of planning on the part of the Modi government!! and it is okay with the masses!!! there is no cynical analysis of Modi’s arrogance in not thinking through this Draconian policy.. but the same masses AND the Indian Media was SOOOOO critical and cynical of the Delhi Chief Minister who is one of the rarest breed of Indian politicians who is sincerely trying to rid the country of corruption!! there is blind hero worshiping of Modi as a savior of the masses without a semblance of critical analysis of his misdeeds

  12. Ken Ward

    India’s public is remarkably sophisticated. All those people caught in enormous queues commented to one another that the short term inconvenience was worth putting up with in exchange for long-term gain.

    By chance, Prime Minister Modi overheard these comments and, in a speech he delivered in Agra, that was reported in 20 November’s Hindi press, he said that “your sacrifice will not be in vain” (aapka tap bekar nahi jaega).

    Or could it be that Mr Rohit Iyer is attributing Modi’s own words to the Indian masses?

  13. Sudhir Voleti

    I’ve been reading NC for years now. This is my first comment here, IIRC.

    I live in India and there’s little doubt common people have been inconvenienced, some quite severely. You’d think that’s suicide in a democracy. But mass psychology can play different ways. Astonishing thing is that large majorities still seem to be willing to give Mr Modi a chance (he’s asked for 50 days, i.e till the end of 2016). Large part of that support has to do with 2 reasons:

    1. A get-back-at-them feeling (them == hoarders, corrupt politicians and bureaucrats, hoarders and black-marketeers) simply because with black money, those who had nothing to hide had nothing to fear (that’d be some 90%+ of the populace). An analogy would be how the 99% of the occupy wall street movement would feel like if the 1% of corrupt bankers and wall street pundits were to wake up and find their ill-gotten gains drop to zero value.

    2. Modi’s clean, nay, incorruptible image which endows him with credibility enough that he can look his voters in the eye and ask them to suffer short-term inconvenience in national interest. Doubt any other politician in India in decades now has had anywhere near the credibility required to pull this off.

    It’s plain that those hurting the most from the move to invalidate black-cash piles – politicians, the media, the bureaucracy, hawala operators, commercial sex workers, criminal networks dealing in everything from narcotics to trafficking etc – appear to have suddenly rediscovered concern for the common citizens’ inconveniences and struggles. With Big media’s credibility at sub zero levels, not many are fooled anymore by this elaborate drama. Not anymore.

    Of course, its early days yet and plenty can go wrong. Time will tell if this gamble pays off. We’ll see.

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