India’s Cash Crisis: What You Need to Know

What the government giveth, the government taketh away. Like that money in your wallet. Do you really think it’s yours? If so, the people of India would like to have a word with you.

By James Corbett and cross-posted from International Forecaster

Oh, haven’t you heard? In case you missed the story during the din and clatter of the US sElection circus, all hell has broken loose in India.

It all started on November 8th, when Indian Prime Minister Narendra Modi made a surprise television address to the nation. As you might have guessed, this was no stale policy speech. Instead, Modi sent shockwaves through the country (and the region) by announcing that as of midnight that evening, existing 500 and 1000 rupee notes would no longer be accepted as legal tender. The tax cattle would have until December 30th to trade in their 500 and 1000 rupee notes at post offices and banks.

And just like that the bits of colored paper in everyone’s wallets were revealed as…well, useless bits of colored paper.

Although this type of revelation would cause panic and chaos even in the most orderly of transitions, the way the Indian government has handled this event has made it that much worse. The list of rules, regulations, stipulations, stop-gap measures, withdrawal and exchange limits, deadlines and red tape involved in switching over to the newly-minted replacement 500 and 2000 rupee notes was enough to leave people in as much confusion as panic. At one point they even started marking people’s index finger in indelible ink to prevent repeat money exchangers from clogging the lines at busy banks.

To put the scale of this move in perspective, note that the old 500 and 1000 rupee notes make up 86% of the cash in the Indian economy. And all that cash has just been stripped of its legal tender status with the flick of a bureaucratic switch.

So you can imagine (or, this being the age of the internet, you can actually watch) the scenes of violence, chaos, and public nudity(?) as tensions flare and people wait in unbelievable line ups to exchange their cash. And you can also imagine how the government is scrambling to make ad hoc adjustments to their ad hoc rules for dealing with the mess they created.

Oh, but here’s the kicker: The printing of the new notes to replace the old notes began in August and the printers were told to prepare for a New Year launch of the new currency. But surprise! The government was lying! So now the printers are scrambling like chickens with their heads cut off, trying to print new notes even as they are already being handed out.

In short, the rule of Governmental Reverse Midas Touch applies. Everything the state touches turns to putrefying garbage.

OK, OK, so this rupee “demonetization” (there’s your new word for the week) is a complete mismanaged fiasco of epic proportions. It is causing violence, panic, chaos and headaches for businessmen, farmers and others who rely on a steady stream of cash in order to continue operating. It has led to wide-scale protests and has decisively ended any talk of an “extended honeymoon period” for Prime Minister Modi. So why on earth did they do it?

Why, to go cashless, of course! Well, that and to combat the counter-economy. Of course. We’ve discussed counter-economics previously in these pages, but just to reiterate:

“Economics is the realm of white markets: legal, licensed, sanctioned, taxed and regulated exchanges in the above ground economy. Counter-economics is everything else: black market and grey market activity either specifically outlawed by the state or not licensed or approved by it. So doing work under the table for cash or making a mix tape for your friend are counter-economic activities.”

In India, they call cash gleaned from counter-economic activities “black money.” It’s not known to the government, it’s not stored in the banks, and it’s not taxed. In other words, it’s the would-be technocratic overlords’ worst nightmare. It’s impossible to know the size of this “black money” pool (can we call it something cooler, like “freedom funds” or something?) but it has been estimated to be as much as 20% the size of the total Indian economy. Now with the vast bulk of those freely-gotten gains being brought back into the banking system (or exchanged with a valid form of government identification), it will come back under the purview of Big Brother and his friend, Uncle Taxman

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