How is the demonetisation of India going?

A feature of these times is what I have labelled as the war on cash . In essence this war involves the establishment blaming it for financial crime and tax evasion. The High Priest of such thoughts Kenneth Rogoff is giving a talk this evening on this very subject at the London School of Economics.

Tomorrow at LSE: Leading economist on why we should get rid of most paper money

I did reply to enquire if they meant leading as in leading everyone off a cliff? Unfortunately I cannot be there as I will be on Share Radio but I do hope that someone will ask why if all the interest-rate cuts have not worked going further into negative territory will?

India and Demonetisation

This is an area where it is hard not to think of our Ken and his pet theories. Back on the 11th of this month I explained what had taken place.

Government of India vide their Notification no. 2652 dated November 8, 2016 have withdrawn the Legal Tender status of ` 500 and ` 1,000 denominations of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India till November 8, 2016.

They were taking advantage of a public holiday to facilitate the move.

All ATMs and other cash machines will remain shut on November 9, 2016 to facilitate recalibration

After that there were going to be limits on what cash could be withdrawn.

cash withdrawal from a bank account over the counter shall be restricted to ₹ 10,000/- per day subject to an overall limit of ₹ 20,000/- a week from the date of the notification until the end of business hours on 24th November, 2016, after which these limits shall be reviewed.

So we are pretty much there especially if we allow for the time difference so how has it gone? The Hindustan Times gives us some insights.

“Consumers have not had the cash to complete purchases, and there have been reports of supply chains being disrupted…The time spent queuing in banks is also likely to have affected general productivity… ,” said Fitch, one of the world’s three big rating agencies alongside Moody’s and Standard & Poor’s.

It gave specific examples of industries which have been affected.

The automobile industry, which accounts for 7.1% of the GDP, is witnessing a fall in stock prices of up to 12% since the demonetisation. Himanshu Sharma, auto analyst at Centrum Broking, said two-wheeler sales can get affected by 40- 45%. The impact on cars is less, since most of them are bought on loan, but it could still be 10-12%……..Things aren’t any better with pharmaceutical companies, as sales of medicines have plunged almost 15%.

Why has the pharmaceutical industry been affected? Well something of a shambles seems to have been at play here.

Even though chemists are allowed to take old currency notes, distributors are not.

It goes onto point out that in the words of Taylor Swift there was always going to be “trouble,trouble,trouble” if you withdrew 86% by value of bank notes in the country described below.

This was only to be expected in a country which has 20% of its $1.8 trillion GDP and 80% of employment in the unorganised sector. Nearly half the population still does not have a bank account. Less than 300 million use the internet, and therefore the overwhelming majority cannot make electronic payments.


The initial statement implied that ATMs would be up and rolling after the bank holiday yet if we look at the Reserve Bank of India today we are told this.

17. Can I withdraw from ATM?

The ATMs are progressively getting recalibrated. As and when they are recalibrated, the cash limit of such ATMs will stand enhanced to ₹ 2500/- per withdrawal.

There has been a specific change today which tries to cover the Indian habit of paying for weddings in cash.

With a view to enable members of the public to perform and celebrate weddings of their wards it has been decided to allow a cash withdrawal of maximum ₹ 250000/- from their bank deposit accounts till December 30, 2016 to meet wedding related expenses.

A fundamental point through all this is the assumption implied below.

7. ₹2000 cash is insufficient for my need. What to do?

You can use balances in bank accounts to pay for other requirements by cheque or through electronic means of payments such as Internet banking, mobile wallets, IMPS, credit/debit cards etc.

This is all very well for those applying the move who no doubt have these but India’s many poor? They do not.

What about the economic effect?

Back on the 11th I reported on the official view.

I hope that they have success in that and also that the official claims of a 1.5% increase in GDP as a result turn out to be true.

How is that going? From Bloomberg.

The most pessimistic of these estimates comes from Ambit Capital which says GDP (gross domestic product) growth could crash to 3.5 percent. Others like HDFC Bank and HSBC are paring down GDP growth estimates by 0.5 – 1 percentage point.

Down seems to be the new up yet again. There are also concerns about rising prices due to shortages as industries wonder why weddings get relief but they do not?

What does Kenneth Rogoff think?

You might think he would be cheering and high-kicking but no.

The short run costs are unfolding, but the long-run effects on India may well prove more than worth them, but it is very hard to know for sure at this stage.

Indeed for a man whose plans for ever more negative interest-rates require an elimination of cash this is not far-off breathtaking.

First, I argue for a very gradual phase-out, in which citizens would have up to seven years to exchange their currency, but with the exchange made less convenient over time.

Mind you what is “less convenient”?! Our Ken is trying to have his cake and eat it here. Also I have a few £10 notes and a £20 note in my jacket pocket and will give them a serious telling off later.

the vast bulk of physical currency is held in the underground economy, fueling tax evasion and crime of all sorts.


This comes to mind as it is a type of polar opposite to India in that so much of its money is already electronic. So I noted this from Cecilia Skingsley of the Riksbank on the 16th.

Will we have e-krona in an e-wallet in the future, as naturally as we now have a wallet with cash in it? The less those of us living in Sweden use banknotes and coins, the clearer it becomes that the Riksbank needs to investigate whether we should issue electronic money as a complement to the money we have today.

Is complement the new euphemism for replace? Convenient should you ever find yourself looking to take the official interest-rate lower than -0.5%. Indeed one of the accompanying slides poses this question.

Should we accept that the use of cash comes to an end?


This was always going to be a very difficult thing to do in India. The stated reasons are on their own good ones as India plainly has severe problems with corruption and the underground economy. The issue can be expressed Bob the Builder style ” Can you fix it?” I note some pointing out that in India corruption is regularly to be found at the top of the system. Also according to Live Mint Credit Suisse has reported this.

In the last two years, the share of the top 1% has increased at a cracking pace, from 49% in 2014 to 58.4% in 2016.

if you were looking for corruption where would you start after seeing that? it makes our 1% in the UK seem lightweights doesn’t it? It reminds us also of the point that a lot of crime takes place in electronic finance as the recent issues at Tesco bank illustrated in the UK. The ordinary Indian can still be affected by this although of course it is indirect for many. Maybe someone tonight will ask our Ken about online financial crime?

There are differences to the western war in cash in that India for example has interest-rates of around 6% as opposed to the -0.5% of Sweden. But there are also similarities.

As to language let me translate a speech given today by Kristin Forbes of the Bank of England. Here is the entry in my financial lexicon for these times.

Uncertainty: This means we were wrong, “This is well above the consensus expectation by economic forecasters, as well as the MPC forecast. ” But as we are so intelligent and nobody else we meet at dinner parties thought anything else that’s fine…

Sad really as she is perhaps the brightest member of the Bank of England

Share Radio

I will be on the Simon Rose show after the 7 pm news tonight and already there is much to discuss.

31 thoughts on “How is the demonetisation of India going?

  1. the vast bulk of physical currency is held in the underground economy, fueling tax evasion and crime of all sorts.

    They are allowed to “steal” ,
    they get to set the rules on what is “theft”
    they define both terms to suit their own wealth

    I pay my local government taxes with cash
    I pay my food bills with cash
    I pay my sons and daughter pocket money
    I pay the window cleaner with cash

    And these are all CRIMES ?

    and lets be sure on this – when every transaction of the people is logged and accounted for

    those at the top , who write the rules , will be gleefully be counting more pennies into their coffers …..

    what price freedom then ?


    After the fall of the Berlin Wall, a German politician, speaking about the reach of the Stasi and its influence on East Germany, remarked, “there were really only two who were truly innocent in the system, the newborn child and the alcoholic, who was tanked up every day.”

    The presumption of innocence relies on privacy:

    Look closely enough and everyone is guilty of something.

    • Hi Chris

      I was thinking of this earlier. Initially gold demand will probably be lower as Indian’s struggle to get hold of cash to buy it with. Perhaps that is a factor in the recent gold price weakness ( another ~2% fall today). But once things normalise I would expect to see more demand for gold and other precious metals.

  2. What happens if/when there is a power cut? No-one can access their online money.

    On the subject of fraud I see there is a new online crime to hack into ATMs so they spew out cash at many ATMs at once with people on hand to collect it!

    • Hi Jan

      Yes that is a good point and one which has not been answered. There is also the issue of online outages say as a result of a terrorist attack or war. Individual issues can be fixed as when my broadband went down I could buy a coffee/pint and sit in a local shop/pub and work online. But I would be much less happy about doing banking on public wi-fi for obvious security reasons.

  3. Hi Shaun
    With cash banned and a ‘smart meter’ in every home, your access to funds will be completely out of your control.
    Welcome to feudal society ’21st century’.

    • Hi JW

      My gas and electricity supplier has been enthusiastically offering me a smart meter for a while now. I can apparently have one for free but if I wait a few years I will have to pay,or so they say. As I wonder for what? I find no answer. The ads saying “getting gas and leccy under control” but how? Right now I wouldn’t turn my laptop off or the lights in this room. The heating? Er no. Okay the radio on which I am listening to the Champions League football er no? So where’s the gain?

      • It’s their gain – now they can see your usage day by day and adjust your monthly bill and direct debit accordingly and with the virtual outlawing of cash you’ve got no choice. Tomorrow is cancelled due to lack of interest (in both senses of that word).

      • Hi Shaun
        The real reason for smart meters is to allow the supply to be controlled , not for you to control your demand. Once the provision of electricity to individuals can be identified and controlled remotely, that ability can be used for all sort of reasons rather than just the original rationale of managing demand/supply balances.

        • He who pays the piper calls the tune. The electricity utilities control the software specifications of smart meters.

          There is a problem for consumers, in that demand loading is not reflected in consumer pricing. Why pay for smart tech to turn on/off water heaters, fridge freezers etc based on grid spikes ?

          Realtime demand pricing gives valuable market signals to budding renewable grids, and may reward consumers who invest in storage. I know you dislike renewable electric – but it is progressing – note their grid stability comes from hydro. The new perovskite tech will bring solar panels down to a competitive price level. But I am skeptical of current domestic storage options.

          I’d also comment that solar/storage would be very useful in rural New Zealand when the grid is damaged by earthquake.

  4. If I was ad homing wor Ken I’d ask how many people died because of his spreadsheet error and over enthusiastic austerity that resulted. Or mercifully did every ignore him and his mates?

    However this may be even dumber and certainly more fascistic. It’s not like non state money is not available. It’s getting to stage where we will all be Bitcoin et al, VPN and encryption experts and is that unintended consequence actually what they want?

    How much GDP dies if we loose cash economy which Ozza used to boost GDP – drugs and prostitution? How do I buy anything anonymously? It’s absurd like Rogoff to this non economist frankly.

  5. Shaun
    Great blog. I know that you don’t do politics, but it seems to me that there is an existential struggle going on between politicians on the one hand who would like to control us and pretend that they know best and on the other hand we plebs who have been obedient up until now.
    I feel an Orwellian nightmare will be upon us if we give up cash, however much they tell me it’s only to stop criminals.

    • Hi James

      Many of these issues have come in his history as we note ” No taxation without representation” or the way the English Civil War was caused by too many taxes. But I agree that right now feels like the latter books in the Dune series which report that the reaper is getting ever closer.

  6. India can eliminate mid-value legal tender. They can even make holding foreign currency illegal, but they cannot stop the popluation from desiring hard foreign currency.

    I’d note that the USSR made possession of hard currency illegal. Currency bans are implemented by evil totalitarian dictators. Benevolent democratic politicians don’t act this way.

    • Hi ExpatInBG

      You made me look at a currency charts to check whether the Rupee was weakening. As everyone is weakening against the US Dollar I looked at the Euro and until recently it has been gently strengthening ( 76 to the mid 72s). So no sign yet but perhaps it will take time for people to get back in control of their money and make a move.

  7. Shaun,
    I’m waiting the for the £20 note to go plastic then I’ll empty my bank account into this long lasting denomination and stash it in various parts of my assets. No Banking system is going to steal my money.
    Paul C

  8. Congratulations on getting to a million hits on your website, Shaun. You deserve to get a lot more hits than that and I am sure they will come over time.
    Thank you for mentioning today’s speech by Kristin Forbes, “Uncertainty About Uncertainty”. She delivered her speech just two weeks less a day after the National Statistician announced that he intended to make the CPIH the preferred measure of inflation starting in March 2017, but she makes no mention of it in her speech. Her Figure 9b shows that higher uncertainty leads to lower inflation but her analysis is based entirely on the CPI. She might have done the same analysis with the CPIH to give different results.
    I noticed that Chris Giles reporting on the National Statistician’s announcement in the FT said that the ONS was disappointed that the Treasury Department hadn’t announced any plans to move to the CPIH as the target inflation indicator for the Bank of England. I really wonder if it isn’t the deliberate policy of the Treasury Department and the Bank of England to fly under the radar with this change. Why would they want to provoke a public debate that they would likely lose?
    In fact, either in March or a year after, could not Mr. Pullinger simply declare that the CPIH would now go by the name of CPI, and the CPI, which would be discontinued, would be called the alt-CPI? After all, what we now call the UK CPI was just the UK HICP until Gordon Brown decided to rebrand it. In that case would it even be necessary for Philip Hammond to give the Bank of England a new remit? Would not the remit just be changed through the back door by an ONS decision to change the name of the CPIH series?

    • Hi Andrew

      Thanks for the kind words and also your reply on Statsusernet about my enquiry on measuring quality using ladies coats as a measure. As to CPIH I was able to give it some airtime on Share Radio a couple of hours ago as we are on our way to a not very merry mess.

      You mention HM Treasury but if things are indexed to CPIH then it is likely it will have to pay out more. So I suspect it will remain with CPI which might keep the Bank of England with it too. So rather than a main index we will have an even bigger mess.

  9. Hello Mr Richards.

    I am writing from the ground in India. Some economists here are suspecting that this demonetisation is really about forcing people to deposit money and shore up the badly stressed banking system.

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