The Demonetisation saga in India rolls on and on

As we emerge ( at least in England & Wales) blinking into 2017 then the main economic action is in the East. For example new currency controls for retail investors in China. Such factors are in my opinion what has been behind the subject of my last post of 2017 which was Bitcoin. This broke the 1k barrier in US Dollar terms and is now US $1020.68 according to Coindesk. A factor in this rise must be what is ongoing in India which is what has become called Demonetisation which I first pointed out on the 11th of November last year.

Government of India vide their Notification no. 2652 dated November 8, 2016 have withdrawn the Legal Tender status of ` 500 and ` 1,000 denominations of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India till November 8, 2016.

Something that was immediately troubling was that the official view was along the lines of “please move along, there is nothing to see here”.

There is enough cash available with banks and all arrangements have been made to reach the currency notes all over the country. Bank branches have already started exchanging notes since November 10, 2016.

The initial communique mentioned the 24th of November implying that it would pretty much be over by then and that the Indian economy would boom afterwards.

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 it going?


The Markit/Nikkei PMI or business survey had a worrying headline yesterday,

Manufacturing sector dips into contraction amid money crisis

Indeed it went further in the detail.

Panel members widely blamed the withdrawal of high-value rupee notes for the downturn, as cash shortages in the economy reportedly resulted in fewer levels of new orders received. Concurrently, manufacturers lowered output accordingly.

Actually pretty much everything seemed to be going wrong here as input inflation rose and employment fell.

Meanwhile, input costs increased at a quicker rate……Cash shortages and lower workplace activity resulted in job shedding and falling buying levels during December.

So whilst small changes in a PMI tell us little a drop from above 54 in October to 49.6 in December poses a question. This is reinforced by the other PMIs for manufacturing we are seeing that have overall improved (China for example).

Actually the industrial production numbers were weak even before Demonetisation according to dnaindia.

For the April-October period, industrial output declined by 0.3% as against a growth of 4.8% a year ago, as per the data released by Central Statistics Office (CSO) today……..The manufacturing sector, which constitutes over 75% of the IIP index, recorded a contraction 2.4% in October.

All this adds to the problems recorded in the services sector back in early December.

Services activity declines as cash shortages hit the sector

So according to these surveys there was a clear deflationary impact from Demonetisation leading to this.

Nikkei India Composite PMI Output Index dipped from October’s 45-month high of 55.4 to 49.1 in November, thereby pointing to a slight contraction in private sector activity overall.

There were hopes for this to be short-lived back then but for now those seem more to be of the Hopium variety.

A response?

Well if Prime Minister Modi was watching the cricket he may have thought of mimicking England and the UK as he has announced a pumping up of the housing market. From dnaindia.

In a bid to boost rural and urban housing post demonetization, Prime Minister Narendra Modi on Saturday announced interest subsidy of up to 4% on loans taken in the new year under the Pradhan Mantri Awaas Yojana.

Bank of England Governor Mark Carney hasn’t been to India has he? Anyway I do hope that the next bit actually happens unlike in the UK where we seem to announce the Ebbsfleet development every year like it is in a Star Trek style time warp.

Announcing a slew of measures, Modi in his national address on New Year’s eve also said 33% more homes will be built for the poor under this scheme in rural areas.

I wish India better luck than the UK where schemes under the official label of “Help” have in fact contributed to house prices becoming ever more unaffordable for those wishing to get on what is called the housing ladder.

What about other credit?

According to Gadfly of Bloomberg the banks are now awash with cash.

Almost all the 15.44 trillion rupees ($227 billion) of currency outlawed by Prime Minister Narendra Modi has entered banks as deposits, with the biggest, State Bank of India, receiving $24 billion. This “unprecedented” surge in liquidity led SBI to cut lending rates by 90 basis points on Sunday. Other government-run banks followed suit.

But in a familiar trend for the credit crunch era businesses do not seem to be that keen on borrowing more.

The average daily value of new investment proposals announced since the cash ban has slumped by three-fifths, according to the Centre for Monitoring Indian Economy.

In fact a consequence of the economic weakness following Demonetisation is that both companies and individuals in India are less able to borrow.

Supply chains greased by cash payments are broken. From diamond-polishing to shoemaking and construction, layoffs are increasing. As borrowers, both the average Indian worker and his employer are much more subprime today than they were just two months ago. Using this group to pull up credit growth, which has plunged to a 25-year low of 5.8 percent, is both impractical and risky.

Whilst in terms of deposits the Indian banks are in the opposite situation to Monte Paschi of Italy they too have capital issues. This may explain the problem with business lending which invariably ties up more bank capital than other forms of bank lending.

The Real Economy

If we move to actual experiences we see signs of trouble, trouble,trouble as India Spend reports.

Now, the government’s decision to withdraw Rs 14 lakh crore–86% in value of India’s currency in circulation–has dealt a hard blow to 80,000 workers, whose economy was defined by cash. Before notebandi, despite a growing downturn, the town soldiered on.

This is the town of Malegaon which has an economy based on the power-loom industry which has gone on a 3 day week.

In the weeks following demonetisation, power looms, known to work 16-18 hours in a day for six days a week, were working only three days a week–Saturday, Sunday and Monday–halving the wages of thousands of workers.


Why? Well here it is.

Most of the transactions in the power-loom sector are in cash–power loom owners buy raw material in cash, disburse wages in cash, and  sell in cash.

Thus we see how the problem feeds through the economic chain in what is a clear government driven credit crunch which hits weak industries like this one the hardest. Even more sadly the same is true of people. From @bexsaldanha.

“Business is down so we work on the farm more,” Megha Patil, Hivali village, Bhiwandi Taluka

Goods supplier Santosh Jadhav: From Wada to Vikramgad, supply chain to 203 Kiranas has broken down. Nobody has money.


There are obvious issues with the unofficial economy in India and attempts to reduce it are welcome. Except in any move you need to look at the likely side-effects and these were always going to be large from removing over 80% of the cash money in circulation. I warned about the problems back on November 11th.

I remember watching the excellent BBC 4 documentaries on the Indian railway system and the ( often poor) black market sellers on the trains saw arrest as simply a cost of business. Will this be the same? Also there is the issue of whether it will all just start up again with the new 2000 Rupee notes.

We can expect the traditional Indian love of gold to be boosted by this and maybe also non-government electronic money like Bitcoin.

Actually the gold trade has not been boosted and as The Times of India points out there is more than a little irony in the reason why.

“The business was down by more than 70% in December, primarily because of the cash crunch and weakened purchasing power of consumers and investors. Many don’t still invest in gold except for by cash transactions. Besides, the liquidity crunch is also impacting trade,” said Shanti Patel, president, Gems and Jewellery Trade Council.

So whilst very little is easy in a country where changes are even harder than turning an oil supertanker but so far the message is not good.

Number Crunching

We learn from the table below that Helicopter Money would be much easier for the Swiss Air Force than the Indian one.





15 thoughts on “The Demonetisation saga in India rolls on and on

  1. This must really stick in the Indians’ crore…

    Nice to get the new year off with an appalling pun Shaun, but very much looking forward to your commentary on the events of 2017. Who knows what it holds, but we can be sure it’ll be a bumpy ride.

    Best wishes all,


  2. It’s pretty much a self-inflicted economic crisis. It was probably on the cards anyways… Indians must be feeling the hard bite….

  3. hello Shaun,

    Happy new year to you and all your readers

    So is this India debacle a prime example of incompetence ?

    when you think of the ways you could have achieved the intended result it makes you wonder

    perhaps the intention was to boost the economy by making everyone spend spend spend?

    backfired then if that was the case.

    So a blue print for what not to do , like Cyprus (!!)

    makes you wonder what other blunders our illustrious leaders have planned
    ( planned ? or panic ? )


    • “So a blue print for what not to do , like Cyprus (!!)”

      Unfortunately the UK is infamous for copying the worst examples of what not to do. The most recent example was swervin Mervyn going to Japan in 2008 to learn how not to handle a credit crunch and then promptly copied everything Japan did despite the testament to their failure of a lost decade (now 2 decades).

      I worry that the UK establishment will now be watching India closely and scurrying around making copious notes ready for when it’s the UK’s turn!!

  4. Happy New Year, Shaun and off to a good blog here!
    Does no-one actually sit down and think things through at a political level when deciding on economic policies such as removing most of the currency from a largely cash-based economy? I am sorry, but it seems pretty obvious to an uninformed outsider that, if you take out most of the cash, there will be collateral damage and not just a reduction in crime.
    The next thing that you will be telling me is that a set of politicians decide to merge their currencies without a fiscal or banking union or have I overstepped the mark in improbability there?

  5. Hi Shaun,

    Its great that you raise this story since, I like many others can’t help but think we too will get some ill-judged monetary experiment in the UK, probably not too shortly it USA pushes their rates up to 3%. I work with Indians each day, Tata Consultancy employees and I have challenged them about this carry-on, at the start they were sure that it was a good thing, black-market abuse etc, some even revealed that their wives back home had found themselves “fessing-up” to having wads of cash that was formerly un-known. I shall ask them again now, some have been home for the break so I might get a useful update.

    Paul C.

    • Hi Paul C

      I agree with both the issue ( corruption) and the size of it. This meant that something needed to be done. But this methodology brings so many problems with it especially for the poor. Why not use the legal system and start from the top?

      You see if the country is so corrupt that the legal system and police cannot be relied on won’t it all start again with the new notes?

      • This is part of a wider problem for politicians, namely that they cannot rely on the levers of the past to do their bidding. This seems to apply to:
        1. Corruption, as you say, where new rules will simply not be enforced;
        2. Interest rates;
        3. QE.
        They must look back fondly to the times when a boom was calmed by interest rate rises and a bust was helped by interest rate falls. Exports in theory responded to currency exchange rates. A golden era of things working (or so it must look like to them) has been replaced by coercive measures such as negative interest rates, confiscation of cash.
        My belief is that not a single politician or central banker has the faintest idea as to how we get back to “normal”, ie get rid of QE/reverse it, tax banks on their profits rather than bail them out or fine them for misdemeanours and achieve “normal” interest rates to reward savers and stave off potential inflation.

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