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Government of India vide their Notification no. 2652 dated November 8, 2016 have withdrawn the Legal Tender status of ` 500 and ` 1,000 denominations of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India till November 8,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

Manufacturing

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.

Comment

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.

https://twitter.com/BTabrum/status/816208447846907904

 

 

 

 

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.

Ch-ch-changes

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.

Sweden

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?

Comment

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.

The war on cash continues

A feature of recent times has been the way that those in authority are becoming more authoritarian. This has come as a by-product of the fact that there has been more central planning often by central banks. The catch has come that in spite of an enormous amount of what was called extraordinary monetary action which now feels normal we are still struggling with the consequences of the credit crunch and seem unable to reach the “escape velocity” promised by the Governor of the Bank of England Mark Carney. Economic growth does not seem to be what it used to be does it?

On that road the central bankers promised success first from interest-rate cuts and then from bond buying or QE (Quantitative Easing) and more recently for even lower and negative interest-rates. That posed its own problems as of course the “innovation” of Forward Guidance had left them promising interest-rate rises but in the case of Governor Carney then delivering a Bank Rate cut whilst promising later cuts. This moved ever more central banks on the edge of or actually in the world of negative interest-rates or what has become known as NIRP (P=Policy). This then led to fear from the central planners as bank notes or cash offer 0% ( if you ignore storage costs and the like) and as official interest-rates go ever lower central banks are afraid that they will lose what power they have if people switch to cash on a large-scale. It would also be quite an own goal by the central planners as the use of electronic methods of payment has made like simpler and more efficient. In other words another possible side-effect for them to look at “another time” when they write self-congratulatory working papers.

More interest-rate cuts remain the recipe

You might think that after so many interest-rate cuts there would be the realisation that the medicine is not working yet instead we see this. From the IMF about Switzerland.

Calibrating the negative interest rate differential so as to discourage persistent inflows that can cause prolonged deflation and weaken activity is appropriate.

Translating that into English means that the next time the Swiss Franc comes under upwards pressure interest-rates should be cut below the present -0.75%. Also the Riksbank in Sweden seems to have come to that conclusion itself as we note this from it.

The Executive Board were unanimous that the repo rate should be held unchanged at –0.50 per cent and assessed that it needed to remain at this level for six months longer than was forecast in September. The probability of the repo rate being cut further has also increased.

That would be intriguing as you see Sweden is perhaps the country which has advanced the most in terms of electronic payments and so a “dash for cash” would be especially destabilising.

Back on the 5th of May I pointed out that the ECB was planning to scrap the 500 Euro note and that the Financial Times was rushing to support the establishment line.

The use of high-denomination notes, in particular the €500 note, is a problem reported by law enforcement authorities,” according to a draft of the plans seen by the Financial Times. “These notes are in high demand among criminal elements . . . due to their high value and low volume.”

It then went on about “gangsters” and “Greek savers” but seemed unaware that the German Bundesbank was not a fan.

There is scant concrete information on the extent to which cash is being used to facilitate illicit activity

Back in February Larry Summers was on the case in the Washington Post.

It’s time to kill the $100 bill

As a side-effect Larry seems to be keen on some weight-training.

a million dollars weighs 2.2 pounds as with the 500 euro note rather than more than 50 pounds as would be the case if the $20 bill was the high denomination note.

US $20 bill as the highest denomination Larry? I have also just been contacted on Twitter by @PeterWarne29 who apparently was watching a chess show yesterday and saw the high priest of this movement Kenneth Rogoff come on and say that high-value notes were used by criminals and tax-evaders. How very Orwellian or perhaps just a bad dream or of course both!

The disappearing 500 and 1000 Rupee Note

From the Reserve Bank of India on Tuesday.

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.

So in terms of South Park “It’s Gone”  and this does matter because most Indian cash money was in these two notes. It came with something also a bit chilling.

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

Although it was a public holiday even so it makes you think. Even now there are limits.

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.

Today’s press release tells us everything is fine.

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.

Although we may need a financial lexicon for these times version of the concept of fine.

As mentioned in RBI communications, it may take a while for the banks to recalibrate their ATMs; once the ATMs are functional, members of public will be able to withdraw from ATMs upto a maximum of ₹ 2,000 per card per day up to November 18, 2016;

How is it going?

Just for clarity those are not pictures of the queue to get into the England versus India Test Match to watch Virat Kohli bat. The banks have been told to open over the weekend.

Also there is this from the same source.

Maharashtra: Temples sealing donation boxes in Marathwada region so that people don’t try to donate their black money after

Comment

There is much to consider in India’s move and let me open with a difference from elsewhere. It has just offered a fixed-rate repo at an interest-rate of 6.25% so we are a long way from NIRP or even ZIRP. With the problems of corruption and tax-evasion in India I am sure there is a fair bit of truth in this from the RBI.

This is necessitated to tackle counterfeiting Indian banknotes, to effectively nullify black money hoarded in cash and curb funding of terrorism with fake notes.

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. There is an immediate catch in that if the black economy is the size we are told it is then the gain is minor but perhaps I should not be too churlish. However there are clear side-effects as the picture above shows and the Financial Times has pointed out.

It has made it harder to buy vegetables and rice, and hire rickshaws. And, for hundreds of millions of Indians who work in the informal economy, it has brought commerce to a halt. If there is a well-laid plan to mitigate the impact of this surprise crackdown on “black money”, it has yet to reach rural parts, where few Indians have bank accounts or credit cards.

Not much sign of a boost to GDP there! Also are some of those who should be caught able to slip and slide away?

The poor are hit far harder than the rich, who have credit cards and live in places where shops accept them.

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. Meanwhile here is a light-hearted suggestion for UK bank notes in the future, it is a joke right?