Rs 500, Rs 1,000 note ban: Two men die trying to exchange old notes, majority ATMs remain shut

HomeEconomy Rs 500, Rs 1,000 notes ban: While India plugs black money holes, Indians find leaks Rs 500, Rs 1,000 notes ban: While India plugs black money holes, Indians find leaks Indians are inventing ingenious ways to try and hide their money from the tax inspector, as the government attempts to flush out vast undeclared wealth by abolishing high denomination bank notes. By: Reuters | Mumbai | Updated: November 11, 2016 10:48 PM A man displays the new 2000 Indian rupee banknotes after withdrawing them from State Bank of India in Agartala. (Reuters) A man displays the new 2000 Indian rupee banknotes after withdrawing them from State Bank of India in Agartala. (Reuters) Indians are inventing ingenious ways to try and hide their money from the tax inspector, as the government attempts to flush out vast undeclared wealth by abolishing high denomination bank notes.

The shock announcement by Prime Minister Narendra Modi on Tuesday gave people only a few hours to spend or deposit 500 and 1,000 rupee bills before they were abolished, although plans are in place to allow a more gradual conversion to new notes. Those plans involve depositing old bills in bank accounts, however, where they can be seen and analysed, and, as millions of Indians scramble to convert savings using this method, some with piles of so-called “black money” are looking for loopholes. Retailers and wedding planners say they have been inundated with frantic calls from people looking to bring forward large-item purchases from anyone willing to accept the old notes. In Mumbai, a senior marketing executive at an event management company that organises large weddings has witnessed the scramble, and said his firm was debating whether to accept payment in the old money. Like many others, he was unwilling to be quoted by name when discussing his customers’ requests. “It has been a stressful day. Wedding clients are going mad,” he said this week. “One client called and said ‘I’ll give you 30 million rupees ($450,000) in (old) 1,000 rupee notes.’ There is loads of black money.” That amount is not unusual for a wealthy Indian family’s wedding celebrations. Others are looking to line up friends, domestic staff, and even senior citizens who are prepared to legally exchange the cash in small enough chunks to avoid scrutiny from banks. Simply stepping forward and declaring the money is not an appealing option for tax dodgers, as banks have to report to tax authorities anybody depositing over 250,000 rupees ($3,765). Being found to be holding undeclared cash can lead to a penalty of 200 percent of the tax owed. TRAIN TICKETS

Other unusual methods of exchanging cash are appearing on social media. One tweet described how people were paying agents for expensive first-class train tickets with old bills and then cancelling them later to get reimbursed in new notes, all in order to get around the tax man. State-run Indian Railways was one of the few places still allowed to accept the old notes until Friday. Anil Kumar Saxena, spokesman for Indian Railways, said ticket purchases for first class, air-conditioned compartments, the most expensive category, had surged. “We usually sell about 2,000 tickets every day,” he said. The day after the demonetization measures were announced, that rose to 27,000, Saxena added. Officials have caught on to some schemes. The railways will refund tickets worth over 10,000 rupees booked on November 9, 10, and 11, but not in cash.

“It will be done by cheque, or electronically,” Saxena said. A jeweller in Mumbai said he stopped accepting cash payments after someone he believed to be a revenue official lingered outside his shop. Jewellers stayed open into the early hours of Wednesday, and one well-placed industry source in Mumbai estimated that about 250 kg of gold, worth an estimated 750 million rupees at spot prices, was sold in the city within a few hours of the ban. The source said jewellers were paid anywhere between 20 and 65 percent above the going rate by buyers snapping up the precious metal with old notes. Meenakshi Goswami, Commissioner of Income Tax, underlined how hard it was for the authorities to detect such activity. “I’m not aware of anything going on,” she told Reuters. “But (the) income tax (department) can’t be sitting in the marketplace unless there is a specific complaint.” SHADY ECONOMY The problem of the shadow, or “black” economy in India is pernicious. Transactions that take place outside formal channels amounts to around 20 percent of India’s annual $2 trillion gross domestic product, according to investment firm Ambit. Shrinking it is a major objective for Modi, who is trying to get more money into tax coffers. India’s tax revenue as a percentage of its GDP was 16.7 percent in 2016, compared with 25.4 percent in the United States and 30.3 percent in Japan.

Macquarie estimated the government could raise $30 billion in additional tax revenues from its scheme to withdraw higher-denominated bills, enough to significantly reduce India’s fiscal deficit, which in the previous year stood at around $80 billion. Modi’s administration also implemented a tax amnesty scheme that brought in nearly $10 billion in undeclared income, while regulators are also trying to target unreported accounts overseas. Bringing money into the legal economy without declaring it is proving tough. A senior citizen in Mumbai with around 500,000 rupees in undeclared cash told Reuters she split up the amount and opened bank accounts for four of her domestic workers. Others say they are asking cousins, employees, and senior citizens for help to exchange the cash in the hope that it attracts less attention. “For smaller sums, there are ways to change the money,” a partner at an investment firm told Reuters. “But for large amounts, like 400 million (rupees) and up? I’ve tried looking. I have not found a way. Modi really is serious about black money.”

One of the major criticisms it has faced is that it has mixed up domestic black money and illicit money kept in tax havens abroad by Indians. These two need to be dealt with in different ways. Some part of the domestic black money is used in productive activities like real estate, trade, construction, mining, transport, restaurants and other businesses. The illicit money kept in tax havens abroad is, by and large, not used for domestic purposes unless it is round-tripped through share markets or foreign direct investment (FDI) to domestic operations. Domestic black money is a no-confidence motion on the government of India while illicit money kept abroad is a no-confidence vote on India itself - its stability and its people. Domestic black money is primarily dependent on the cash economy and tries to avoid formal transactions through banks due to fear of being captured by electronic systems and the tax authorities. So the holding of black money is usually in the form of cash and transactions undertaken in cash. This implies that substantial portions have to be kept in high denominational currency, since storing or carrying huge quantities of cash in small denominations is relatively difficult. Another issue about holding cash in our context is this. The black money report says: "As of now there are no legal restrictions to keeping very large amounts of cash with oneself or transporting it from one place to another. One is neither required to report it nor provide any explanation for it. There have been suggestions that the government may consider amending existing laws, including the Coinage Act, 2011, the Reserve Bank of India Act, 1934, FEMA, and the Indian Penal Code, or enacting an entirely new statute aimed at regulating the possession and transportation of cash above a particular threshold limit. This may include creating a limitation on cash holdings for private use, as well as provisions for confiscation of cash held beyond such prescribed limits. However, such laws need a broader political consensus to emerge for their acceptance in Parliament." We find that political parties do disburse cash to voters prior to elections and for which a huge amount of cash is held and transported from one location to another. For instance, one report suggests that in the recent Andhra Pradesh byelections cash valued at as high as Rs 32 crore was

seized prior to the polls. These were presumably meant for distribution to voters. An earlier report pertaining to last year's elections in Tamil Nadu suggested that Rs 24 crore in cash was seized by election officials. There are many other reports which give us a clue that cash is held and transported in huge quantities not only for bribery at elections, but for other black money transactions. It is important that we bring in the necessary changes in the Coinage Act, 2011, and other relevant acts to make holding of cash above a threshold level, say Rs 10 lakh, punishable. This threshold can be arrived at by the Reserve Bank after taking into account the requirements for genuine cash transactions in the economy like marriage and religious ceremonies, wage disbursals in construction activities, etc. This limit should not be applicable to obviously banking institutions and corporates having construction/project activities where substantial amounts of cash disbursals take place. In developed economies like the US, there are no restrictions per se in terms of holding or transporting cash domestically, unless it is suspected to be drug money. Even there, transactions beyond $10,000 in cash are expected to be notified to the Internal Revenue Service (IRS) by shops and establishments. Of course, there are restrictions on the amount of dollars one can transport during immigration/emigration. But since the US is a well developed economy, most of the transactions are conducted through plastic cards or banking channels. In our country, cash transactions are more to avoid taxes and generate black money. The higher the denomination, the easier it is to transact and transport. Taking into account our situation, we should evolve laws to prohibit the holding of cash beyond a threshold level and this will go a long way in preventing disbursals for black transactions.

These two steps - demonetising Rs 500 and Rs 1,000 currency notes and creating a threshold limit for cash holdings - will facilitate a reduction in domestic black money transactions. These decisions will not eliminate domestic black money, but will help reduce it to some extent. Probity in public life comes in an incremental fashion since we have reached the nadir. Are our parliamentarians and other opinion makers ready for at least incremental steps to reduce domestic black money? Rs 500, Rs 1,000 note ban: Two men die trying to exchange old notes, majority ATMs remain shut Four days after Prime Minister Narendra announced the demonetisation of Rs 500 and Rs 1,000 notes, the rush to exchange old notes claimed two lives on Friday. Two men have reportedly died in separate instances across the country due to the difficulties posed by the sudden demonetisation of high currency notes on Tuesday. According to reports, a 73-year-old man died of heart attack in Mulund, whereas a 48-year-old man fell off from the second floor of a bank in Kerala while trying to deposit old notes. As reported in Zee News and Maharashtra Times, 73- year old Vishwas Vartak was standing in a queue outside a bank in Hari Om Nagar in Mulund when he was seized by a heart attack that caused his death. The elderly man had been standing in the queue for 30 minutes to exchange the currency notes when the incident took place, the report said. Though he was rushed to hospital by some people who saw him collapse, he was declared dead before admission, police said. Allegedly, ATMs of various banks in south Mumbai, Lalbaugh, Parel, Dadar, Andheri, Ghatkopar and Mulund were found to be out of service and not dispensing money, forcing people to return empty-handed. A 48-year-old man, who came to deposit Rs five lakh worth of scrapped high denomination notes in a bank in Thalassery, Kerala, died after he fell down from the second floor of the building on Friday. Unni, a Kerala State Electricity Board employee, was filling the necessary forms to deposit the amount in a State Bank of Travancore's branch, located in the first floor when the mishap occurred, the Police told PTI, quoting preliminary information. He had unsuccessfully tried to deposit the notes on Thursday and had come to the bank again in the morning. Meanwhile, there have been reports of bank branches and post offices all over Punjab, Haryana and Chandigarh that have witnessed serpentine queues of customers for the second successive day on Friday, waiting to get the new denomination currency. Prime Minister Narendra Modi had announced demonetisation of old Rs 500 and Rs 1,000 notes on Tuesday night in order to curb black money, counterfeit currency, corruption and terror financing. The banks had remained on Wednesday, and opened on Thursday allowing people to exchange notes of old denominations and deposit it in their accounts. All ATMs were shut on Wednesday and Thursday to help banks re-fill them reload cash, and were supposed to open on Friday. Despite that a large number of ATMs continued to remain closed due to non-availability of cash. And the cash in few ATMs, which were filled up on Friday, exhausted soon due to hordes of people trying to get cash, PTI reported. People could withdraw only up to Rs 2000 from the ATMs which worked. Those who had got exchange of Rs 4,000 on Thursday, in the denomination of Rs 2,000 currency notes also faced harassment as the notes were not being accepted by vendors, traders and shopkeepers in the absence of small denomination notes with them for the return of balance. On Friday, several banks were offering only Rs 2,000 currency notes due to unavailability of notes of lower denominations. Some banks, however, distributed only Rs 100 denomination notes and the queues outside such banks got significantly longer due to easy exchangeability of Rs 100 notes at various shops and commercial establishments. The customers, including women, started reaching bank branches and ATMs early in the morning as they were facing problems in purchasing day to day items, including vegetables and milk. Heated exchanges were on at various branches with people stopping those trying to jump the queue. Additional counters opened by various banks also failed to mitigate the sufferings of the people. In what people are already calling a historic move, Prime Minister Narendra Modi today announced the demonetization of Rs 500 and Rs 1000 currency notes.

First, people who have a lot of cash, legally earned, will deposit it in the bank. This will increase bank’s deposits by a huge margin. This will also increase the lending activity because banks have a CRR (cash reserve ratio) to maintain and with more deposits they can do more lending. Credit (loans) will become easier and interest rates may come down. More loans given out increases broad money supply and creates inflation. But this will happen slowly, not over-night. What will happen over-night is heavy deflation. Because people who have illegally earned this money may be afraid to deposit it in a bank. There are people with crores of cash, black money, earned through illegal ways, such as corruption, smuggling etc. How ‘black money’ keeps an economy from flourishing Some of these guys will try to find this money into a bank, but they have to declare it as income and pay taxes on it. Then the question arises - how did they make this income in the first place. Most of these guys will chicken out, count their blessings and just waste the money they have stashed somewhere in Rs.500 and Rs.1000 notes. This will reduce the total currency circulation in the economy - leading to deflation. Deflation increases the value of money that we have because the total money supply goes down but the commodities and things available in the market have not gone down. [Example] If there are 100 widgets and 100 coins, each widget's value would be Rs.1. If there are 100 widgets and only 50 coins, each widget would cost Rs.0.50 only. Which means with each coin, you can buy 2 widgets. The inflation and deflation will balance out each other on some level. But it is going to take some time for the inflation to happen because lending activities do not happen over night. Deflation will happen first, for the next 6 months to 1 year. Gold prices will drop, stocks & commodities will drop. Everyone will get excited and congratulate the government for making this move. Then slowly, as lending activity goes up, the broad money supply will go up and prices of all things would go up, slowly and steadily.

Now no one can predict the extent of the deflation and inflation. In an ideal world, if 100% of the people who have Rs.500 and Rs.1000 notes have it as white money, then we would see only inflation. If a lot of these are black money and if many people decide to waste the money instead of depositing it, then we will have deflation in the short term. If you see heavy deflation and heavy drop in prices, then it means that India has a lot of corrupt people who earned money in illegal ways, too afraid to deposit the money in a bank! And my gut feeling says that we would see heavy deflation in the next 6 months. If you bet on this, then buy gold, stocks of asset-heavy companies. Related read: Social media abuzz with talk of ‘NGC chip’ that makes new Rs 2,000 note ‘trackable’ What about Real estate? It would crash slowly and recover quickly. That's because, in real estate, there is no index price like gold and it is fixed by the market in a demand-supply balance. Let's say I have a real estate plot - a 40 x 60 plot which I bought for 1 crore a year back. Let's the say market value of it until yesterday was 1.5 crores. I would still think that the value of it would be 1.5 crores and I wouldn't sell it for less than that. But if I want to sell it because I need money, I wouldn't get a buyer immediately. Because most buyers in real estate are doing the transactions in black money. Potential buyers would tell me that they don't have 1.5 crores in white money, so they will not be able to buy it. With less potential buyers in the market and fewer people having white money, the demand for the land goes down and drives down its price. If I yield and sell it for 1.2 crores, I am driving down the market price in the entire locality. Read more: What do Industry veterans have to say after PM Modi’s demonetization move?

Real estate crash will happen slowly because people will yield to the pressure slowly and start selling at lower prices because suddenly the pool of potential buyers have gone down. I predict that real estate prices would dip to lowest by end of 2017 and then start moving up again as inflation catches up. [Currencies, inflation, deflation, payments and banking is a very interesting subject for me and I have read a lot of books on this topic. This is just my opinion, but I am bold enough to share this in the public domain. However, I may be wrong. Let's see how this pans out. Today is an iconic day in India's journey. History in the making. Nov 8th 2016! This would be a day to remember.]