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Black Money Is Dead. Long Live Black Money. (The 500/1000 Rs. Note Ban)


Rupee Note Bundles

Image from

The RBI and the government have removed Rs. 500 and Rs. 1000 notes from the economy as legal tender. Meaning, if you have it, you have to go exchange it for cash or deposit it in a bank.

This is a huge huge deal. These notes have been a problem because of a) counterfeiting by Pakistan-based terrorists and b) hoarding of these notes by people who don’t pay taxes or declare it as income.

Let’s get into the opinion piece later. For the record, I think it will do our economy well in the longer term. But first, what is the deal? (See RBI FAQ)

  1. Rs. 500 and Rs. 1000 notes are no longer valid. It’s over folks.
  2. If you have these notes, you can exchange them for either smaller notes at banks (or post offices or RBI offices) or deposit them into your accounts.
  3. But not tomorrow. Nov 9 is a bank and ATM holiday. Because they need to refill them with notes.
  4. Can you exchange as many notes in as you want? Yes. But only Rs. 4,000 will be given to you in new notes – the rest goes to your bank account.
  5. Up to Rs. 4,000 can be converted using an ID proof. For more, you’ll need to put money into your account.
  6. ATMs need to be refueled. So, till Nov 18, you can only draw Rs. 2,000 per day. This goes up to Rs. 4,000 per day after that.
  7. Till Nov 24, you are limited to Rs. 10,000 per day of cash withdrawal (through a self-cheque or such) and Rs. 20,000 per week (including ATM withdrawals).
  8. Exchanges can be done Till Dec 30 at banks. After that, you have to visit a RBI office.

This is not about cashless transactions. There are Rs. 2000 and Rs. 500 notes, New!

This is not an attack on cash. There will be new Rs. 500 notes. And a new Rs. 2,000 note. (Which is not going to be tracked by satellite, so don’t believe the WhatsApp rumors) So if you think about a vegetable seller, after a couple days of inconvenience, he will accept the new notes and give you change just like earlier. The cash economy continues.
The new notes will slowly get into the economy, and while they do so there will be periods of heavy demand, but it won’t change things after a while.
This is not going to change things for people who deal only in cash. They will continue to do so. This will not bring everyone into a “cashless” payment system. Cashless is only for the elite right now, and it will remain an elite thing until we get the education thing better and far far better fraud protection. People use cash because they hate it when bankers won’t treat them like humans and won’t tell them what happened to their money – and only the elite get treated better. So let’s zip up until the RBI creates massive penalties for banks mishandling people’s money – and if RBI does that, most of the banking system will fail because they just will not bother to care. People won’t go cashless, and not due to this change – at best, they will move to gold.
Black money gets reset to near zero, since if you have large swathes of cash, you can’t really do much. So the black money person will probably pay with a huge discount to a dealer or jeweler to exchange for new notes.
But Black Money will start again. Once the new notes are in, cash generation continues. More black money will be generated, supported by a new Rs. 2,000 note to store it in. When the king dies, the next heir is immediately the new king. So the saying goes, and you have to say it fast, “The King is Dead. Long Live The King”. We’re just going to replace “King” with “Black money”.
The people that are hurt the most are the people with massive cash hoards. The image above has probably around Rs. 50 lakh in cash in bundles. And those are Rs. 500 notes – with Rs. 1000 notes, a similar number of bundles is Rs. 1 cr. All this would fit in a bag that you use to carry vegetables. And people have cupboards and mattresses full of them. They are gonna hurt big time. And it probably serves them right.

What happens to the market?

The general feeling is that real estate is screwed. Of course, it is. Much of the transactions are paid for in cash, at least 30%. That part will change but painfully. A house that is registered for Rs. 70 lakh and whose market value is Rs. 1 crore, will now be difficult to sell at Rs. 1 crore. because no one has the Rs. 30 lakh in cash to pay extra. Housing prices are more likely to drop because the cash component is gone.
And that will hurt the housing ancillaries. Like Tiles. People pay for tiles and furnishings in cash, except in large cities. For that, you need a reasonable cash hoard. If you have a reasonable cash hoard, you’re probably screwed. So you won’t buy the tiles, and that will crimp business. Tiles, paint, furnishings, pipes, carpets etc – all of these industries will hurt in the short term.
Also, we will see an impact on housing finance companies and even banks. A real estate crash will hurt them – they have lent Rs. 800,000 crores to housing (If housing prices fall, there will be defaults).
The overall economy gets hurt too. People that hoard cash also spend cash. They won’t now because they’ll run scared – since their money is no longer legal tender. Traders won’t have liquidity to buy stuff (if they bought earlier in cash) and that will create shortages – and thus, lower spending. The cash economy probably accounts for at least 20% of GDP, which is about 30 trillion rupees (or Rs. 30 lakh crores). There is only Rs. 17 lakh crores in cash, but it rotates a lot within the system. This is about Rs. 2.5 lakh crores of GDP per month in cash. Even a small percentage impact – even 10% – will have a large impact, relatively speaking.
Gold is likely to go up, because hey, we don’t trust the currency, remember?

The Positives

But overall, the impact is hugely positive in the long term. We deserve a market correction anyway. And real estate deserves to come down substantially. We also deserve a slowdown in terms of a recession, and this might just help trigger it.
But as we come out of it, we’ll have a more organized system – lesser black money hoards out there (though it will continue to build up). The same banks that hurt due to an RE bust will be stronger because some of the black money will come back in as bank deposits and strengthen their CASA. The government will probably collect some tax from cash undeclared earlier, which will help in terms of the Govt. not imposing even more taxes on the rest of us. Lastly, honest taxpayers will feel vindicated.
Cutting black money helps in general, as money isn’t locked in mattresses and the relative business advantage of not paying tax carries a huge risk of losing all of the money. It will also help with removing counterfeit notes, in the near term.
Also, what is positive is that on a day like this, we don’t give a damn about Donald Trump or Hilary Clinton.
Lots more action to come, but ask us your questions!

  • Mike says:

    Nice analysis! Why do you say that black money will live again, after some time with the new notes? This time around at least the govt will be able to track all the money right? So theoretically it won’t be black any more…

    • Er…not sure how the governemnt can track it. It will be lumpy and in hajaar people’s hands etc. Once it becomes currency, its untraceable – try writing something on a note and figureing out where the note has gone 🙂

  • Apoorva says:

    Thanks Deepak well articulated. A question, or rather a scenario: what do you think happens to the person with (say) 10 crores in cash lying in his house. This will go worthless in 50 days, bringing it to a bank is not a viable option as all of this is ill-gotten. Will this person buy luxury items? Gold? Will retailers accept his cash even though it’s no longer legal tender? At a huge discount if they do? I suppose what I’m asking is that a 1000 rupee note was worth a 1000 yesterday. What is it worth today? 900? 500?

  • dsy says:

    an engineered recession? what can go wrong, eh? this might affect the demand side for real estate by keeping cash transactions out. real estate prices are not just demand side alone. the supply side needs huge reforms. right to property needs to be back as a fundamental right to even begin thinking of making useful impact.

  • dsy says:

    corruption has never been reduced in the basket case countries like argentina and brazil where such actions have been carried out before. black money is caused because babus and netas have discretionary power over economic transactions. since that part is not addressed at all, we can be confident that other avenues of hoarding illegally obtained money will arise. no developed country has ever had to deal with it.
    georgia – an ex soviet corrupt country has shot up the ranks of transparency and economic freedom in the last few years under sakhasvili, and no, he didnt have to do this idiocy

  • Ro says:

    So will vendors who pay tax won’t mind coming the increased cash flow say till Dec end? .. They can always deposit. Will there be increase in consumption of high value items? Or even Money laundering?

  • Sanjeev B says:

    Thanks for the quick analysis Deepak, really appreciate it.
    Do you think services will become more expensive? Travel, transport, health, food, entertainment, personal services are all paid mostly by cash. In many cases the sellers do not account for these and do not pay the service tax. If they get nervous and register for service tax (which is good), will there be a significant increase in the prices for these services?

  • Anand M says:

    Black money lying with the corrupt likely gets reset to near zero, This means earnings growth rate in the coming years will need to be higher => this could also mean the poor common man paying more bribes 🙂

  • kar says:

    One of my friend sold his land to a good amount.. registered the value for less(as it is normal practice). Now has cash in hand (nearly 20 lakh) for his daughter marriage. What can he do? Please suggest any way out… Should he pay 200% fine

  • Manickkam says:

    Nice analysis. Real estate will see a big hit as it is one of the biggest industry living on black money. People who have recently sold also will not be able to invest that additional black money that they got.
    As you said, this will come back again (slowly/quickly based on the further policies after first 30 days) based on the per day limit provided to withdraw for a person. As everything is white money now, it has to be withdrawn and given to a person who has intentions to have it black money and the black money will continue.
    What are your thoughts on curbing the black money from thriving again?
    Do you expect the real estate sellers to sell for the registered value as white money in the next 3 months, if he is dire need of money.
    Already, there are developers who can build Joint venture and convert the demanded money into couple of flats and register the flats and get legal white money and continue to thrive in the same way. These people will have a problem when they are buying things in cash using their own black money until now.

    • Black money will continue to thrive. If you eat at a small hotel and pay in cash, do you expect that because of the notes thing, the person will start declaring him income? Ha!
      The RE bill will do more for destroying RE black money; but the biggest black is in land deals where developers are not involved. Eventually this has to be done by putting big people in jail. Then the RE thing will unravel.

  • lohit says:

    >We also deserve a slowdown in terms of a recession, and this might just help trigger it.
    Can you explain this ‘deserve’ part further? Even before the demonetization, the country was already hurting due to slowdown. Low credit growth, IT sector slowing down, RE sales/construction slow or non-existent. Why do we deserve more ?

  • Deep says:

    Really.Most of black money is held as gold,real estates and foreign holdings.At most 5% will get accounted for by this move.This whole exercise is another gimmick.

  • Ashvc says:

    Very well explained. Thanks! With regards to your comment about black money thriving again, won’t the IT department be tracking high value transactions like gold purchases, flat purchases, cash withdrawals, cash deposits etc. going forward. There have been TDS & TCS introduced across these transactions and hence I reckon it will become difficult for large amounts of black money to be generated again. Hope what I am thinking is right and these hoarders will not be able to get away again.

  • chalam says:

    Does banning 500 and 1000 rupees notes really help Indian economy and common man..?
    I really don’t understand how does this less black money will help common man…
    Most of the people who have huge black money, have it in the form of gold and Land and foreign investments and banks. I hope there is very less black money in the form of cash. If anybody has black money as cash, they are mostly business people and they show it as business transaction; or they buy poor men to deposit into their accounts.
    I have few doubts.
    You have mentioned in your post that – cash economy accounts for at least 20% of GDP, which is about 30 trillion rupees (or Rs. 30 lakh crores), does it includes deposit in banks, digital wallets, ATM withdrawals e.t.c..?
    Say I need 1 lakh as digital cash; when my digital cash in my accounts is zero, then I have three ways to get digital cash. 1) deposit 1 lakh to bank and get 1 lakh digital cash 2) pay 1 lakh to somebody and ask them to do a net transfer to your account. 3) sell goods worth 1 lakh and ask the buyer to pay through card. In 1st two ways, I am buying digital cash by paying printed cash. I think you need to account it for Cash economy. In third way if you have bought the goods with digital cash and selling it for digital cash then we can account it for digital economy. But if you are buying with cash and selling for digital then hope we cannot consider it as digital economy completely. In the same way if I withdraw money from ATM or Banks, it means I am losing (giving off) digital cash by taking paper cash at ATMs. I think this will also comes under Cash economy. Is digital economy possible without cash? How does PayTM gets cash in to digital accounts without paper cash..? Can India manufacture (generate) digital cash directly..?
    What about unaccounted goods sales..? How do you calculate it..?
    Ex: Poor farmer sells rice and onion for cash as he doesn’t hold a swiping machine. As his monthly profit is less than the taxable income limit, he doesn’t show the sales in his bills or accounts.. How do you calculate this type of cash economy..? How do we know this..?
    What about service transactions..?
    if I ask a labor to lift a rice bag to my home and pay him Rs.10 how will you calculate this economy..?
    Ex:- auto charge, rickshaw charge, porter charge, small school fees(they don’t hold service tax license) e.t.c
    I hope every transaction including unaccountable services must be considered in to Cash economy.
    Is it possible for you to give to public what is the total cash economy in a year including cash deposits and cash withdrawals at Banks, ATMs, money valets e.t.c…?
    What is the overall cost of fuel spent by each person for going to ATMs and banks ( he has to roam and roam as many ATMs are out of cash or he wants to check if other ATMs are less crowded)
    how much time does it takes to deposit 14 lakh crore (may be half of it) by individual people..?
    What is the average common man value for time on working days..? How many man hours are wasted waiting at queues of ATMs, banks, petrol pumps and railway stations..?
    In India cost of man hour is always lesser compared to the productivity or profit for the company..
    How much productivity we will be losing..?
    How much does it cost to print banned notes faster (we need to pay extra for labor) 10000 crore..?
    Are there losses of lives of earning member in a family due to this ban…? If so what is the loss for the government..?( I am leaving loss of the family and their life as it is not considered now)
    Ex:- A small or poor business man in a underdeveloped city is ill or has got a breathing problem or a heart attack, his wife tried to take him to hospital and went searching for an auto, every auto person first inquired her about change..? she somehow managed by collecting with delay in time, when she went to local hospital they asked her to take to City. then again she has to search for a vehicle, again she had to arrange 100s first(we cannot expect auto or van people to do social service, they are struggling hard for their family and they have their own problems. if one decides he has to do for many) but by the time she reaches to hospital patient died. Now take many such cases and possibilities due to this ban. Flood like buying blood, Buying emergency medicine (announced to take 500s but we know the realty when we go to medical shop and buy a tablet worth 50 for 500) and calculate the loss to the Indian economy (you can exclude loss of a family absolutely, as that is not the case now)
    Other ex:- losses incurred by girls fathers who arranged a marriage, he may try to suicide or try to take more bribe to cover his loss. (you can exclude life and dignity of girl whose marriage got stopped)
    you can consider many such possibilities.
    This being rainy season, how does people wait if it rains?(considering the floods in Chennai last year during same time) how would people survive if city gets flooded due to heavy rains? How would people from other states help the affected city/state effectively? Or if there is any natural calamity or terrorist activity, how would people handle the situation? If this is the case individual spending will increase more.
    Many new shops that were planned to open but would have delayed as they were running out of cash. they all have to pay interests without running the business..
    Loss to common man by cancelled trips, over charging, late payment fees e.t.c
    There is actually reduced business now as there is less cash in hand. Will there be any impact on economy due to business loss and profit reduction..? He has to bare the same rents and interests.
    Ex:-small kirana/grocery stores, recharge shops.
    By not taking 500s and 1000s, if vegetables and fruits are not sold, and retailer waiting to sell for the people who bring 100s but finally if those get spoilt waiting..?
    how much fresh food, cooked food in hotels will be wasted by waiting for the customer who brings 100rs notes..?
    Any loss for economy..?
    Many people donate money to orphanages and old age homes.. Will those homes receive the same funding after this..? if not what will they eat..?
    If we see case to case from layman to common man we get many scenarios..
    I think the post is going lengthy, so I need to Stop.
    What I want to request you is, Please consider and analyze each possible loss case and calculate if it is really worth to Ban 500s and 1000s..? and post a detailed note here for the public awareness. . If possible please estimate the whole value of gold, Lands, Houses, foreign bank deposits and investments, businesses net worth
    I feel losses as petrol burn, Loss of human values, loss of new cash printing cast, loss of lives, loss due to stopped marriages and functions will compensate to the black money that does not get to the bank.
    What if government gets 3 lakh crores as black money and the cumulative loss is 3 lakh crores..(this loss continues, as if one person with loans goes in to loss, then he will be losing more in the future)
    Thank you

  • essaytigers says:

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