From the ACDC album in 1990, (money talks) to living within your needs as opposed to living beyond your means for your wants. This is the plague which has been ripping apart all economies the world over and ripping apart all government calculations for their budgets - the scourge of BLACK MONEY , as people find innovative ways to not pay taxes and hence generate black economy and an entire ecosystem that lives off this urge to satisfy all wants.
The moneyed and the super rich or the so called 1% has its money tucked away in overseas money havens whereas the rest are left to potter around in a cash economy ecosystem to beat the taxman.
In this scenario the demonetisation brought in by the Modi government will hit at the core of economic activity and the effect of the same will be seen only when the dec and march quarter service tax returns and TDS returns are filed.
Now for some numbers:
As of Mar'16 there were 1571 crore pieces of 500/- notes AND 633 crore pieces of 1000/- notes. they account for 24.4 percent of the total number of notes in circulation and a whopping 86.4 % of the total value (approx 16.4lakh crores ie 14.2lakh crore) of notes in circulation.
There have been 2.3crore transactions in all banks combined between the 11-13th ie 7.67lakh transactions per day or approx Rs.65000 per transaction in value terms on average.
Amount of value deposited in banks estimated at 1.5lakh crore in the first 3 days - we expect another 7% to have been exchanged - hence taking the value to 1.6lakh crore. that is an approximate 11.5% of the value up for grabs. assuming this continues it will take another 24 days to clear the total value ie only after the 10th of december one can expect the banking system to come to some level of normalcy assuming they work all weekends till then.
So what are we looking at?
1. End of fake currency at least for 8-14months
2. Increased cost of terror financing for another 8-14months
3. Government expects at least 12-15% of the currencies to not turn up ie a straight benefit on the Balance Sheet of the RBI to the tune of 2 lakh crores. Personally i expect this to be closer to .9-1lakh crore of benefit. The value in GDP terms is 1.5% in case of the Govt and in my calculations it is closer to .8% - these values are truly worth the effort. Cost of this exercise to the govt - estimated at 15000crores(.1%of GDP). Cost to the people in lost man hours etc - possibly 27days ie 7.4% of the total year ie a negative impact of 7.4% of the GDP. On the converse the attempts to bring all this money in the mainstream (methods explained below) will result in an increase of close to anywhere between 12% (pessimistic) to 25%(optimistic) to the GDP. NOW this again is significant as the net bump up to the GDP is between 4.6%-17.6% with a corresponding prorata increase in tax collections - hence the lookout for the service tax and TDS numbers of the next 2 qtr's.
4. Real estate and gold are now dead ducks in the water for a long long time as more and more people in the shadow economy are forced to liquidate over the next few months to meet their many obligations. For eg the bookie who couldnt honour his dues for the bets made on the US elections, to the hawala operator who couldnt make the 2nd leg of the transaction, to the businessman who has loans in cash, to the real estate benami who cannot meet his obligations to his masters, to the money launderer who can no longer continue as the hawala guy is missing and so on and so forth.
5. Indian Jugaad to meet this new reality.
The PM dropped the bombshell of demonetisation at approx 820pm on the 8th of November, by 9pm Biyani of Future retail had sent an SMS telling that his shop will be open till midnight for all those who wish to buy their daily provisions. A visit yesterday showed that a lot of their stocks was depleted and the staff confirmed that one months sale was booked in those 3 hours and since then there has been a relative quiet as 2/3rd of the business was in cash sales - only 1/3rd were card users like me. So the first jugaad was to keep shops open till midnight and in case of jewellers etc they kept it open till the 10th when raids across the country finally forced them to shut shop.
Second jugaad was loan melas organised by politicians and strongmen where monies to the tune of 2-3lacs was given on a interest free basis to the villagers from where the politician/ strongman hails on a pay back after 3years basis. (this is what Modi meant when he said that he would put money in people's hands taken from black money hoarders!!)
Third jugaad is splitting the money into smaller packets of 10k each and getting the same deposited into the accounts of the many jan dhan account holders for a commission ranging between 10-30% depending on how desperate one is -as jan dhan account holders have a limit of 10k per month - hence in my estimation the majority of the people queuing up at the banks are these commission agents of hawala operators. as 4k can also be exchanged each jan dhan holder so identified is clearing out 14k at a time for the operator who get back approx 12k on an average - this is not bad as the first hawala operator to be back in business can charge an obscene commission from the others.
Fourth jugaad is the advance payment of salaries in many companies - or just cash payments and marking the staff as absent for the said days.
Fifth jugaad is investing in high value assets and non-perishable stock items BUT this was only possible in the first 24-48 hours - totally ended after the recent raids.
Sixth jugaad is people like my LPG supplier who billed me on the night of the 8th and shows delivery made on the 11th but is yet to physically deliver the gas!! obviously the poor fellow is trying to get as much of his high denom notes into the bank as possible as he is in the list of exempted services - just like airlines and trains which saw 1400% increase in transactions wherein people are buying tickets for subsequent cancellation - just that airlines have announced that tickets bought with old currency are not refundable!!
There are many more jugaads in process as the people scramble to protect/ save as much as possible of their ill gotten wealth.
So taking all this into account, assuming that 40% of the economy is unaccounted and 60% of this is converted by various jugaad methods we arrive at 24% - assuming that half of this remains in the cash economy, I estimate that 12% will add to the GDP on a net net basis. This calculation to some extent also matches with the calculations in point 3 above.
Political impact:
My first and continuing assessment is that I hope that Modi has not damaged his chances at a 2019 reelection by this move - that would be more disastrous to the overall Indian renaissance which Modi has embarked upon. of course he can undo this damage by reducing taxes furthur as promised already to 25% from 30%. The last time tax rates were reduced was in '97-98 - so 19years later in the '17-18 fiscal he can get some brownie points after a rather brutal attack on the entire economy in the search for Black money.
Share market:
Going forward we expect interest rates to go down furthur - not very good for retirees as they will get even less going forward forcing some of them to look for employment
Bonds will go up furthur so their bull run continues till maybe end of 2018
Stock will have only way to go and that is up after GST and this attack on Black money, SUBJECT to the new American president policy which we will have an inkling about sometime in Feb'17 - so its more of the same for stocks - wait and watch.
The moneyed and the super rich or the so called 1% has its money tucked away in overseas money havens whereas the rest are left to potter around in a cash economy ecosystem to beat the taxman.
In this scenario the demonetisation brought in by the Modi government will hit at the core of economic activity and the effect of the same will be seen only when the dec and march quarter service tax returns and TDS returns are filed.
Now for some numbers:
As of Mar'16 there were 1571 crore pieces of 500/- notes AND 633 crore pieces of 1000/- notes. they account for 24.4 percent of the total number of notes in circulation and a whopping 86.4 % of the total value (approx 16.4lakh crores ie 14.2lakh crore) of notes in circulation.
There have been 2.3crore transactions in all banks combined between the 11-13th ie 7.67lakh transactions per day or approx Rs.65000 per transaction in value terms on average.
Amount of value deposited in banks estimated at 1.5lakh crore in the first 3 days - we expect another 7% to have been exchanged - hence taking the value to 1.6lakh crore. that is an approximate 11.5% of the value up for grabs. assuming this continues it will take another 24 days to clear the total value ie only after the 10th of december one can expect the banking system to come to some level of normalcy assuming they work all weekends till then.
So what are we looking at?
1. End of fake currency at least for 8-14months
2. Increased cost of terror financing for another 8-14months
3. Government expects at least 12-15% of the currencies to not turn up ie a straight benefit on the Balance Sheet of the RBI to the tune of 2 lakh crores. Personally i expect this to be closer to .9-1lakh crore of benefit. The value in GDP terms is 1.5% in case of the Govt and in my calculations it is closer to .8% - these values are truly worth the effort. Cost of this exercise to the govt - estimated at 15000crores(.1%of GDP). Cost to the people in lost man hours etc - possibly 27days ie 7.4% of the total year ie a negative impact of 7.4% of the GDP. On the converse the attempts to bring all this money in the mainstream (methods explained below) will result in an increase of close to anywhere between 12% (pessimistic) to 25%(optimistic) to the GDP. NOW this again is significant as the net bump up to the GDP is between 4.6%-17.6% with a corresponding prorata increase in tax collections - hence the lookout for the service tax and TDS numbers of the next 2 qtr's.
4. Real estate and gold are now dead ducks in the water for a long long time as more and more people in the shadow economy are forced to liquidate over the next few months to meet their many obligations. For eg the bookie who couldnt honour his dues for the bets made on the US elections, to the hawala operator who couldnt make the 2nd leg of the transaction, to the businessman who has loans in cash, to the real estate benami who cannot meet his obligations to his masters, to the money launderer who can no longer continue as the hawala guy is missing and so on and so forth.
5. Indian Jugaad to meet this new reality.
The PM dropped the bombshell of demonetisation at approx 820pm on the 8th of November, by 9pm Biyani of Future retail had sent an SMS telling that his shop will be open till midnight for all those who wish to buy their daily provisions. A visit yesterday showed that a lot of their stocks was depleted and the staff confirmed that one months sale was booked in those 3 hours and since then there has been a relative quiet as 2/3rd of the business was in cash sales - only 1/3rd were card users like me. So the first jugaad was to keep shops open till midnight and in case of jewellers etc they kept it open till the 10th when raids across the country finally forced them to shut shop.
Second jugaad was loan melas organised by politicians and strongmen where monies to the tune of 2-3lacs was given on a interest free basis to the villagers from where the politician/ strongman hails on a pay back after 3years basis. (this is what Modi meant when he said that he would put money in people's hands taken from black money hoarders!!)
Third jugaad is splitting the money into smaller packets of 10k each and getting the same deposited into the accounts of the many jan dhan account holders for a commission ranging between 10-30% depending on how desperate one is -as jan dhan account holders have a limit of 10k per month - hence in my estimation the majority of the people queuing up at the banks are these commission agents of hawala operators. as 4k can also be exchanged each jan dhan holder so identified is clearing out 14k at a time for the operator who get back approx 12k on an average - this is not bad as the first hawala operator to be back in business can charge an obscene commission from the others.
Fourth jugaad is the advance payment of salaries in many companies - or just cash payments and marking the staff as absent for the said days.
Fifth jugaad is investing in high value assets and non-perishable stock items BUT this was only possible in the first 24-48 hours - totally ended after the recent raids.
Sixth jugaad is people like my LPG supplier who billed me on the night of the 8th and shows delivery made on the 11th but is yet to physically deliver the gas!! obviously the poor fellow is trying to get as much of his high denom notes into the bank as possible as he is in the list of exempted services - just like airlines and trains which saw 1400% increase in transactions wherein people are buying tickets for subsequent cancellation - just that airlines have announced that tickets bought with old currency are not refundable!!
There are many more jugaads in process as the people scramble to protect/ save as much as possible of their ill gotten wealth.
So taking all this into account, assuming that 40% of the economy is unaccounted and 60% of this is converted by various jugaad methods we arrive at 24% - assuming that half of this remains in the cash economy, I estimate that 12% will add to the GDP on a net net basis. This calculation to some extent also matches with the calculations in point 3 above.
Political impact:
My first and continuing assessment is that I hope that Modi has not damaged his chances at a 2019 reelection by this move - that would be more disastrous to the overall Indian renaissance which Modi has embarked upon. of course he can undo this damage by reducing taxes furthur as promised already to 25% from 30%. The last time tax rates were reduced was in '97-98 - so 19years later in the '17-18 fiscal he can get some brownie points after a rather brutal attack on the entire economy in the search for Black money.
Share market:
Going forward we expect interest rates to go down furthur - not very good for retirees as they will get even less going forward forcing some of them to look for employment
Bonds will go up furthur so their bull run continues till maybe end of 2018
Stock will have only way to go and that is up after GST and this attack on Black money, SUBJECT to the new American president policy which we will have an inkling about sometime in Feb'17 - so its more of the same for stocks - wait and watch.
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