What’s Going on with India’s Cash Crisis?

The “war on cash” has found a new battlefront.

India is the latest country to become the victim of central bank animosity toward physical bank notes.

Recall that in May, we wrote about the European Central Bank (ECB) putting the kibosh on high-denomination cash, specifically the 500-euro note.

The reasoning behind that move was ostensibly to limit the so-called “Bin Laden bank note,” as the 500-euro note is known to be used to finance terrorist and other criminal activities.

In India, the Nov. 8 surprise decision to quickly scrap the 500 and 1,000 rupee note by declaring the bills no longer legal tender is a step that’s also being taken with the ostensible reason of cracking down on corruption and illegal cash holdings, known in the country as “black money.”

According to the Indian government, the move represents an attempt to curb tax evasion so that the government can bring the billions of dollars of unaccounted cash into the official economic accounting.

So, what’s the problem with the government wanting a full accounting of the actual commerce conducted by the Indian people?

Well, in theory there isn’t anything wrong with it, and I understand the need for a full accounting. However, the way Prime Minister Narendra Modi made the move has caused chaos in one of the world’s fastest growing economies.

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The shockwaves for the Indian economy began with the Nov. 8 announcement from Modi that the nation would have just four hours’ notice — that’s right, four hours — to deal with the proclamation that the current outstanding 500 and 1,000 rupee notes would no longer be legal.

The reason this was such a shock is that these bills make up an estimated 80% of the currency in circulation. Moreover, India is predominantly a cash economy, as an estimated 90% of all business transactions in the country are in cash.

According to a story in the BBC:

People were told they could deposit or change their old notes in banks until 30 December and new 500 and 2,000 rupee notes would be issued.

Until 24 November Indians will also be able to change a small sum of old cash into legal tender as long as they produce ID. This amount was reduced from a total of 4,500 rupees to 2,000 rupees on 17 November. Anything above this needs to be credited to a bank account.

As you might imagine, the surprise declaration from the Modi government was met with shock, disbelief and a sense of fear and dread.

The multiple accounts I’ve read of the reaction by Indian citizens confirms that, but to confirm it for yourself all you need do is imagine if the cash you had in your safe, or safe deposit box, was suddenly declared illegal.

It doesn’t take a novelist’s imagination to plug into the sense of dread that accompanies this condition.

The result was a run on banks, as people went to ATMs to withdraw cash and exchange their old bank notes.

Per the BBC story:

The queues are long and people are short of cash — even buying daily essentials like milk and bread has become difficult. Police have had to be called in at some banks and ATMs to calm tempers.

If you’re a country proud of your recent pro-capitalist reforms, as India rightly is, then this move isn’t very comforting. It also represents a rash move that will undoubtedly stunt at least the short-term economic uptrend.

According to an article at CNNMoney.com,

Analysts estimate India’s shock decision to scrap its 500 rupee and 1,000 rupee notes — accounting for about 86% of cash in circulation — will shave at least 1% (and possibly much more) off India’s current GDP growth rate of 7.1%.

If that decline does take place, it will push India’s growth below that of rival China.

One recent victim of India’s war on cash is Indian stocks.

The chart here of the PowerShares India Portfolio (PIN), the benchmark exchange-traded fund holding the top Indian stocks, shows the big plunge since the Nov. 8 announcement.

Shares of PIN are down nearly 6% from their Nov. 7 close, and the decline has sent the ETF below support at the 200-day moving average. And though shares have come back off their lows of the month, the immediate damage to Indian equity values — and shareholder portfolios — has certainly been done.

The moral of the story here for U.S. investors is to be aware that investing in emerging markets such as India, China, etc. often comes with political, social and central bank policy shocks that you usually won’t see when investing in mature markets.

While one can make a lot of money in emerging markets when conditions are right, you have to know going in that your money is susceptible to impulsive government proclamations.

Now, it may turn out that the move by Modi to essentially ban the current 500 and 1,000 rupee notes will be a long-term positive for the economy, and for the companies held in PIN. If so, then the move may turn out to be a long-term positive for those with Indian equity exposure.

Yet for now, Indian citizens are feeling the pain of fiat monetary policy decisions … and that’s something I hope their growing economy can work through quickly.

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Are you worried about the war on cash coming to America? There’s already a push to use credit cards and electronic payments in lieu of cash … but should we be concerned? I’d like to hear what you think about this issue, or any of the issues we cover in the Afternoon Edition. Fortunately, doing so is easy. All you have to do is leave me a comment on our website or send me an e-mail.

Also, see our recent video report we put together on how to prepare for such an event now.

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Stocks returned to positive territory after Monday’s modest selloff. All three major indices finished in positive territory, as the post-election trade continues with bullish sentiment.

Elsewhere in the news …

• Georgia Republican Rep. Tom Price has been tapped by President-elect Trump to be the Secretary of Health and Human Services. Price is one of the leading critics of Obamacare, and is likely to spearhead an effort to repeal and replace the current law.

• Oil futures fell nearly 4% Tuesday, settling at their lowest level nearly two weeks. Traders sold crude as doubts grow that OPEC will be able to finalize a deal to curb production at its meeting in Vienna Wednesday.

• Home prices were strong in September, rising to levels they haven’t seen since the peak of the housing bubble. The S&P/Case-Shiller 20-City index was up 0.1% in the three months ending in September, or some 5.1% higher than the same time a year ago.

Good luck and happy investing,

Brad Hoppmann
Publisher
Uncommon Wisdom Daily

Your thoughts on “What’s Going on with India’s Cash Crisis?”

  1. If the government has a war on cash they could then have a war on gold. Laws could be put in place to have one arrested for trading in gold !

  2. “Are you worried about the war on cash coming to America?”

    Cyprus, Greece, India – the war has already begun. Coming to a theatre… sorry, country… near you soon!

  3. I live in Switzerland. We store some 1’000 CHF notes at home, and we would not face any difficulties to use them in order to pay e. g. the bill in a restaurant. I am not worried that the Swiss National Bank will suspend cash. A voter’s initiative would lead to a reinstallation.
    Best Bruno Riek

  4. Replacing our cash with credit cards and debit cards relies on a precarious digital infrastructure. What would happen if the banks hit a bigger bump in the road than the 2008 melt down? What would happen if the banks were seriously hacked by a foreign power? Eliminating cash removes the economy’s analog backup system. What could possibly go wrong?

  5. Brad,
    Before we decide to go fully electronic with all our payments, and totally dispense with cash, we need to make sure that our internet service is bulletproof (and I am absolutely certain that it is not). If we wind up going essentially 100% to electronic payments, and then our network that approves and processes said payments goes down, the problems in India will seem very minor indeed.
    Given that there are widespread reports that the military forces of various countries, and others, are now considering cyber as another domain of war (along with air, land, sea, and space), there are certainly efforts underway on all sides to be able to shut down the internet in an opposing country in the event of hostilities. If we make all our payments dependent on the internet, then possibly our enemies would need no other means of attack, especially if they were able to hide their tracks or make it appear that the attack came from a different source.
    I understand the convenience and efficiency of going all-electronic with our transactions, but I think we need to consider the risks as well. They are not trivial.

  6. looks like complete control of people’s money. there will be ‘haircuts’ every so often ‘in the national interest’. remember cyprus two years ago. so your money is not really all yours. its there in your account for plundering by the government. what easier way? cash is outlawed, gold is confiscated and we are defenceless against our employees. yes, the government is our employee, we pay them to manage the country not to bully us into situations we cannot control or comprehend.

    our employees are guarded by the police and the army etc. and that is the main reason for such bodies. have a think about that. if there is any trouble brewing against the establishment, the police are summoned to protect the politicians (who are so very valuable) or in extreme cases the army. in today’s world the military police are armed to the teeth and shoot to kill, so resistance is almost fruitless against them.

    one w.o.? yes it is here already but not yet fully displayed. your country is in line for a civil war : clinton-soros-rothschild vs trump- putin-ping. get it?

  7. Yes, I am very concerned that we are moving to a cashless society. It’s not the change per se, but I feel like it puts even more power into banking, commerce and government at the expense of “We The People”. I think it will result in more loss of privacy as huge entities see and share all that we do through electronic access to our accounts. Call me a bit paranoid but I believe it equates to a loss in liberty and freedom.

  8. Strikes me that it is just a dress rehearsal for the same thing in bigger economies.
    Undoubtedly there will be some future “gift” to India for trying this out.

Comments are closed.

Brad Hoppmann originally grew up in Florida, but has lived in Baltimore, Charlotte and New York as well throughout his career. Always an athlete, he played varsity football and water polo at the University of Florida and received All-SEC/SCC honors.