India's Money Problem

I was tweeting about this yesterday. I have had some more time to think about it and read about it and come to realize how the situation that country is in stinks. I'll do my best to explain, be patient!

Here is what the Prime Minister of India, Narendra Modi, did to their money supply. 

     - On November 8th, the same day as our election, Modi declared the 500 rupee ($7) and the 1000 rupee ($15) worthless and no longer allowed to be used in any transactions. 
     - People (1.25 billion) of India will have until the new year to exchange their money for the new denominations and currency.
     - The 500 rupee note is getting an aesthetic change and they are creating a 2000 rupee note. The 1000 is going to no longer be in circulation.
     - This is what the rupee compared to the dollar did when Modi announced all of this...

It fell nearly straight down in a matter of 3 weeks. It looks more drastic because it's a one year chart, but nonetheless the drop in the value of their currency is tremendous.     (Jump down to the comments to see a brief explanation of another explanation of why this chart looks the way it does, courtesy of Subhankar)

     The reasoning behind Modi stopping the 500 and 1000 rupee from continuing circulation is due in large part to the vastness of India's "black dollars". The government believes that there is too much counterfeiting going on and they can't get an accurate reading on the money in circulation. Originally India came up with the idea to just print more money and cause crippling inflation in an effort to destroy some of the wealth illegally created by some. It worked in that sense; the rich peoples money was worth less! But the inflation made the poor even poorer. The 500 rupee note is the bill that is most easily faked which is why they are changing the design of it. 
     Another effect the black money is having on India are the amount of taxes being paid. Somewhere in the ballpark of one percent of Indians paid taxes last year. The first thought for some people I'm sure is, "Alright! Government sucks!" However, think of the differences between America and India. They need that income tax over there because the country needs money to improve the all around infrastructure of their entire country. The road systems are garbage. In an attempt to fix that issue like I said they are trying to remove the looming presence of that black money.  
     A caveat to that money exchange though involves taxes as well. If any person tries to exchange more than 250,000 rupees ($3,659) they have to have documentation proving they paid taxes on it previously. If they can not provide that information, they are charged double the income tax. 
   


     If you peek back up at that chart I posted and think to yourself, "okay, I see how that's bad, but I don't think the strength of the rupee should have dropped that much. They'll be fine, maybe now is a good time to try and trade forex. Go long on the rupee." 

"NOT SO FAST MY FRIEND"   *Lee Corso voice* 

     The 500 rupee and the 1000 rupee note make up around 86% of the money in circulation in India.

Let that sink in. 

     86% of the money that people were using is no longer usable. Buying groceries or going out to eat or paying for literally anything is a LOT harder now. And the thing is, the government isn't printing enough money to hand out! There are people waiting in line to exchange their money for hours and Modi is running short on the new 500's and 2000's. 

     Oh and by the way, there are reports saying that cash transactions account for between 65% and 80% of all transactions. This whole ordeal poses a very bleak future for small business in India. With so many cash transactions happening every day and now hardly any cash to use....not good. Also the future outlook of the Indian GPD looks disappointing as well. 

     Overall. Modi and the Indian government and bank have the right idea, but the implementation has been rough and cumbersome. It definitely could have been handled better. All this being said, India in a year or two, or whenever this money situation/crisis is figured out, it could bode well as an emerging market investment. I'll be thinking about them.

And Xichigan Still Sucks! Go Bucks!









deuces.