The Real Indian Currency Crisis

By Hard Asset Alliance – Re-Blogged From http://www.Silver-Phoenix500.com

On November 8, 2016, Indian Prime Minister Narendra Modi dropped a bombshell. In a televised address at 8:00 pm, he declared that after midnight—four hours later—banknotes with face values of INR500 (US$7.50) and INR1,000 (US$15) would no longer be legal tender.

These bills comprised 86% of the monetary value of currency in circulation, so to say that panic ensued would be an understatement. The market stayed open all night as people rushed to buy gold, Rolex watches, and anything else they could get their hands on to use up their cash.

During the next two weeks, gold traded for as much as US$3,000 per ounce, a premium of almost 100% to the international price. Foreign currencies traded at similar premiums.

Soon, Indian tax authorities descended on the gold market, confiscating security camera recordings to identify any transaction that might have bypassed taxation. They were raiding people’s houses with abandon.

Chaos, Death And Tragedy

India is already well known as a society where it is virtually impossible to find a public servant who won’t ask for a bribe, but now the number of bribes skyrocketed. Fear gripped the population—but most still didn’t realize that they were witnessing the emergence of a police state.

The government provided a one-time option to convert $30 worth of cash into the still legal banknotes, which were in extremely short supply. People’s fingers were to be marked with indelible ink to ensure they couldn’t repeat conversion. Any excess cash would have to be deposited into a bank account, which for all intents and purposes had the same effect as freezing people’s assets.

You’d see massive lines outside all the bank branches. The date by which the cash had to be deposited kept changing. Regulations that materially affected the handling of currency often changed more than once per day, until the last day of the demonetization exercise. The chaos was unprecedented.

To fully comprehend the level of turmoil, you need to know that 95% of Indian consumer transactions happen in cash.

The net effect of all these events was to rapidly stall the economy and to send it into a state of shock. Scores of disabled, sick, and old people—who had no choice but to personally take care of the currency exchange—died while standing in line at a bank all day. Many soon found themselves cash-strapped and with no means to buy staple items, including food.

Street markets started looking like ghost towns as even those with cash avoided non-urgent purchases. Next, the sudden drop in demand caused small businesses to fail. Even export houses, like diamond polishers, had to lay off their employees because they had no cash to pay salaries. The economy spiraled downhill.

Even today, vegetables sell for half as much as they normally do. This would be considered a good thing had it happened as a result of excess supply, but the reason for the price drop is the destruction of demand—resulting from lack of funds among the poor people who lost their jobs. And don’t expect any reports on this in the Indian media, which must toe Modi’s party line.

The Pampered, Salaried Middle Class

India’s salaried middle-class employees, on the other hand, were very happy with the situation: taxes are automatically deducted from their paychecks, and they want businesses and employees from the informal sector to pay their “fair share.”

The informal sector, or informal economy, is the part of a country’s economy that is neither regulated nor monitored by government entities. In developed countries, it makes up about 10% of the overall economy. Not in India, though. Here, it accounts for 90% of the economy and at least half of total GDP. 75% of all Indian businesses belong to this shadow sector, which makes this country one of the largest informal economies on the globe.

In other words, the informal sector is India’s backbone—without it, the ivory towers the salaried middle class reside in would come crashing down. Their persistent demand to tax it into submission is partly envy and partly an utter lack of empathy. Also, consider that virtually all taxes collected by the government end up in the pockets of politicians and bureaucrats, with no benefit to the people.

CONTINUE READING –>

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