The Week That Was:

From: Vartaa Editorial Team on Nov 13, 2016

Demonetisation announced in a bold gamble

PM Modi, in a surprise move this past week, announced the discontinuation of existing Rs 500 and Rs 1000 denomination notes. The PM addressed the nation on Monday night and said that these notes would stop being legal tender with immediate effect. The PM laid out the motivations behind this action as being that of curbing black money, terrorism funding and other nefarious activities. The government has given a deadline till Dec 30 for depositing old notes in the banks with new notes being issued from Nov 10. The move initially invited criticism from political opponents but the move saw support from sections of the public who viewed it as a step in the fight against black money.

Scramble in the banks as rush for notes begin

It appears however that not many had anticipated the challenge that swapping currency notes would bring for the general public. 86% of India's currency consists of Rs 500 and Rs 1000 notes and after the government's announcement, long lines began forming at banks to deposit existing notes and obtain new ones. ATMs struggled to keep pace with the demand for Rs 100 notes and many shut down. There were concerns that those suffering the most from this move would be the poorest who keep their savings in cash and those who do not have access to formal banking channels. As frustration grew over long waiting time and slow response from banks, the government was forced to print 5 million new currency notes to ease the shortage. The only people who seemed pleased were e-commerce and mobile wallet companies who have been wooing customers to spend more through their cashless portals while the cash shortage continues.

Donald Trump wins, sends shockwaves arounds the world

In a remarkable and unforseen upset, Donald Trump defeated Hillary Trump in the electoral college and became President-elect of the United States of America. Trump's victory was built on the back of turning out large swathes of rural and exurban white voters to overcome Clinton's support in urban centres. Trump managed to win traditionally Democratic leaning states like Michigan, Wisconsin and Pennsylvania on the back of wooing disaffected white voting class votes in these areas. Trump's election led to protests within US cities and concerns across the world on whether he would implement his divisive and at times erratic proposals into effect.

Opinions you must read:

  • An Indian American shares his dismay at Donald Trump's election and calls out the nativism driving his voters.
  • The Indian Express examines why SP supremo Mulayam Singh has rejected a grand alliance between opposition parties against BJP for the upcoming assembly elections.
  • The Economic Times digs deeper into the Mistry-Tata conflict zeroing in on the hotel business in the conglomerate which seemed to be at the heart of the personality conflict.

Chart of the Week

The biggest news last week was the Modi government's decision to discontinue 500 and 1000 Rupee notes to address the issue of 'black money'- those economic activities and the income derived from them that circumvent or otherwise avoid government regulation, taxation or observation. The move is expected to take a lot of ill-gotten cash out of circulation although it will cause considerable pain to the population in the short term.

So how big is the shadow economy in India? Estimates widely vary. One government report commissioned by the Manmohan Singh government puts the figure at a scary 75% of GNP. That number however, seems awfully high. Consider the fact that only 2.5% of Indian citizens pay Income Tax and the 75% does not sound all that ridiculous anymore.

The World Bank commissioned a study to gauge the size of shadow economies around the world. The 2007 figure puts the size of India's shadow economy at 21.4%. It has very likely grown since. The actual answer may however, lie somewhere in between 21.4% and 75%. The size of the problem is undeniably large. But how does India compare with the world's major developing economies and advanced economies such as the US? This week's chart sheds some light. Among large economies, towards one end of the spectrum is Russia at 41% while the US has an astoundingly small shadow economy of 8.4% of GNP. Smaller number of cash transactions and an empowered Internal Revenue Service have been instrumental in reducing the size of the shadow economy in the US. Here is to hoping the sweeping measure in India put a lasting dent in tax dodging and other white collar criminal activities and provide a boost to the legitiate sector of the economy.