Why did India suddenly decide to ‘withdraw’ the 500 and 1000 rupee notes?

Hello readers, welcome bank to rsira-economics.com where as usual I will be giving my take on the top trending economics news stories. Last week I discussed the impacts of the outcome of the US presidential election and how Mr Trump… perhaps I’ll stop there, we don’t need to discuss that for another 4 years. This week, I will be discussing why India suddenly decided, overnight to remove its largest denominations of the rupee: the 500 and 1000 notes and replaced these with a new crisp, purple note worth 2000 rupees. It caused lots of economic turmoil and had a number of significant impacts on the everyday person in India as well as affecting many firms and businesses, but at the same time it has proposed a number of key benefits for the country. In today’s post I will try to outline the general reasons for why India has done this, what this will mean (costs and benefits), and how exactly it will help. I aim keep this short and to the point whilst making it detailed, but still accessible to the non-economists out there, who are reading this. If you have a few minutes to spare, give my view on the current situation a quick read and hopefully it will all become much clearer for you. As always please post any comments below and I will try to respond to them. Alternatively you can email them to me at rajveersira@gmail.com

With corruption becoming more and more of an issue all around the world and leading to an inevitably poorer economy, it is putting pressure on governments to tackle such issues and clamp down on this. India, a country with over a billion people is ranked at 65 on the corruption index out of 150 countries and although this is not too bad, the problem of corruption and illegal cash holdings has become a widespread, ubiquitous issue throughout the country. India and its government believe that by removing the two largest notes, it means that people will be forced to change their old notes to the newer notes and in doing so it will remove high proportions of ‘black money’ from the system, which is money that should have been taxed and had not, or money that has been acquired in an unlawful manner e.g. drugs or stolen money. The finance Secretary of India, Shaktikant Das said that banks will be “closely monitoring the exchange of old notes for new notes” in order to catch those out who have been hiding large stashes of cash. Most transactions made in India are through cash as there is a large proportion of people without cards, mainly those living in slums or in absolute poverty (those who earn less than the equivalent of $2 a day). This is a major inconvenience to the local people as it means that around 1 billion people will have to make a trip to the bank or local post office to get their notes changed. This may seem like a simple task in your head when you are reading this, as all it means is that they just have to pop down to their local branch and exchange their notes. Simple. Surely? Well the pictures below kind of sum it all up. In a country where there are so many people, services and infrastructure are simply overwhelmed and cannot cope with the number of people depending on them on a day-to-day basis. This extra influx of people will be chaotic and with only about 50 days to change your notes, it seems like a recipe for disaster. If people aren’t able to change their notes in this time then their notes will simply become meaningless, worthless, pieces of paper.

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In addition to this, no one saw it coming, not even the news organisations and as a result it caught everyone off-guard; however, this was always the plan. The secrecy of the operation and limited time allocated to change the notes was exactly what Mr Modi was hoping to achieve, as it will hopefully clamp down on corruption. One might argue that this would have been a much smoother transition if India had given the country warning and longer to change these notes, although if that were the case, it may have not helped at all and could have even led to money leaving the country into off shore illegal accounts or other illegal practices such as money laundering.

Furthermore the notes were made no longer a legal tender on the midnight of the announcement, creating a panic-stricken population and radiating shock waves across the country. The worst impact was on the poorest in society as they only deal with cash and their businesses depend on cash flow, thus they were severely affected. What makes matters worse is that most of the people who voted for Modi were among some of the poorest citizens and now they appear to be in the worst position. Although it’s not just the poor who have been affected, large corporations and businesses have experienced huge amounts of disruption.

On the day of the announcement, it prompted people across the country to rush to ATMs that offer 100 rupee notes in an attempt not to be left without cash over the next few days. This whole upset to the system, has certainly created uncertainty in the economy, and already with so much uncertainty looming over the globe at this moment in time it is questionable as to whether this was the right time for the Indian government to act. However this has always been Mr Modi’s goal and when his party the Bharatiya Janata Party came into power in 2014, they promised to bring billions of dollars of black market money into the country’s financial system.

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The official economic term for what has happened is “demonetised”. So we can say that the 500 and 1000 rupees ($7.50 and $15) notes were demonetised, which in simple terms means they have been taken out of the system.

There are no precise figures available but experts say the government’s move could be “a very powerful measure” to curb “black money”. On the flipside, whether or not doing all this will actually benefit the economy is still unclear as analysts have suggested that people may hire lots of other people to deposit their notes into their own accounts and then send it back for a fee, which is ironic as a scheme which aims to clamp down on corruption is in fact contributing to more corruption.

Only time will tell whether this has been the right decision by the government or not.

The latest developments so far on this story (from NDTV):

  1. The amount in exchange of old notes with new ones includes: 5.12 trillion rupees ($75.1 billion) in bank deposits and 33,000 crore rupees ($ 4.85 billion).
  2. The central bank has made a series of announcements, allowing banks to give borrowers an additional 60 days for repayment of housing, car, farm and other loans under one crore.
  3. The RBI has eased cash withdrawal rules for businesses, saying overdraft and cash credit account holders can now withdraw up to Rs. 50,000 in a week now.
  4. To help farmers in the middle of the Rabi sowing season, the government said on Monday it will allow them to purchase seed with the banned 500 rupee notes.
  5. The ban on high value notes has largely been praised by financial experts and analysts, but many have questioned its implementation and the government’s preparedness, with people having had to queue up for hours at banks to get rationed new notes amid a cash crunch.
  6. Prime Minister Narendra Modi has said there are teething problems in the implementation of a decision with long-term benefits for the Indian economy. The inconvenience to people will not last more than 50 days, he has said.

 

Sources used: BBC business news, The Economist and The Guardian, NDTV

 

 

How has the US presidential election impacted the UK’s economy?

Welcome back readers, to my take on the week’s latest economics news stories. I’m pretty sure you can guess what I’ll be discussing this week. If you haven’t quite sussed it out yet, then pick up a copy of the economist and just look at the dark silhouette of a man printed all over the front page. If you can’t bear to hear that dreaded name again let alone even allow the image of him to engulf your mind, then perhaps you should close this page and continue with what you were doing before opening this page; but if you are keen to understand exactly what America’s latest edition to the Whitehouse could be about to do, and understand what the impacts of his presence are likely to be on a global level, then stay with me. In today’s post, I aim to give a quick summary of what has happened, why it has happened and the implications of this, focussing on Britain towards the end. I will discuss just how America, arguably the world’s most powerful nation, with a population of around 320 million could be lured into voting for such a terrible, racist and arrogant candidate with little respect for women and other ethnic origins. I will look at whether Americans really believe that he can ‘make America great again’ and some of the drastic measures he is looking to impose, for better or for worse; as well as whether he will actually carry out all the promises made in his manifesto. If you have a few minutes to spare give my view on the current situation a quick read and hopefully your understanding of what the outcome actually means will become clearer. As always, please post any comments below and I will try to respond to them. Alternatively you can email them to me at rajveersira@gmail.com.

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Perhaps that’s a bit of a hyperbole, nevertheless you get the idea. With brexit creating so much uncertainty in the UK and now hearing that Mr Trump has become president one might question what exactly has happened in the Western World, and for certain 2016 will go down as the year in which the world changed.

Many of us, about a year ago would never have even thought that Donald Trump had even the slightest chance of becoming president of the United States of America. Maybe he had a good idea with the whole apprentice thing in America and perhaps he was an interesting character to watch on TV but can you really imagine that same guy running the United States of America and taking the position of the most powerful man in the world? His attitude towards aspects such as religion, people’s rights and what he believes, resemble rather closely and have roots in Hitler’s inhumane ideology. By making comments such as “I will build a great, great wall on our Southern boarder and I will make Mexico pay for that wall” and that he would call for a “complete ban on all Muslims entering the US” (which has now actually been removed from his website), it seemed almost inevitable that Hilary Clinton would have won without a doubt. With making such comments, you would think that people would turn against him, yet this had almost the opposite effect, so much so that he not only did he win the US presidential election but by quite a substantial number of electoral votes. This gives rise to the idea that even if Trump is completely out of his mind, so many Americans liked his attitude towards society. On the other hand people in the UK were almost laughing that such a candidate, was putting himself forward and it has left many people all over the world including democrats in America, confused, angry and frustrated with the outcome. With absolutely no experience in politics, no idea of what to do in terms of running a country, he seems to be just doing the exact opposite of what would be seen as conventional and somehow people liked this.

Even the famous comedy show “The Simpsons” in an episode 16 years ago predicted that Donald Trump would one day become president of the USA. Who would have thought that it would ever have come true?

So why did everyone like Trump and why did they follow him as if he was a hero?

It puzzles the minds of some of the most intelligent people in the UK and many other countries across the globe as to why such a candidate could be put forward as a candidate, let alone win the election. It’s not even like he has had previous success. His multi-billion dollar empire was largely inherited and it was recently found that he was in a lot of debt and had declared bankruptcy in the past. His character is also not exactly the most charismatic and with so many allegations and claims that he had assaulted a number of women, had made prejudiced remarks to certain members of society, and does not think before his actions, for example when he said 7/11 instead of 9/11 during one of the debates. #Not our president has gone viral and many democrats have been protesting outside Trump towers in New York. In addition on the day of the result, the Canadian immigration website crashed as so many people were desperately trying to leave America.

With no government and political skills or experience it is questionable as to whether he actually knows what he is doing and if he really will burn America to the Ground, like many anti-trump supporters are suggesting.

People want answers as to why he has become the head of the most powerful country in the world in which the rest of the democratic world looks to for leadership. With the most powerful armed forces, special ops and access to nuclear weapons Mr trump really does have the power to start world war 3.

The answer however is not as complex as it may seem. If we look at the correlation between levels of education, poverty and social inequality and the states that voted democratic and republican we can see that there is a actually quite a strong relationship between the two. Many people like with the Brexit result may have voted as a protest, as they wanted to see change in the way a country is being run. Perhaps the answer lies with the fact that with over 200 million people it is hard to understand how America picked these two candidates, supposedly the ones they thought were best for the role of president. Perhaps if a more suitable, stronger candidate for the democrats was chosen then people would not just default to voting Trump.

Nevertheless in todays democratic society nothing can actually be done about the outcome of the election and we must accept what the majority of society has voted.

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What is “Trumponomics” all about then?

Figures/predictions taken from: Deloitte webinar Ian Stewart UK chief economist and this week’s economist.

Trump has said a lot of things throughout the campaign and from this we have been able to get an idea of some of the changes he is likely to impose, although it appears as if he has watered down a few of these. Here are a few of his ideas, explained in a simplified, easy to understand way:

  • In terms of trade, Clinton was highly supportive of globalization whereas Trump much more critical of this and is against the idea of free trade. He has said that he will restrict trans pacific (US and Asian nations) trade, and trade with Europe and withdraw from the North American free trade agreement as well as the world trade organization. He also wants to impose tariffs on Mexican imports.
  • He is much more protectionist than Clinton. For those who don’t know what this means, protectionism is defined as government actions and policies that restrict or restrain international trade, often done with the intent of protecting local businesses and jobs from foreign competition (according to Investopedia).
  • Trump has said he in terms of infrastructure he will be spending twice as much Clinton had proposed, leading to a sum of around 500bn. According to the world economic forum America’s infrastructure is quite poor, ranked at 24 for overall quality. The aim: “Transform America’s crumbling infrastructure into a golden opportunity for accelerated economic growth and more rapid productivity gains with a deficit-neutral plan targeting substantial new infrastructure investments”.
  • Substantial government spending will increase the country’s debt. Trump is relying on the infrastructure to create stronger growth in the long term. These are some key elements of Keynesianism, who was very much in favour of governments spending to stimulate growth in an economy.
  • Trump wants immigration to be significantly reduced. He also wants to keep interest rates low.
  • Trump is saying that he will propose aggressive tax cuts. He wants to reduce business tax from 35%-15%, top rate income tax from 39.6-33%, repeal estate tax.
  • Initially he wanted to withdraw from NATO, but later in the campaign he said, “I’m all for NATO”. He also said Obama Care was rubbish, but now it appears he is not scrapping it just yet.
  • Promised to cancel nuclear deal with Iran and is no longer claiming to impose a ban on Muslims.

 

Impacts on the UK in particular:

Source: BBC news

  • US dollar is the global currency. All commodities are purchased in US dollars and thus changes to this will affect world trade.
  • Bad day for psephologists as there was an 86%implied probability that Clinton would win. This affected many betting companies in the UK.
  • Huge cloud of uncertainty covering the world and lots of economic turmoil and uncertainty. This adds to the uncertainty already present in the UK.
  • If UK stock markets, business and consumer confidence were to be dragged down for weeks or even months the Bank of England could make a further small cut in interest rates.
  • But if markets settle as quickly as they have on Wednesday, the Bank of England may decide to hold rates at their current level.
  • UK Prime Minister Theresa May said she was “looking forward to working” with Donald Trump, in a strong “trade, security and defence” partnership.
  • President Obama warned the UK would go to the “back of the queue” for a US trade deal if it voted out. Trump’s proposal is more positive as he himself said it made “no difference” if the UK was in the EU or not.

 

 

Stay tuned to rsira-economics.com with an update of brexit to follow shortly after we here the outcome of the Supreme Court’s intervention in December, and a few book analysis/reviews of the well known, enjoyable economics books: ‘The Undercover Economist’ and ‘Freakonomics’ coming soon. The usual ‘take on the week’ will still be published next week.

 

 

 

 

Where are we with BREXIT?

Hello readers welcome back to my blog. Last week I discussed the recent announcement of the Heathrow expansion and its potential impacts on the UK. This week I will be discussing perhaps the most controversial issue in Britain, which has been flooding the news over the last few months: BREXIT. It has caused lots of economic turmoil and has had a number of significant impacts on the everyday consumer as well as affecting many industries and firms, mainly due to the falling value of Sterling, low ‘animal spirits’ and high levels of uncertainty. So much so that Nissan, the Japanese car manufacturer that has based it’s car manufacturing plant in Sunderland, was thinking about potentially not investing in the future of the plant which supports around 30,000 jobs. On the flipside brexit has surprised many economists with not actually causing the country to go into a recession like many ‘remainers’ predicted before the referendum. But why did it all have to happen in the first place? Was it necessary to create so much uncertainty? It is also poses a number of other key questions such as will the UK still have access to the single market, i.e. will the UK opt for a soft brexit or go down the route of a hard brexit. Other questions such as will there be another general election, how long will it be until article 50 of the Lisbon Treaty is actually triggered, if it is ever triggered, and what does this all mean for the average person. More recently the high court has rejected that the government has the right to trigger article 50 by royal prerogative and that any such step requires approval from parliament, but this is set to be challenged.

A little lost already? Stick with me as I aim to summarize the key issues caused by brexit and answer some of these fundamental questions that ultimately determine the future of Britain. If you have a few minutes to spare, give my take on the brexit situation a read and hopefully by the end of it will have a clearer understanding of the UK’s current position. If you have any questions or suggestions, please post them below and I will try to respond, or email them to me at rajveersira@gmail.com

Why did we even need brexit in the first place?

The answer is we didn’t really need to have a referendum. Apart from UKIP and its followers, it is fair to say that many people were quite happy with the UK’s previous set-up, although David Cameron, back in 2013, made it part of his manifesto as he wanted to settle the EU issue once and for all and thought that it would be convince people to vote for the conservatives rather than defecting to UKIP. His aim was to comfortably win the referendum and give the UK confidence and stability. Ironically he lost and it became clear how divided Britain really was. Although with such a small majority of people (52%) voting for brexit and such a high number of ‘Bregreters’ as well as those who voted as a protest vote or because of a lack of education and understanding of what brexit actually was, it is questionable as to whether a second referendum should have been called and whether the outcome would have been what many of us had hoped for. It is strongly controversial whether brexit is actually the right decision for the country. One may justify brexit by saying it gives new opportunities and allows us to control immigration, but does it really? With an aging population, surely we would want to allow young, motivated and hard working people into the country who pay taxes and will contribute to the economy.

We only have to look at the exchange rates, which demonstrate simple supply and demand to see that brexit perhaps wasn’t the smartest move.

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Will Theresa May call a general election and if so what is her plan?

This question is purely down to speculation and Theresa May has not yet given any indication as to whether she will be calling a general election anytime in the near future. One rationale for doing so could be so that she could possibly negotiate a better deal with Europe which would allow the UK to remain in the EU perhaps with stronger border controls and call a general election on that basis especially since the Labour party is currently in a state of turmoil and is unlikely to win a snap election.

What are the impacts of brexit so far?

Here are just a few of the damaging effects of brexit:

  • With all the hype and excitement surrounding brexit and its issues, Russia has seized the opportunity to take control of the situation in Syria and has placed vessels in the Mediterranean, yet this has so far been overlooked.
  • There may be growth in the short term due to the weak pound and increase in the real purchasing power of money for other countries leading to higher exports which are an injection into the circular flow of income, however it has made imports much more expensive and since the UK is a net importer with a trade deficit accounting for around 6% of GDP this could severely worsen the balance of payments. It is important to note that the US dollar is thought of as the global currency and most commodities are in dollars, so the 32-year low in the value of sterling against the dollar will really impact this. However if Donald Trump wins the US election it is not unreasonable to expect that the dollar will fall like Sterling did when the UK voted to leave the EU.
  • Stagflation where there is a period of sluggish growth but high inflation is what the UK is likely to face because of the increase in imported goods such as fuel.
  • The ONS has said that the recent inflation figure of 1% is not ‘explicitly linked’ to the fall in the value of the pound and that rising prices are just because the cost of fuel and other items such as clothes were cheaper last year. It is estimate that by next year inflation could rise to as much as 4%, which is above the asymmetric target of the bank of England. This would almost certainly mean that interest rates would rise in order to combat this having subsequent knock on effects on the housing market.
  • Housing market-more and more houses over one million pounds in London are being put on the market as landlords are uncertain about the future of Britain and what lies ahead.
  • Luxury houses over 5 million have had to reduce prices by hundreds of thousands to attract forging investors who have been put of by all the uncertainty.
  • Although the UK did not experience a recession as predicted growth has slowed down from 0.7% in Q2 to 0.5% in Q3 2016.
  • If overall animal spirits (a Keynesian idea) are low this could lead to reduced spending and a contraction in aggregate demand, which may create a negative wealth effect.
  • Negotiations have yet to begin and Theresa May is not going to give a ‘running commentary’ as she says this could impact negotiations.
  • The cut in interest rate from 0.5% to 0.25% has impacted growing pension funds.
  • The number of homes for sale is at a 30-year low
  • Hate crime and racially motivated attacks have been on the rise since 23rd
  • Holidays abroad have become much more expensive and the pound’s crash is finally starting to scare regular people.

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Has Nissan been promised anything special?

Nissan has said they will be producing the next models of their Juke and Quashaqi in the UK although Theresa May is not telling us what has deal the UK government has agreed with Nissan that has convinces them to continue investment in Sunderland. Interestingly in Sunderland 6/10 people voted brexit, which is clearly very shocking.

“We want our country back”!

Many ‘brexiteers’ used the expression ‘we want our country back’. However they did not perhaps understand what brexit was all about, and that even though it may have controlled immigration, until Britain actually leaves there will still be high or even higher rates of immigration. Also immigration is not necessarily a bad thing and although people feel jobs are being taken from them, they perhaps do not see how we need a younger population to pay for rising pensions.

What next…? What is the future for Britain?

The next step is simply to wait and see the outcome of the appeal of the high courts decision. Following this we will know when article 50 is likely to be triggered, how long the whole process will actually take and if another general election will be called. What the UK clearly needs is certainty and stability. Perhaps the boldest move would be simply to call another general election in the hope that Britain would make the right decision the second time round. It is also important to note that when the high court did block the so-called move to trigger article 50 the value of sterling rose by around 0.75%. If brexit does eventually go ahead, it is hoped that this will be a soft brexit, as this would benefit trade within the UK. Mark Carney, the governor of the bank of England said that a brexit court defeat for the UK government is, “just one of many twists and turns that are likely to happen” as Britain progresses further with leaving the EU.