Demonetisation in India - OMG

I recently returned from India, where I met with over 250 Indian companies with an interest in direct investment in the U.K. by way of acquisition. It was a wonderful trip from both a business and cultural perspective. More on that in another blog. But for now, I wanted to focus on the most incredible recent developments in India. Developments, remarkably, that I do not think have been reported across the globe in the true way that they deserve.

The Indian government - and more specifically Prime Minister Modi - has pulled off a master stroke in a personal fight against the enormous black economy - the 'cash' economy - which commentators believe counts for over 80 percent of Indian GDP!

Consumer and business deals are done in cash. No records are created and no tax is paid. This black economy represents a gigantic black hole - as it does in many countries - but it is something against which the Indian PM has said he will get tough on. And he has. Over night.

A few weeks ago, Modi's master stroke was announced and became effective with IMMEDIATE EFFECT. In a nutshell, he rendered ALL notes more than 500 Rupees (c. ￡6.50) illegal tender, but offered to change these at banks and exchange houses for NEW notes - of exactly the same value - for the next 50 days only. The rules around this though are what makes this so earth shattering.

Key rules being;

1) Any individual cannot change more than 2,500 rupees (c.￡30) per day (banks are using indelible ink to mark your fingers when you visit!)

2) The government will allow you to deposit up to the equivalent of c.￡1,500 in the 'old' bank notes in your own bank account (if you have one) with 'no questions asked'. However, for amounts more than this, you are required to show the equivalent of your tax return or the deposit will not be accepted.

It sounds draconian. It is. Certainly if you have been earning in cash, not declaring it and stockpiling cash - something that is widespread across India. It is a master stroke that has caused complete panic amongst those who have been paid in cash (in many cases for years and years) and now have the problem that it is completely and utterly useless. Quite literally, billions and billions of rupees have been removed from the system.

This means taxi drivers, street traders, small (and medium sized) business owners and politicians who in many cases have, literally, hundreds of thousands of pounds worth of rupees in dirty cash on which no tax has been paid are completely and utterly stymied.

Many are desperately trying to avoid the inevitable - BURNING their cash as it is rendered worthless overnight. Many with illegitimate cash are, allegedly, getting the poor in society to line up at the queues at the banks to help them deposit it. It would take over 3,000 'helpers' to change ￡100,000 of notes - you can imagine the logistics of this.

The implications of this are widespread. Amongst them;

- Seriously long queues and unrest at banks and ATMs (all the ones I saw had enormous lines extending in some cases to several miles that were protected by the army).

- An inevitable huge spike in Indian GDP as lots of earnings from here on in are 'declared'.

- An exercise (called demonetisation) that will serve as an experiment for other 'cash' economies around the world. Will this be repeated? I suspect so if it is successful.

- A different view of India and their popular prime minister Modi. India is a serious place to do business and will be stamping down on corruption.

It has been a fascinating time to be in India. A truly wonderful country and at such a fascinating time. Let's see how this unfolds in the coming weeks and month.