The unknown unknown for the Indian economy.

In a brutal attack on the people, by the government, Rs 1,000 and Rs 500 notes ceased to be legal tender since midnight. As is usual, it is couched in pious intentions of rooting out black money from the nation. Cause enormous inconvenience to all the people to catch a few crooks. Which people have black money? Politicians, civil servants and their friends in business. Will they lose out? Unlikely. They will hand over sack loads of cash to friendly bankers in return for gold or foreign currency. The real sufferers will be the people. All of us have to keep up to Rs 50,000 in cash to pay our maids, those who wash our cars, to buy vegetables and to buy groceries. Because our politicians have an absolute blind faith in low interest rate, retail inflation has been allowed to run virtually unchecked. Retail inflation fell to 4.31% in September, to which the Reserve Bank responded immediately by reducing interest rate. Trouble is that the rate of inflation may have fallen but prices are still increasing at over 4%, starting from a high base, which means we need more cash for our everyday needs. We will have to stand in mile-long queues to exchange the useless notes for new currency but we are allowed to exchange only Rs 4,000 everyday. Which means we will waste some 10 days of our lives exchanging notes. How will people work if they are sweating in queues? So how much black money are we talking about? No one knows for sure but it could be 20% of the GDP, around Rs 30 trillion. Most of this is in real estate, so we can expect a crash in the value of properties. This will make it easier for people to buy real estate but states will lose a lot in taxes, because stamp duty varies from 4% in Sikkim to 12.5% in UP. Which means they could demand a greater share from the Goods and Services Tax, which is already a mess of different rates, additions of cess and other distortions. Exactly the sort of thing it was supposed to get rid of. However, what is not certain is what a sudden reduction of Rs 30 trillion will do to the economy. Will the rupee fall, because so much wealth has been suddenly wiped off or will it rise because so much money has been taken out of the circulation. Will consumer spending dip because the wealth effect has been affected. The Prime Minister is keen to make India a cashless economy. Which means we will have to use cards for every transaction, from buying bananas to buying condoms and sanitary napkins. Which will result in a complete lack of privacy. Also every transaction will be online which means either Google or Apple servers in the US. You can lock up your gold in a vault, as in Fort Knox, but how do you secure your wealth when it is bouncing round the world. Even the RBI will not be safe. Are they aware of unintended consequences?