The sale of luxury goods in India has reportedly taken a plunge since the start of the year when the government required retailers to record the customer’s tax identification number for cash purchases of more Rs200,000 ($3,000).
As reported by The Financial Times, the impact on Ethos Watches, a luxury watch retail chain with 45 stores, was immediate: sales plunged 60%. Before the new rule, 45% of the company’s sales were of Swiss timepieces worth over 200,000 — often bought with suitcases full of notes.
“People are no longer able to make cash purchases of expensive products without the risk that they will be called by the income tax department inquiring where they got so much cash from,” YashoSaboo, Ethos’s owner, told the Financial Times a few months after the new regulation took effect.
Monitoring large cash payments is part of Indian Prime Minister Narendra Modi’s campaign to crack down on “black money” — cash earned through illegal activities, or earned legally but never declared to tax officials.
The campaign hit its apogee last week, with New Delhi’s surprise ban on the use of Rs500 and Rs1,000 notes — a radical action intended to catch black money hoarders.
The scrapped currency — together worth more than $220bn, or 86% of India’s circulating cash — is no longer legal tender and is not supposed to be used for any transactions, except buying fuel at state petrol pumps or in government hospitals.
Until December 30, the notes, worth $7.50 and $15 respectively, can be deposited in bank accounts or exchanged in very small quantities over the counter for new currency. But income tax officials will be alerted to any deposit of more than Rs250,000, a sign of the widening campaign against corruption and tax evasion, reported The Financial Times.
The cash ban, which was announced on November 8, shocked India.
“I know the forces up against me,” Modi said in a speech this week. “They may not let me live. They may ruin me because their loot of 70 years is in trouble.”
According to The Financial Times, the stealth decision to abruptly cancel and replace most of India’s currency is a radical economic experiment, and political gamble, with few precedents.
“No country has done this kind of shock therapy,” Jahangir Aziz, global emerging markets analyst at JPMorgan, was quoted as saying. “We don’t have any precedents of doing anything of this sort. We are flying by the seat of our pants.”
Swapan Dasgupta, a member of India’s upper house of parliament, says the move is intended as a radical shake-up of Indian society, where corruption and tax evasion, by businesses and affluent individuals, is a way of life.
“It’s motivated by a philosophy which is that if you want India to be a meaningful player on the world economic stage, you’ve got to take tough measures,” says Dasgupta, who has close ties to Modi’s ruling Bharatiya Janata party. “Otherwise you can plod on.”
“There is not a soul in India who has not paid black money,” says Surjit Bhalla, senior India analyst for the New York-based Observatory Group, an economic consultancy. Bhalla admits he caved in to pressure in the 1990s to pay Rs300,000 to a Delhi city official who withheld permission for him to build a house for two years. “We have created an environment in which everybody is forced to be corrupt,” he says.
Meanwhile, economists agree that the sudden cash crunch will be a painful blow to the economy initially. Analysts estimate that the ban on the notes will shave about 1% from GDP growth in the current financial year, which ends in March.
According to Deutsche Bank, fast-moving consumer goods sales have dropped by 30% in some regions, while consumer durables in small towns are at a standstill. Much of India’s trucking fleet, which relies on cash for tolls and taxes, are stranded on the highways.
Property prices have also been hard hit, with implications for the employment-intensive construction sector.
According to The Financial Times, the full impact of the negative shock will depend on how fast the government can roll out the replacement cash. So far, the process has been agonisingly slow, as each ATM needs physical recalibration to handle the new notes, which are slightly smaller in size than the old ones.
In a separate report, MINT online noted that India’s demonetisation bid has been widely reported in China. Chinese official media commented that Modi’s “masterstroke” to demonetise Rs500 and Rs1,000 notes could be reduced to a “nasty partisan conspiracy” or a “costly political joke” if it fails to deliver on its high-sounding promises.
“While it takes political courage to launch such a trailblazing and massive campaign; it actually takes far more wisdom to give it a happy ending,” an article in the state-run Global Times said on November 17.
“Given the fact that people have to pay an absurdly high price for the expected reform, if BJP fails to deliver its high-sounding rhetoric and promises, then Modi’s much-lauded ‘masterstroke’ or ‘big bang reform’ will likely be reduced to ‘nasty partisan conspiracy’ and even a ‘costly political joke’,” it said.