The Emperor Cash is Wearing No Clothes: Were we heard by government on Taxing Balance Sheet of India (

Notes from Debate of Vallum Team on Master Stroke to curb corruption : Are we going to witness Lehman like condition ( collapse of counter party trade in Indian unorganized businesses)

“Long years ago we made a tryst with destiny, and now the time comes when we shall redeem our pledge, not wholly or in full measure, but very substantially. At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom. A moment comes, which comes but rarely in history, when we step out from the old to the new, when an age ends, and when the soul of a nation, long suppressed, finds utterance. It is fitting that at this solemn moment we take the pledge of dedication to the service of India and her people and to the still larger cause of humanity” Tryst-with-Destiny-speech-made-by-Pt-Jawaharlal-Nehru, 1947

The master stroke played by the government to curb the black money echoes similar sentiments as witnessed during the speech made by founding father of this country. It’s a watershed movement in economic, political and cultural history of India, and its tremor will be felt for years to come. Its renaissance movement for this country and partly resembles what happened in Rose Revolution, 2003 in Georgia. I am reminded of a well know saying “Winner don’t do different things, they do things differently”.

The cash-cheque-cash business, economically rewarding for few, confusing bit for most, has come to a grinding halt. The demonetization of Rs 500/1000 notes along with banking restriction on withdrawal will create chaotic situation amid transition from the old currency to the new currency. This kind of transition has taken place in Zimbabwe, Philippines, European Union, Pakistan. However, all of them were replacement of new notes rather curb on black money.

We have summarized this in three key implications

A.   It has killed Political Funding Mechanism which has existed for long. Over the next few years, the governance in the country will improve manifold. Better governance translates into better profitability for all stakeholders of the country. This move directly impacted politicians, bureaucrats who have stashed their ill gotten wealth in land and currency.

B.   The misallocation of black money in Real Estate and Gold ( will halt and accentuate the slump in these asset classes. This will result in huge financial migration and we believe the unintended beneficiary of all this would be the Equity and Bond markets of the country. The government borrowed around 4,50,000 lac Crs. last year which gets reported as fiscal deficit.  The banking system has Rs 1,75,00,00 lac Crs. of currency in circulation. We are making an assumption that 50% money is not tax declared, there by leading to Rs 8,50,000 crs This deluge of liquidity needs to return to the banking system before Dec 31, 2016. This will expand the deposit base of the banking system by approx. 10% and the Government will have additional revenue of Rs 4,00,000 Crs. by taxes. This will lead to crashing of long term interest rate due to lower government borrowing in the future and channelizes this money for long term investment asset creation in India ( I will also call this move as a careful strategy of Banking Recapitalization by improving their current Investment Deposit of 105%+ to better numbers, lower yields will help them in writing off Non Performing Assets (situation similar to Year 2000-2004) , credit creation participation in government led infrastructure creation. The equity market is rejoicing on most of these counts, including the long term outlook of lower inflation and stable rupee from current state of steady devaluation. The firm agenda put by the government to bring back rural prosperity by improving roads, sanitation, water, irrigation and healthcare should witness significant resource commitment.

C.    We have debated the role of cash in consumption driven economy of India. The consumption of white goods, Real Estate, luxury watches, cars, two wheelers, building material will impact negatively over the next two years before this situation normalizes and the economy adapts to work in a tax paid money. The sword of introduction of GST on unorganized sector will further impact this sector, negatively. We should brace for severe slow down in consumption. The break down in payment mechanism can lead to Lehman like condition (collapse of counter party trade in financial markets) in India by unorganized businesses.

Team remained divided on role direction of short term interest rate due to deluge of money with banking sector versus sudden challenge arising due to need of money by small trader to finance his working capital and daily business needs.


Manish Bhandari (CIIA, CEO of Vallum Capital Advisors, is based in Mumbai and advises on Investments to HNIs and Institutions)


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