I had written an article (https://masculineffort.wordpress.com/2012/05/25/the-indian-rupee-will-continue-to-fall-against-the-usdollar/) 18 months back predicting that the Indian Rupee will continue to fall. The Rupee was around Rs 50 to 1 USD then. It is now Rs 65 to 1 USD. I had offered some arguments then which are still valid. And indeed I predict that it will continue to fall. Especially now that the U.S. has discovered sources of gas and oil on it’s own territory, the dollar can be expected to strengthen and not weaken for the time being. I will now focus more on the rupee’s fall.
Plenty of arguments are being offered for the fall of the Rupee. Government spending, trade imbalance, current account deficit, Gold buying etc etc. But one angle is being ignored which I feel is important. That is the proliferation of fake currency in India.
As is well known, the 2005 encryption for the Rs 500 currency notes in India has been compromised. Yet, it has not been withdrawn. Why? Is it because India’s politicians and senior bureaucrats actually have access to these currency printing machines which are generally only provided to States? It is well known now that most businesses and lands in Indian cities are now owned by politicians.
Let us examine the case of land prices in India. Huge amounts of money are being paid for seemingly small amounts of land. Houses in Hyderabad are now going for up to $500,000, which is 30 million Indian Rupees. Of this, the cost of the land itself is 27 million rupees and the structure itself costs just 3 million rupees. $500,000 is the same as what an equivalent house would cost in a place like Dallas, TX? How is this possible? The same house in Hyderabad which sells for $500,000 rents for $7000 a year. That is a yield of 1.4%. Hell, the bank interest rate in India is 9%. Also, you have to understand that when a house is sold for $500,000 in India, it is paid in cash. That is right. Cash. Not cheque. Some guy (generally a front man for a politician) will just give you currency notes for $500,000. Ofcourse, he will not give you Dollars. You will be paid in Rupees. That is you will be given 30 million Indian rupee currency notes.
This begs some questions
1. How does this guy have so much hard cash
2. If you ask him to deposit the money in your bank account, he will refuse. You take cash or leave it.
A case can be made that this is black money. And it is possible that part of it is indeed black money. But I have to state that a significant portion of this is actually fake or counterfeit money. Even black money has to be earned even if by illegal means. It is easier than honesty, but still much harder than just printing it up. And black money is not spent this indiscriminately. Printed up money is always spent indiscriminately. Black money has always existed, not just now. So black money does not explain the incredible land prices in India. Agricultural land bequeathed to me by my grandmother is now going for 9 million rupees. The yield on that land itself is only 30,000 rupees. That is a yield of 0.3%. If I start farming, it will take me 300 years to pay of the land from the income I derive from farming. So even if it is black money, isn’t there a better place to spend it to make it white? Bollywood has been a favorite place to make black money white.
Finally there is a huge fake money problem in India. There are estimates that 33% of the currency circulating in India is fake. Where is this fake money coming from. The Indian government wants us to believe that this is coming from Pakistan. Just how gullible does the Government think we are? It is true that pakistan does print fake Indian currency, but there is no way they can pump in so much into the Indian economy. No way. They simply do not have the conduit or the channels or the means to do so. No matter what the Indian government wants us to believe, Pakistan is not that powerful. The reason the pakistani government uses fake money is to buy informers and pay their agents and other assorted traitors in India. They simply have no facility to send in so much fake money.
Then where is the fake money coming from? All I say is look who is buying up all this Land and property. In a city like Indore in india, most businesses are now owned by politicians. If you are a small business owner like a restaurant, they will just come up to you and make you a huge mouth watering offer. Any price you dare ask will be paid under the condition that you accept cash. You may ask 10 million Rupees for a restaurant that costs only 3 million. But why do they care? They can just print up whatever sum you ask. They will just do some token bargaining so that it does not appear too suspicious, but at the end of the day they will five you close to what you ask. And thus they buy and own that business. And you are the one holding all that fake money. Even if you discover the money is fake, there is nothing you can do. What will you do? Report to the police? Get serious! This is India. In India we prefer to take our chances with the demons than deal with the police. Besides the fake money is so close to the real thing that you can easily pass it around without serious risk of getting caught. There is no way a layman can tell the difference. You will need an encryption expert for that. You can hardly expect the common Indian to be an encryption expert.
Thus as the fake money gets circulated in India, it competes with the real money. And this brings inflation in prices. And consequently the loss in value of the currency. Of course I have no concrete proof of what I am alleging. I am just a common citizen. I have no access to the the corridors of power. But I can see, hear and think. With these tools I have speculated that counterfeit Rupees are definitely a factor in the Rupee’s fall. And I don’t think anyone will even talk about it because it will ruffle too many powerful feathers. My prediction, Unless they alter that 2005 encryption design for the Rs 500 note, the Rupee will continue to fall.