India: Emergence of Dual-rate Rupee
Recently, in the Hawala market, the Indian Rupee (INR) fell by 20%. The gold price increased by a similar amount. These lasted a few days and left the existence of Argentinian-styled dual rates, albeit, for now, only with a 5% difference.
Indian Rupee (INR) has traded in the Hawala market for a minor discount to the official rate, about 0.5%. So, if the official rate were INR 82 for the US dollar, you would have likely paid INR 82.41 in a Hawala transaction. While illegal, not only does Hawala avoids scrutiny of the rapacious and utterly venal Indian tax authorities and mountainous paperwork, but it also works as well as or better than the banking system.
How does Hawala work? You pay cash locally to someone who visits you with a code. Your foreign currency gets delivered using the same code on the other side of the world a few hours later. For a mere 0.5%, you enjoy the convenience of home delivery and no bureaucracy.
India makes it illegal for citizens to take more than a small amount of INR in cash out of the country. Foreigners can take out none. Despite this, INR is openly transacted in many parts of the world at a not-unusual spread. You might get a better rate from informal dealers in Hong Kong, Dubai, Muskat, Singapore, etc., than the banks in India. In China, even banks accept INR in cash for conversion to Yuan.
In early 2020, the Indian government announced a 5% TCS (Tax Collection at Source) on the conversion of INR. This tax was to be fully refundable in the subsequent tax filing. Accountants, however, advised their clients not to claim this money to avoid getting audited and having to pay bribes. Hawala transactions suddenly became attractive, which led to a 0.5% exchange rate difference from the official rate.
India charges a 10% import duty, a 5% Agriculture Infrastructure Development Cess, and a further GST of 3% on gold. These add up to a total tax of 18.45%. No wonder a massive amount of gold enters India through the porous borders with Bangladesh and Nepal. Ordinary people hide it in their anus and use other tricks to smuggle it into India. So much gold comes through this path that its street price is less than the official landed price—the smugglers are happy to sell their gold for less than 118.45% of the international price and still have a lot left over for a good profit and bribes.
As usual, you are bankrupt if you want to run your business through the book in India—no one will buy gold from you if you sell only the officially imported gold. Some gold is, of course, imported for window-dressing purposes.
Does the higher tax on gold lead to higher tax collection? No, but it does help with a more elevated—and in bulk—collection of bribes from smugglers, as will likely be the case with the recent imposition of a much higher TCS on foreign currency transactions.
The Indian government recently increased TCS from 5% to 20%. Moreover, they brought credit card transactions into this scheme. If you use your Indian credit card to pay $100, you will be charged $120, with $20 refundable in the subsequent tax filing. Then the announcement of the demonetization of INR 2,000 bills came. Ironically, this bill was introduced when India demonetized 86% of its currency in 2016.
While the official exchange rate was INR 82 for a US dollar and the Hawala rate not too different, in the chaos and suffocating confusion, the latter jumped immediately to INR 98, creating an Argentina-styled dual rate system. As gold is imported into India, its price increased commensurately—from INR 60,000 to INR 70,000 per 10 grams.
While the rate difference has slowly reduced to 5%, this is now here to stay and will significantly affect the INR, sending a lot of currency trade underground. Afraid of the government’s shameless expropriation intentions, there has been a rush out of INR. The next fear is that India wants to demonetize even INR 500 bills, force people to adopt Central Bank Digital Currency, and impose all the associated interference and loss of privacy.
Indian government’s deficits continue to increase exponentially, and the economy is faltering. Corruption is universal, blatant, far worse than ever, and as common as the air around you. The tyranny continues to increase. Indians are total participants in this. Always happy to virtue-signal using others’ money, they have no hiccups about letting their government steal from others. They fight tooth and nail to protect their politicians and India from getting a bad name, openly lying about the horrendous problems facing what is one of the poorest and wretched countries. They have created a mythological image of India’s past through TV serials—ironically, the British discovered most of its history. So much of the Indians’ identity is associated with what outsiders think of them that they are clueless about how the rulers shamelessly exploit them under that cover.
Editor’s Note: If you want to navigate the complicated economic and political situation that is unfolding, then you need to see this newly released video from Doug Casey and his team.
In it, Doug reveals what you need to know, and how these dangerous times could impact your wealth.
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