3. Next we come to the issue of loopholes. There are so many that I am only vaguely aware of a few. Someone with greater experience in finance would know dozens:
- As mentioned above, too much of the black money in the economy is already part of the formal, legal economy. It is invested in shares, bank deposits, legitimate businesses, real estate, etc. The reason as to why revenue is not able to mop up this money is because
they do not have much faith in the IT-enabled means to track and record transactions, and also, they don’t have the requisite manpower. And mind you, the gap is only growing each day.
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As for real estate, lack of centralized land records means that there is no consolidated account for each person’s holdings. Aadhar-based seeding of property tax records will take ages, and will only be able to AT BEST detect benami property. Most property from black money is owned by people not covered under the definition of benami. That is because they were either purchased before the value-based reporting system came into existence, or were purchased with loans, or in joint names, or of values less than the reporting threshold. Most people I have talked to do not know anyone with benami property. Yet they know dozens of people with property in their own names who will have a hard time explaining themselves.
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The loan loophole is one of the biggest sources of tax evasion in India. If you purchase anything on a loan, it is automatically exempt from scrutiny. So one can just take a loan, and keep paying it with the black money he already has or continues to generate.
- As mentioned earlier, traders operate their own system of negotiable instruments. These traders are accepting old notes at discounted rates. What will they do with these old notes? They will not exchange them at the bank. They will either use it as discounted negotiable instruments themselves, which are totally unregulated, or will “lend” it to those who have no cash left. These traders will then trade with those who honour the old notes. The non-legal tenders will find some permanent acceptability (perhaps at a permanently lower value) within the black economy, thereby creating an even more undetectable system than at present. Two major functions of money include medium of exchange and store of value. If people continue to exchange in old currency notes with the faith that it will be accepted at least within the black economy, it may become a permanent feature of Indian monetary system. It will be especially useful for many transactions which are illegal any way and will never show up in the formal banking system. While the present black economy intersects the legitimate economy at various points, this new economy will not.
- I am sure that most people are aware of back-dated buying of gold, so no need to explain that I guess.
- Using bank employees to access unused and Jan Dhan yojna accounts is also big business. Rest assured, a lot of the millions of new accounts opened in the last two years in the names of poor people will have deposits and withdrawals made from them, of just less than 2.5 lakhs.
- Then there are the ingenious ways such as booking and cancellation of train tickets, paying advance salaries, giving loans, using the agricultural income loophole, using the loophole of contributions to political parties, etc. etc. etc.....and these are only the ones I know of.
- I hope it is now abundantly clear that the intended targets of this move are hardly losing any sleep over it.
4. I now come to some general concerns about this move and the road ahead of us.
- The issue of counterfeit notes is the biggest mountain of a molehill – ever
. According to the Indian Statistical Institute, the total amount of counterfeit currency in circulation at any time is about Rs.400 cr. This is such a small amount that it needs no elaboration. And the cost of printing new notes? Rs.12,000 crores? Cost of ATM re-caliberation? Cash movement? Working hours lost? Retail business lost? Human suffering? As Mastercard would say – priceless.
- In any case, financing of terrorism in India has had age-old sources which have only grown over the year – narcotics and arms smuggling. Any Indian member on PDF who is interested in geo-strategic affairs knows exactly what happened after the Afghan War, the change in policy regarding asymmetric warfare, and the funding through heroine and gun-running. Since this thread does not involve our Western neighbours in any way whatsoever, I am desisting from elaborating further.
- The information was already leaked. SBI reported suspiciously high withdrawals of small denomination notes April-onwards. Local dailies in Gujarat had spilled the beans early enough. Cash deposits in banks spiked in the last quarter, reversing a trend, despite industrial growth weakening further. A further slap in the face of the “bahut achcha kiya” brigade.
- The only way demonetization
in itself can even touch the problem of further generation of black money is by permanently contracting the cash supply in the economy. And along with being disastrous for the economy in general, this will hurt the poor and illiterate far more than the wealthy or the corrupt. Even a conservative estimate of the black money generated each year in the economy is Rs.30 lakhs – more than double the money being withdrawn from circulation. I hope the bhakts understand.
- The newly introduced higher denominations, once they are adequately available, will first go to the same people as they always went to before anyone else, referred to as “hoarders” – rest assured.
- We don’t have the infrastructure for a cashless economy, period. Stop this clap-trap about Jan Dhan yojna, blah-blah.
With only 46% banking penetration, only 22% internet connectivity, 19% of population without electricity connection (and others with unreliable connection) and only 1.2 million of 14 million merchants having point of sale devices, India simply doesn't have the infrastructure for a cashless economy. POS penetration in India is around 693 per million, compared to around 4,000 for China – and even China doesn’t dream of going cashless. More food for thought for Bhakts. No doubt the government has made some good efforts, but they are far behind the curve.
- The government could have, for example, instructed public sector banks to reach out to all retailers etc. and install POS free of cost, as well as offer free maintenance. That would have prepared us for going cashless. Only recently has the RBI constituted a body to ensure that the issue of POS installation and the cost issue is addressed – expect something to start happen by the middle of next year, at the earliest.
- Also, we have one of the lowest rates of digital literacy in the world. In fact it is so low that RBI says that 88% of debit card transactions are for ATM withdrawals only. Those people who gloat over Jan Dhan blah blah should see how these accounts are operated. Bank employees or kind strangers have to literally do all the work for these people. People who cannot even put a thumb impression without being told how it is done are all supposed to just live on their debit/credit cards and online banking. If there is a crueller joke, I am yet to hear it.
- The printing of new 500 and 1,000 notes would take about seven months because the capacity of India's currency presses was only 300 crore pieces per month. The total number of currency that has been withdrawn is seven times higher. There were 2,203 crore pieces of ₹500 and ₹1000 notes in circulation. This is at full speed, mind you. So if Modiji asked for 50 days, what did he mean? That the supply of cash would be permanently brought down? Because otherwise the numbers don’t add up.
- We are being told that the move will benefit us in the long term. And yet, global experience has been that the only changes that work in the long term are policy and structural changes. By moving in such a drastic manner, and especially the sudden and unprepared nature thereof, the government betrayed its lack of faith in policy and structural change.
- While making decisions about monetary policy, there is extensive deliberations before even the minor adjustments are made. Economists and central bankers discuss the possible effect of .25-.5% rate changes for months. Will it cause inflationary/deflationary pressure? Will it affect liquidity? Will the common man be disproportionately affected? Will it achieve other desired objectives? Here, the government has sucked all liquidity from the system at one go, without a fixed timeline for its restoration. To think that this makes sense in economics is not only dangerous, but insanely so.
- The utterly ridiculous fact that no relevant authority was either informed or consulted has been turned on its head. It has been presented as a masterpiece of lightning action, and the total unpreparedness as a logical and desirable fallout. Even the most atrocious mistakes such as meaninglessly changing the size of the notes, thereby requiring such extensive re-calibration, has been explained away as a security feature. If this trend of blind faith continues, we are in severe danger of becoming a banana Republic.
- The global experience of demonetization is extremely discouraging. The only countries that have embarked upon such a move are those on their last legs or fighting a losing battle with inflation and economic collapse. Soviet Union, Zaire, North Korea – this is hardly a list to join, and in each of these cases, demonetization failed.
- The real experts have largely stayed out of the debate as they know how damagingly blind bhakti has taken over the public space in India. Former chief economist of the World Bank Kaushik Basu says it is a wrong move. Raghuram Rajan has stayed silent but in an earlier speech he had said that demonetization does not work (scholar-speak for disastrous). While D. Subbarao has generally agreed with the move, he has warned that he idea of refinancing banks is undesirable (scholar-speak for extremely stupid).
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Business and the economy thrive on confidence. And confidence comes from predictability. Anyone who has done business/tax structuring will know exactly how much effort, time and money businesses invest before making any decisions – new projects, acquisitions, expansion, etc. If they cannot foresee the implications – they will not act. And now our government has shown itself to be totally unreliable, and not only that, has promised many more of these surprise moves. There is a new rumous each day – new financial year, all taxes to be replaced by just Banking Transaction Tax, and so on. In this environment, business will not invest. Period. All the bhakts can take note.
- I am not even mentioning the escalating consequences such as loss of work, livelihood, short-medium term deflationary pressure, complete halt in employment growth etc. Those who understand will do their own research and as for bhakts, they have already discounted all of these things as “temporary inconvenience”. Such callous insensitivity will only end when the livelihood of the bhakts themselves is at stake. Only then will they understand what has happened.
- There are much saner alternatives that can kick in within two years and show actual results soon enough. The trouble is, calm competence has been jettisoned in favour of voodoo economics, and we are all paying its price.
This was the first thing the govt should have done and stopped cash transactions above 99,999/-. or even better above 49,999/-.
Next it should have waited to print Rs. 2000 notes and rather printed excessive notes of rs 100/- and below.Then after 3 months rs. 500/- and after 6 months rs. 1000 new notes should have been introduced. There is no need for Rs.2000 notes.
Before announcing all the jandhan accounts should have been issued with debit cards.
After announcement the banks were kept closed..... that day should have been used for caliberation of rs.100 notes in the ATMs and the ATMs would dispense only 100 rs notes.
Instead of exchanging 4000 rs. per day for new currency... all the old cash should have been allowed to be deposited in bank accounts. Special provisions for those who do not have a bank account. Later the govt. would be free to question those who deposited more than 2 or 2.5 lakhs in their account. This would have acted as compulsory disclosure scheme and all unaccounted deposits would allow the government to deduct taxes with 200% penalty.
Banks to visit temples, dargahs and religious / charitable centers to collect the cash on 10th november...and after that these temples, dargahs and charitable organizations etc will not be permitted to deposit cash in the banks.
These are small things that the government should have done to avoid hardship to the people. This could be more refined but it would have substantially lowered the doubts on govt. intention.
This was the first thing the govt should have done and stopped cash transactions above 99,999/-. or even better above 49,999/-.
Next it should have waited to print Rs. 2000 notes and rather printed excessive notes of rs 100/- and below.Then after 3 months rs. 500/- and after 6 months rs. 1000 new notes should have been introduced. There is no need for Rs.2000 notes.
Before announcing all the jandhan accounts should have been issued with debit cards.
After announcement the banks were kept closed..... that day should have been used for caliberation of rs.100 notes in the ATMs and the ATMs would dispense only 100 rs notes.
Instead of exchanging 4000 rs. per day for new currency... all the old cash should have been allowed to be deposited in bank accounts. Special provisions for those who do not have a bank account. Later the govt. would be free to question those who deposited more than 2 or 2.5 lakhs in their account. This would have acted as compulsory disclosure scheme and all unaccounted deposits would allow the government to deduct taxes with 200% penalty.
Banks to visit temples, dargahs and religious / charitable centers to collect the cash on 10th november...and after that these temples, dargahs and charitable organizations etc will not be permitted to deposit cash in the banks.
These are small things that the government should have done to avoid hardship to the people. This could be more refined but it would have substantially lowered the doubts on govt. intention.
While I disagree with you on certain points you made, your post shows an honest attempt at trying to understand and solve the present mess. We need more of this, and not blind bhakti. Cheers!
Most PDF Indian members probably are lucky enough to work in "formal sectors", so they don't have to go through this pain.
While the sum total of Indian members here is varied, the Modi-bhakts have a uniform profile. They are either college students studying at middle-rung universities or office goers with reasonably well-paying jobs. They are definitely not poor. But neither are they intellectuals, and I doubt many of them have any experience at running businesses either. How else can one explain the joy at the government's promise of many more surprises to come? Which businessman likes to hear that?
