> Anyone with outstanding notes must either deposit them in a bank -- potentially incurring a tax -- or exchange them for replacements in strictly limited sums.
Incurring a tax is the entire point of replacing the old currency. A large portion of the black untaxed money is untraceable in the form of cash, so getting them into banks and taxed is the first step.
This article is overly negative about some negative things that are part of the expected outcome, that even the people who are proponents of the change admit. Of course there are obvious drawbacks to invalidating most of a nation's currency at once, the point is how this process benefits the country.
A lot of poorer Indians barter or use smaller cash denominations anyways, and the government isn't trying to crack down on that; comparing India to Nigeria in that sense doesn't matter. And reducing the economy of the entire country temporarily is very intentional- if a big part of your country's business dealings is with illicit cash, cracking down on it will of course reduce the market.
The idea is to sacrifice some money in order to reduce corruption and increase the trust in government and business systems. If that is successful, then this move is very beneficial for India in the long run.
I don't see how charging tax on cash is the solution to this problem of people not paying their taxes. They are punishing the person who lost at musical chairs or am I missing something?
How does this prevent it from happening again with the new notes? Tax system is still broken.
Let's say you are an honest citizen. You earn $1000, of which all of it is properly taxed. You get $100 in cash and give it to a corrupt official in order to do something. Another person is a corrupt official/businessman; under this official, there are maybe 100 people, and each person gives this official $100 in order to get something done. This income is in the form of cash, and is untaxed.
If you force everyone to put their money into a bank, then anyone who pays their taxes already has their $900 in assets accounted for and don't need to pay more taxes. If you have $10,000 in cash you need to deposit into a bank and no documentation for it... you'll have a bad time.
There is no musical chairs, since the money flows upwards. If you are honest, you should not get hit by any additional taxes.
This is the reason why currently most of India supports the move of discontinuing the old currency and replacing it. Unless you take in a large amount over your taxed salary as untaxed bribes, it doesn't affect the amount of money you have.
But what I don't see are measures to ensure that people will continue to deposit money in the banks / pay their taxes. While I appreciate the move to force the turnover of black money now, what stops someone from starting to accumulate black money again, lets say a few months from now?
I hope there are measures being taken in that account.
That's a very valid point, and at the moment, I don't think anything is being done in that regard. However, the difference between the Have's and the Have Not's in India is enormous. Defying-belief levels of enormous. There were reports of people burning suitcases full of money, or just throwing it away in sacks because they couldn't figure out what to do with it. Given this fact, even this first step has the potential of reinjecting a lot of money back into the economy. We have this rule of thumb in India, for instance, that when buying real estate, only about a quarter of the actual price is paid in "white money" (legally) and everything else is under the table. We have a staggeringly bad corruption situation, and I think it's a good first step.
On the other hand, there is something to be said about Joe Public in the emergency ward who cannot afford the fee simply because the ATMs run out of money within hours of being restocked, and he doesn't have the luxury of waiting in long lines. Not sure if the government has anything in place for such a scenario.
Yes. There are. There will be a cap on the maximum transaction that can be done using cash. So cash accumulation gets reduced. And hoarding large amounts of cash in physical notes will be dissuaded.
> That could have been done gradually without banning notes.
Please correct me if I'm wrong, but banning notes is to bring about a few changes like forcing people to declare black money and fighting the counterfeiting industry (just to name a few). Like you pointed out, the cash transaction limit could have been brought into force without banning the notes, but by combining both, isn't the cap more effective in deterring accumulation of black money in the future?
> Introducing higher denomination make even more less sense.
I don't quite understand this. Higher denomination or not, the cap is on the transaction amount, so how are they related?
For a good argument in favor of the move, and for a theoretical perspective on this, even in a developed economy with less paper money %, please see Kenneth Rogoff's blog post and also his book - the "Curse of Cash" (I've not read his book though only his posts and tweets on this)
Thanks. So if I'm not wrong, what you're saying is even with demonetization and a transaction cap, they will barely make a dent in the state of black money in India. Am I correct?
Remove "and a transaction cap" part, you are correct.
Going cashless will solve terrorism and counterfiet problem. World is going cashless and naturally India would have gone too without the huge cost of banning notes.
However I have different issue with this, allow me to quote
Corruption and black money are a consequence of big government, of one set of individuals having discretionary powers over the actions of others. If Modi was serious about tackling black money, he'd bring about institutional changes that would take us towards the minimum government he had promised in his 2014 campaign. Instead, government keeps getting bigger, controlling more and more of our lives. More government = more corruption.
Also Center/Modi wants to make prosecuting corrupt public officials more difficult and bribe-giving a criminal offence. Considering giving bribe is unavoidable fact-of-life and cost of doing business in India, Center wants to make CEOs responsible [1] [2].
> The size of the government is not the deciding factor.
For India it is. Its that simple.
What do you suggest Indian Government should do to reduce corruption while still holding same power if not increase it ? Laws & executions have failed consistently. It wont be different this time.
Corruption is a social problem with huge momentum. It took a while for it to creep in and it will take a while to creep out (like all social problems).
Reducing unneccessry regulations and red tapes are only quick fixs we have.
Part of this is teaching people to USE banks. A comparison would be how a lot of westerners don't understand how credit cards work and just think they'll get into huge debt. Then they use one and realize it simplifies life and is easy to maintain
But it sounds like there are follow-up actions planned. The President (?) of India is rumoured to be expected to give everyone 100 bucks worth of rupees next year as a "Sorry for the inconvenience" celebration with the stipulation that it goes into a bank account.
And I suspect there are a lot more steps planned. Likely benefits to using direct deposit rather than being paid in cash and other options.
A lot of tax evasion is because of the complexity of Tax code. If you are in Mumbai and if you are selling an assembled PC you have to pay around 10 different taxes and 2 cess.
The NDA government has finally come up with GST which will replace majority of these taxes while making the tax compliance significantly easier.
The current sweep has increased the risks for keeping lot of cash in hand FOREVER. Just like how 9/11 has changed the air travel forever. I already see the trends where people are now focusing more on Gold, Hawala, Casinos and other means of investing their cash.
> what stops someone from starting to accumulate black money again, lets say a few months from now?
This is exactly what I've been concerned about. There's a high chance of acceleration in corruption in next few months to a year. There are no working solution that prevents corruption in the first place.
They aren't charging a tax on cash. But if you exchange a large amount of cash, they will look up your past income tax records and if it doesn't line up with the amount of cash you have then you get taxed.
Indian has a problem with large hoards of cash being used to evade taxes. This is basically a come to Jesus moment for tax evaders with these hoards.
It is a pretty crazy policy, but this article glosses over some major points.
There are plenty of folks who think that the US should phase out $100 bills and Europe should phase out €500 bills for essentially the same reason: they are used primarily by people trying to do very large transactions in an untraceable way, which has big overlap with money laundering, drug deals and other illegal purchases, tax evasion, etc.
Most day-to-day cash transactions work perfectly fine using $20 bills.
> [...] illicit activities are facilitated when a million dollars weighs 2.2 pounds as with the 500 euro note rather than more than 50 pounds as would be the case if the $20 bill was the high denomination note.
> they are used primarily by people trying to do very large transactions in an untraceable way
And ? I don't want my large or small transactions traced, monitored and monetized upon the untouchables called banks and I don't understand anyone who agrees with this but otherwise supports freedom and anonymity in tech.
The whole thing is just an excuse for more control.
Using $20 bills wouldn’t make your all-cash transactions impossible. It would just make e.g. tax evasion, drug purchases, money laundering all a bit more cumbersome and conspicuous.
The burden would fall heavily on illicit transactions, while only slightly impacting most cash users, if at all.
(I’m not advocating for this, merely linking it as topical to the discussion.)
Poor example. The government produced a coin and then ordered all of them melted down but 2. When 20 showed up, it is clear they were stolen and the government claimed their property. As a tax payer, I think this is a good idea.
This move is just one of many steps. Let me first establish the context and list the other pieces (as I understand them):
> India recently executed / implemented a nationwide biometrics id scheme which has now allowed the govt. to create bank accounts for a very large fraction of the population that previously didnt have access to banking.
The untaxed / cash based transaction system has distorted multiple facets of the Indian society and economy: from vote buying to a distorted realty market. This also blocks investment. When 20% of your net economy is sitting in closets, it is a large wasted opportunity.
> Apropos the fragmented tax system, the Indian parliament finally passed a monumental tax reform pack (first proposed by the opposition parties when they were in power and then opposed by BJP, the current dispensation in power, but I digress).
> This bill, among others moves the country to a digital transaction / electronic payments based tax & transaction system.
> The govt has clearly established a desire (and has now demonstrated the will) to move towards an electronic payment / transaction system, the benefits of which are obvious, especially in terms of minimising pilfering of welfare money, etc. (The national ID scheme now allows for direct cash transfers without middlemen, corruption, etc.)
(You can see where this is leading..)
86% of the Indian currency is high value (denominated in the ₹500 and ₹1000 notes that have now been banned).
The govt has stated that the new high denomination notes that are being issued will not replace the entire 86% in physical cash. It will be a smaller fraction.
This does two things:
a) people who deposit old currency notes will now, perforce, have to move to electronic / card based transactions.
b) it forces individuals to declare their "black" or untaxed money and also move to the electronic payments system.
So, I think this move helps significantly since it is part of a larger push towards electronic transactions etc. In conjunction with the changes in the tax system (and expected / anticipated reduction in income tax rates / increase in exemptions), this move, while painful in the short term, is potentially transformative for the Indian economy and society.
>> They are punishing the person who lost at musical chairs or am I missing something?
There was an amnesty window leading up to this. Until Sept 2016, all black money could have been deposited in bank accounts in India, no questions asked, taxed at usual income rates.
The people suffering now are the ones who took the Indian Tax system for granted.
>> How does this prevent it from happening again with the new notes? Tax system is still broken.
Fear of losing more than half your net-worth again.
The tax isn't on cash. It's just regular tax - sales tax, or income tax, for that matter. Some businesses pretty much run on cash payments. That way, they can store the cash physically, and not pay tax on it. The "crackdown" is to basically ensure that this happens no longer. The intentions behind it seem to be good (from my limited viewpoint), but I guess the implementation could have gone better.
This measure attacks the STOCK of black money that has accumulated over decades. Govt also needs to attack the FLOW of black money, and those changes are coming soon.
This government has always been pretty tight-lipped about upcoming changes. Decisions are made, directives are sent to the appropriate governing bodies, and then public statements are made. It's a refreshing change from the past.
Even this 6% is not all going to end up in bank accounts and taxed, because the government is insisting on a 200% penalty on the computed tax. So if you do declare your sacks of cash at this point, you'll be charged 90%, on top of which there is no guarantee that the Income Tax department will not go over the rest of your life with a fine-toothed comb. They probably will.
So IMO a large chunk of this 6% will be laundered (including converting to new, valid notes) for something like a 20%-30% loss.
Ya this article is total BS. the estimates I have heard are much larger than that. Just a case in point, when you do any land/real-estate transaction in india its common understanding that about 30-40% of the sale will be cash outside of the stamp duty. its so routine that the bribes are calculated based on this number. Now as far as non-metro areas are concerned almost all transactions are cash. every time I goto india I have hard time paying by credit cards. My rule of thumb is if a shop has glass door then likely you can use CC otherwise most mom-pop shops its all cash. Also those fo us who grew up there its a common knowledge that the only people who pay taxes are the ones that get fleeced at source, rest just pay a marginal amount & then have an 'understanding' with local IRS official. In fact its so bad that small businesses cant just opt to pay taxes and not bribe the official so its creates a competitive disadvantage. This is the reason the Income Tax dept postings are one of the most sought after. I could go on but you get the gist.
now back to the articlw in question. you have to understand the mechanics of it all. for 60 years India has had the rule of cash & a very powerful people have amassed a LOT of it. it stands to reason that these people will have fair bit of influence over media (think Murdoch). if they are going to lose a majority of their fortune how do you suppose they are going to fight back? Hence all the talk about pain of a common man & oh-my-god some old people collapsed standing in line.
In my view this short term pain is very empowering for India in long run. Because it frees up the locked up resources from mattresses. also as a second order effect it reduces the venues 'black money' can find home. Also it makes almost all of terrorism funding traceable, Hell you can design machine learning algorithms to identify this kind of money movement from raw transaction data. lastly IMO it will be great for Indian stock market in long run as really there are no other places left to park large sums of money ('cause real estate is going to suffer for a bit now).
There are multiple sources that cite the 6% to 10% figure. If you have a good reason to call this article BS, please explain.
You make some other remarks about all non-salary income being unreported, and people complaining about the common man because they have unreported income to hide that are too outrageous to bother refuting.
Most people who did have unreported income have already converted it into new notes or bullion. The economy is not going cashless anytime soon. All we've done is show the common man his place and screw up the national economy for the foreseeable future.
> There are multiple sources that cite the 6% to 10% figure. If you have a good reason to call this article BS, please explain.
> You make some other remarks about all non-salary income being unreported, and people complaining about the common man because they have unreported income to hide that are too outrageous to bother refuting.
I am sorry if this does not gels with your modern sensibilities but growing up in indian small town you see sh*t. and one thing clear as day is Income taxes are a joke for most mom & pop shops outside of major metropolis. in fact thats reflected in IT revenue collections regional breakdown (its heavily skewed to metros). Almost the entirety of non metro economy runs on cash & its very common for small business to maintain 2 sets of books. so if you think somebody has an opportunity to avoid paying taxes without repercussions and they are just going to do that for 10% of their revenues then I do have a nice bridge to sell you.
> Most people who did have unreported income have already converted it into new notes or bullion. The economy is not going cashless anytime soon.
this is just too much. How did you come by this information? stop spreading this kind of BS. the entirety of replacement notes arent even printed as yet as their goal was new year release. and there is not enough bullion in indian market to cover the amount of cash conversion not even at already skyrocketing price.
Also, economy does not has to go cashless just that the money needs to be traceable. plus if to take away venues to park this money like real estate then you have heavily disincentivised its accumulation. & looking at his temperament I think its amply clear that Modi is serious about fighting black money. hence the popular support despite the pain. its only the armchair economists that are suddenly worried about hardships of common man in line.
I'm going to ignore the personal jibes you've made and ask you a couple of simple questions. No hand-waving answers please.
1. I'm a shopkeeper in 2017 and all my black money is gone: burnt it, paid a fine on it, whatever. A customer comes in and makes a purchase on a new currency note. What prevents me from not reporting this to the tax authority _because_ of 2016's demonetisation? Note that there is no tracking of cash.
2. I'm a corrupt government official and I want some 'mithai' to select your tender application. I want to get paid in new 2000 rupee notes. What stops me from accepting a cash bribe?
>>A large portion of the black untaxed money is untraceable in the form of cash
No.
The very rich repatriate their money through Foreign banks and investments.
Middle class and Upper middle class has long in India parked their money in lands and houses.
Lower middle class typically goes with gold.
Poor barely have money and whatever little is in cash savings.
People who think rich Indians sleep on mattresses filled with cash have no clue what they are talking about. That whatever cash the rich you seen throwing in lakes and streets is more like pennies left in a long forgotten pant in some old wardrobe. There are thousands of such pants those people own.
Another Modi cult follower, its hard for such people to swallow real facts. Sense and sensibility is lost for such people who just ignore the facts. On the ground nothing changed except problems for common people and slowing economy. I have to admit Modi is very successful in projecting himself as poor and the whole world working against him, in spite of unprecedented majority.
Nothing is achieved in past 2-1/2 years, and blame it on others and play poor. Hide the promise of bringing black money from outside India under the rug and target the small 20% common people.
Lucky author of article is not in India, otherwise there will retribution as it happened all across with critics in India.
The points are already highlighted by the author with facts and data. I don't think there is a room for discourse when every issue has been reduced to me poor and those rich adversaries as always portrayed by Mr. Modi in every occasion instead of any real data or facts.
Asking 50 days suffering without providing any solid research for its effectiveness. Based on how previous RBI governor was forced out of office, there is little room for discussion. Its just if you are not with me, you are an enemy of country that is what game played by current govt and its leaders in India.
Agree with you coming back to the point when 5% Indian owns 80% of wealth why they aren't the target. Only targeting 20% wealth owned by over 80% common Indian won't bring any benefits.
The prime minister has very openly said that real estate is next. And just wait till January next year the jewellers who sold a shit ton of gold in this period will also come under scrutiny.
The only thing that is not clear is what steps if any the government will take to make sure black money hoarding doesn't start again. I am hopeful we will see something by the budget session.
>>The only thing that is not clear is what steps if any the government will take to make sure black money hoarding doesn't start again.
So you want government to change the entire Indian mindset. While addressing nothing about why that mindset exists?
Hoarding or investing call it whatever you like these things look differently from everybody's personal perspective.
Indians save wealth because there is a inherent feeling of scarcity. You can pass as many laws as you want, but you won't be able to force people to spend money they think they need for the future. This is simply because they don't want to spend it.
It just comes down to the fact that you can't force anybody to some thing they don't want to do.
I find that claim very strange. Who is asking you to spend your money? Is paying tax or not taking bribes about mindsets? I save up and I pay taxes and nobody can force me to spend money I don't want to.
It's really strange, considering that gold-smuggling has historically been the source of funding for assorted terrorist orgs.
Demonetization may turn out in hindsight to be a master stroke, but there are too many variables that are hidden.
There remains anonymous routes such as p-notes that are still open for "black-money" routing. Hawala is likely to be hit very hard by this. See Swamy's latest lecture,
"It’s like the PM is cleaning a pond to kill the crocodiles, forgetting that crocodiles can survive even on land. Big crocodiles have survived. Small fish have died." [1]
The immediate reaction of the common man on de-monetization of higher currency notes (followed by replacement with newer ones) was euphoric. A popular thought process was that people can tolerate inconvenience for a few days because it'll invalidate the "black money" [2] and thus rein in inflation, property prices and corruption to some extent. However, the moment this was announced, people have been brazenly finding loop-holes to convert their currency notes through unofficial means. Example : back-dated receipts for expensive items (gold, cars, property), fake accounts, hiring poor folks for conversion via official channels, bulk purchase of coupons / cards for essential items that are permitted to accept older notes, etc..
- Using employees salary accounts to rapidly deposit and withdraw money.
- Bribing officers in Banks.
I was downvoted earlier on HN when expressed skepticism, since this policy is definitely not intended on curbing this so-called "Black money".
After the massive influx of cash, PSU banks have gotten more reserves to pay for their earlier bets that have now run foul (which they were forced to place by the state).
I can't believe for a second that BJP managed to prevent some lowly Greenpeace activist from leaving India, but was unaware of Mallya's escape. This is not surprising considering not much has changed politically since when the dude responsible for Bhopal was escorted and allowed to flee by the then Prime and Chief Ministers - one of whom was apparently hiding in his princely bungalow far far away from the leaking MIC.
BJP is essentially a Hegelian dual for the INC (& associated fools), nothing more nothing less (the policies clearly show this).
> However, the moment this was announced, people have been brazenly finding loop-holes to convert their currency notes through unofficial means. Example : back-dated receipts for expensive items (gold, cars, property), fake accounts, hiring poor folks for conversion via official channels, bulk purchase of coupons / cards for essential items that are permitted to accept older notes, etc..
Plugging loopholes is the only enduringly useful thing that would come out of this exercise. Although, yes, the ones you mentioned have been marginally successful, the administration is doing a decent job at addressing them. For eg, people exchanging cash need to have their nails marked with indelible ink to foil crowdsourced attempts at laundering money, people with abnormally high deposits, with respect to their I-T returns, will need to explain their source.
I remain ambivalent about the approach, or its immediate benefits. However, what will prove effective isn't necessarily an excellent tax collection for the year, but making a big leap towards a transparent economy. That, however, remains to be seen if it's only a pipe dream.
The modus operandi (of loopholes) is nothing new, it's second nature to many businessmen. I wonder why there weren't enough checks in place when the plan was announced.
don't for a second take any populist politician out there by word - they always over-promise to get elected and under-deliver. after all, it's all just a power game to them.
I am based out of India and I find this article misguided. Corruption is a very big problem in India , and lot of bribe is paid in cash. For eg: If you want to buy a house which is sold for 20 million INR , value of same property is 5 million on papers (to evade house tax etc. ) and rest of the money is paid in cash or through some black money . Real estate stocks started sinking down 5 days straight and are expected to sink further after this move. Yes it causes inconvenience to the people but as a tax payer and contributor to the economy I dont mind small inconvenience for greater good.
>>If you want to buy a house which is sold for 20 million INR , value of same property is 5 million on papers (to evade house tax etc. ) and rest of the money is paid in cash or through some black money .
None of this changes even after this.
There is a reason why this happens. Try getting a plan approved from any government agency without bribe. Or getting raw material like cement and sand passed through checkposts without bribe. Builders take black cash because they have to work with an ecosystem where bribes are common, they can't pay those bribes through legally accepted white money for the obvious reasons.
Now this is just one instance I'm talking about. If you start building a house you will notice how many such interactions you will have to do where money is exchanged in non-taxable ways.
You are basically fighting against an highly corrupt citizenry.
>>Real estate stocks started sinking down 5 days straight and are expected to sink further after this move.
Pray, that the builders don't default on their big loans to banks. Or a stock market crash is on hands, and may be a tax payer funded payout after.
>>Yes it causes inconvenience to the people but as a tax payer and contributor to the economy I dont mind small inconvenience for greater good.
This changes nothing. Corruption is a way of life in India. You will end up fighting everything and everybody and still get nothing out of it. Because people are dishonest.
And please! this middle class salaried virtuousness is hypocrisy. Salaried classes are not honest because of choice but because of lack of opportunity. Producing fake rent receipts and medical receipts for tax deduction is common in office places.
one by one my dear, one by one. atleast you'll agree that this move makes most of the cash traceable, right?
Also, businesses are corrupt because they dont have a choice, running you businesses clean & paying taxes does not precludes you from having to 'service' the IT dept & netas. So it creates an environment of competitive disadvantage for them. at their level they really cant do much to change the game, just play it. the salaried class is doing these infractions again because poor tracability of transactions hence exponentially larger effort needed to audit. secondly there is a very common sense of 'we are being fleeced' in salaried class so they try to do what they can.
All of this is an argument to fix these large problems not leave them alone with cynicism.
>>one by one my dear, one by one. atleast you'll agree that this move makes most of the cash traceable, right?
Last time I checked its still legal to trade in cash. They didn't ban cash, they just swapped notes. And bulk of the black wealth isn't even in cash.
>>Also, businesses are corrupt because they dont have a choice, running you businesses clean & paying taxes does not precludes you from having to 'service' the IT dept & netas.
It actually just makes it a whole lot harder, making it difficult for people to do business. This is also known as 'slowing the growth'. Then you have a situation where you will prefer black money over stagnation, like many already do today.
>>secondly there is a very common sense of 'we are being fleeced' in salaried class so they try to do what they can.
That's really some strange definition of getting fleeced, because salaried classes don't even contribute to the bulk of the taxes.
Plus most salaried classes didn't pay taxes to build the infrastructure that already exists and most of it exists because of the taxes non-salaried people pay.
>>All of this is an argument to fix these large problems not leave them alone with cynicism.
>> one by one my dear, one by one. atleast you'll agree that this move makes most of the cash traceable, right?
> Last time I checked its still legal to trade in cash. They didn't ban cash, they just swapped notes. And bulk of the black wealth isn't even in cash.
And How are they going to acquire the swapped cash? by declaring the assets and income so they's come under IT radar, right? isnt that the core reason behind doing this? to connect money with individual. Once the money is 'whited' how willing do you think after this they'll be willing again to turn it into black & go through this ever painful cycle again?
What do you think happens to the 60/40 real estate transactions after this? why do you think real estate prices are falling? Its because its pricing in the writing on the wall. So if you take away real estate how many major avenues are left out there to park black money? So ya you can have your dark cash you cant just cant buy a whole lot with it.
In fact I thought as a side effect this would be great time for cryptocurrencies in India.
>> That's really some strange definition of getting fleeced, because salaried classes don't even contribute to the bulk of the taxes.
Ah yes, the romney 47% argument. the problem with these arguments is it conveniently ignores the actual portion of overall income that goes to salaried class. and do this over decades & you've got massive wealth inequality thats baked into the system where if anything is done to reverse it quickly gets labeled as socialism/populism.
>> This is also known as 'slowing the growth'.
yes, I agree in short term, but look at multiplier effects in longer term. if most transactions are white there is less chances of money getting parked into rentseeking assets like realestate. realestate falling is good for economy as one mans income is another mans expenses otherwise. more productive assets & more vibrant economy. Do think about this.
>> But none of this fixed any problem.
Not yet, but its only been a week. these are the birth pangs of a new India. the real question is will you start seeing things turn around before the next elections or not. I think so ;-)
>>And How are they going to acquire the swapped cash? by declaring the assets and income so they's come under IT radar, right? isnt that the core reason behind doing this? to connect money with individual. Once the money is 'whited' how willing do you think after this they'll be willing again to turn it into black & go through this ever painful cycle again?
This thing got discussed over last time too. The very assumption that every one has a bank account. Or should have a bank account is broken beyond explanation.
If you are already convinced that the whole world owes it to you in some way to follow your advice. You are already at a level where you will unlikely never listen to the other side of the story at all.
>>What do you think happens to the 60/40 real estate transactions after this?
A more interesting what happens to all those expensive flats your dearly middle class bought?
My guess is nothing much will likely change in the Real Estate domain 5-6 years from now unless there is mass fall in demand due to something like a multi year recession.
But those who already bought will likely see 60% of the net value of their flat go to drain. No one will buy and old deprecating flat for an expensive price when new ones are there at a discount.
>>why do you think real estate prices are falling? Its because its pricing in the writing on the wall.
Those are local minimas. Those trends won't last even a few months. Unless there is a multi year recession.
Its not the new properties that are at risk. Its those which are already sold.
>>So if you take away real estate how many major avenues are left out there to park black money?
Black cash isn't there is all to it. Houses are expensive because people look at them as investment vehicles, even with white buying this is unlikely to change.
>>In fact I thought as a side effect this would be great time for cryptocurrencies in India.
I thought you wanted accountability and traceability. Anonymity seems to be the cornerstone for cryptocurrencies.
>>Ah yes, the romney 47% argument. the problem with these arguments is it conveniently ignores the actual portion of overall income that goes to salaried class. and do this over decades & you've got massive wealth inequality thats baked into the system where if anything is done to reverse it quickly gets labeled as socialism/populism.
Let me get this straight. Salaried middle class remains in the stagnant hell hole not because of taxes. But because they are too lazy to work outside 9-5, too very self protective to take any meaningful risks. And beyond all this they think a lot of jobs(which actually pay well) are beneath them.
>>Not yet, but its only been a week. these are the birth pangs of a new India. the real question is will you start seeing things turn around before the next elections or not. I think so ;-)
I admire your zeal. But the problem in India is people and their dishonesty. People want to be corrupt. In fact the very same middle class salaried people you sympathize with will do the very same if given an opportunity.
You can't force people to be honest, nor force them to be dishonest. They will do whatever is in their best interest.
>>What do you think happens to the 60/40 real estate transactions after this?
> A more interesting what happens to all those expensive flats your dearly middle class bought?
> My guess is nothing much will likely change in the Real Estate domain 5-6 years from now unless there is mass fall > in demand due to something like a multi year recession.
I have many friends in real estate construction business & one thing they agree on is over next few years RE is fked. the folks who bought RE over last few years are screwed too especially first time buyers BUT thats a by product of a step change in any system & at any point if you take black money out thats inevitable (unless they start doing the wallstreet MBS thing). But one good thing is that housing will become a lot more affordable to little guy & not just some deep pocket businessfolks or NRIs. Secondly with so much cash surplus interest rates will head downwards so that will be a relief for the white buyer.
Also, there is a bit of feedback loop here (like SV housing) if there is a reasonable certainty that RE is held up by money thats not subject to usual market forces (as much) then in absence of other avenues people will park even their white money there (hence the 60/40). but if this assumption changes, RE will also not be as good an investment as previously deemed.
>>In fact I thought as a side effect this would be great time for cryptocurrencies in India.
> I thought you wanted accountability and traceability. Anonymity seems to be the cornerstone for cryptocurrencies.
I try to keep my analysis separate from my wants. secondly things like bitcoin are not nearly as anonymous are you think, infact quite the opposite. its true that you can create a truly anon cyptocoin (like darkcoin) but far as india is concerned its too late for that. if there was one already proliferated the market with decent cap then ppl may have jumped on it but to create one from scratch and everybody buys into it .. nah
> You can't force people to be honest, nor force them to be dishonest. They will do whatever is in their best interest.
its a matter of degrees not black & white as you are pretending it to be. your argument is basically that if you cannot solve the problem fully then dont try. I see it as a matter of policy actions so you set right incentives for ppl so far the incentives have been pointing only in one direction What I see here is that he is clearly signalling thats going to change going fwd. In 60yrs since independence how many time somebody has seriously tried to go after black money.
> This thing got discussed over last time too. The very assumption that every one has a bank account. Or should have a bank account is broken beyond explanation.
If you have a few lacs of cash then stands to reason that you should have an account. even otherwise actually there are many rural programmes in india that payout small recurring sums to villagers and its very common that since these ppl dont have an account they get fleeced by middle man and lose a big chunk due to cash only nature. these folks are actually benefited quite a bit by such mandates.
Nothing, except that they cannot make any big purchases (like land/gold or cash deposit) with the vast amount of bribe money they make. To think of this as a fix-all solution is misguided ( & for a good reason, pls see my other larger post). this is just peeling layers of the onion. Remember before this He introduced the eqv of ssn in india so that connects a human uniquely to a (large) transaction.
You'll notice the land prices will fall as a result of this move, its because a large chunk of land sale is all cash.
The article is using unrelated statistics (countries by % of GDP in cash) and connecting this to why the experiment may fail. This is humbug.
The biggest threat looks to be the methods of laundering that are cropping up -- I'm starting to hear of instances where offline-chits and money transfer agents are accepting old currency without any markdown. So it looks like laundering hasn't received as large a blow as anticipated, and hence the experiment may very well fail by the Dec 30 deadline.
One positive thing to note is that a majority of the citizens are tired of the parallel economy and are openly supporting the government's moves. Hence it should give the Modi government the cover and incentive to add-in more stringent checks and regulations to take on the laundering. This is probably the only hope for any success in this experiment.
BTW, whether this experiment succeeds or fails, it's a net positive in the long run as it has shown: 1) that a government can take steps towards stopping the parallel economy, and 2) do so with the people's support.
Alternatives methods for corruption will always exist. If you ban one method another will be used shortly after and those most capable of switching are usually the people with biggest illegal funds. Bribes are illegal and yet they are common, then why do you think that another law will help? A better treatment would be to better apply the current law but this too will fail if the culture of corruption is not diminished. Changes on this scale are not achieved in a fortnight but I agree that the Indian government is showing resolve to work on the problem.
You are in error about my post -- I recommended no additional law. My post was regarding the experiment and it's stated purpose of reducing the parallel (black) economy.
The evidence I'm seeing suggests that the experiment is not yet yielding the expected results. Hence my suggestion of certain changes which could help it along.
Full-blown economics discussion, and what could spur the economy, is a large enough topic that I would not tackle it via a HN post.
And I am saying that no changes (law or not) can be effective in fighting corruption as long as the incentives for it are present (broken institutions, culture of accepting bribes, mainly cash economy). Also in the business of government changes are usually implemented through laws. Hence my usage of the term.
Edit: The evidence I provided was that current legal framework is explicit enough in its treatment of corruption and yet corruption is still present which suggests that the problem is not in the rules.
Also, I don't like how you equate parallel economy to black economy. Those are different terms in Economics and the majority of economic transactions outside of regulations and laws are not bribes but a part of the informal sector (grey economy) [1]. And India is considered one of the countries with biggest grey sector in the world [2].
Thanks you for your considered opinion on corruption, which is not something I commented upon above.
The 'parallel economy' is a non-colored word for the non-white economy, which is is transactions that the government does not know about, usually referred to as the 'black economy'. If you do not like the use of the term, you may perhaps launch a petition to change the popular usage?
Not quite sure what the author is trying to get at, any change affecting the entire population of India will of course be 'immensely disruptive'
There's no war on cash, theres a refresh on the notes, its an attack on black money, its time to pay the dues if you've been hoarding illegal revenues. India isn't getting rid of cash, the comparisons to Nigeria are pointless.
Please address points made in the article rather than trying to ascribe ulterior motives to the author by googling them.
This seems like a variant of the very distasteful pro-BJP meme of "if you're against demonetisation, you must be corrupt and anti-national". It shuts down productive discussion.
The article itself is phrased pretty poorly if it's intending to make an honest viewpoint. I'm not sure the author realizes that prefacing your opinion with 'may' and 'might' doesn't absolve journalists of a responsibility to cite sources.
> Those who want to fight corruption by policing cash may have the causality backwards.
The trouble (and advantage when seen as a commodity) with Cryptocurrencies is that they can't be "created out of thin air". Yes I know FRB is seen very skeptically, but there are deep issues with the distribution of these, that are similar to gold. A country that does not have spread-out reserves of gold, can't have a gold-backed currency.
What nobody is talking about here, is that this step also aims to hit hard on the fake currency [0] industry in neighboring countries, specially Pakistan and Nepal. The new dimension and design of the note is to make the printing machines in these illegal mints obsolete. It's no surprise that the 2 month long 'agitation' in Kashmir came to a screeching halt this week. This step hits funding of terrorism in India hard, at least temporarily.
Scheme for poor to open Bank accounts with zero balance
2 times intimation given to Black money holders to pay fine and declare assets
Reason for currency demonetization
1. Tackle Fake currency circulated by Pakistan and then keep on printing anfd fund terrorist
1.1 After Currency Ban Many Terrorist activities stopped for ex. in Kashmir as no money to fund terrorist
2. Black money - Just check news how munch Black Money recovered
3. To encourage all to have Bank account
4. To increase IncomeTax return percentage
5. to fight against corruption
6.to make economy and currency strong
There is approximate more than 80% currency in terms of 500 and 1000 notes, its a very big change and there will be minor problems
We all Indians are going to benefit from this decision and we are with our PM and supports his strong decision
I appreciate the efforts of the author, but I'm a bit saddened to see the level of inaccuracy. The india story aside, the comparison points (The Nigeria narrative) break the article further, because they are not true.
"Nigerians have abandoned cash..."
------
Cash is King in Nigeria. At least 70% of consumer transactions are still in cash. The Central Bank issued a cashless policy some years back, encouraging an explosion in mobile wallets, alternate formal financial institutions, etc, but they have struggled. Cash is still king.
"...because they have so little trust in government-issued currency."
----------
Yes, the currency is weak. Against USD, against GBP, EUR, etc. But this has nothing to do with the everyday man's decision to stuff his mattress with cash vs bank with a formal institutions and have digital currency.
In the same vein, the chart in the article, that shows currency as percentage of GDP... This has nothing to do with the relative volume of cash transactions. It's important to differentiate cash vs currency.
"Instead of using banks, they tend to transact in mobile airtime minutes."
----------
This has been attempted once, but i don't know anyone in Nigeria that accepts airtime minutes over cash. Not to be funny, but I've been asking all day, in case there is some movement I might have missed.
Some rural villages even create their own credit instruments, enforced by local deities.
————
From the cited source, the paper focused on "a limited number of local communities of the Igbo of southeastern Nigeria”. We are talking about a few hundred people, that turned their local 'church' (oracle/deity) into a lender, sourcing funds from the large wealth they have received from donations over time. And yes, they give out these loans In CASH.
Unless the government cleans up its act, people will keep trying to store their wealth in other mediums and will avoid paying taxes. I question the premise that all untaxed money is evil based on the past performance of any Central/State/City/Municipal government in India. The nature of the Indian bureaucracy is such that it induces massive waste of tax payers' money at every stage of Government. For a tax payer from a game theoretic perspective, there is a rational basis for hoarding untaxed assets since to get things done in the bureaucracy, people need to bribe officials in cash or kind anyway. I wonder how people here feel about this thread after observing two weeks of the war against black money. https://news.ycombinator.com/item?id=12902817
Considering that India's state is essentially a rent-seeking colonial state, I don't believe it has much legitimacy.
Then again, considering the large number of Govt. employees suckling at its teat, it's likely never going to go away. The local-minima is far too comfortable for those that matter.
"Data shows only 1% of population pays income tax, over 5000 pay more than 1 crore ($145K USD)"
Only "six individuals fell in the high-end earning bracket of Rs 50-100 crore (7-14 Million USD) of salary income."
Wow ! Just 6 individuals. India's got NO shortage of millionaires & billionaires. The abysmal income tax collection clearly indicates a gaping problem with rules & their implementation.
Growth of capital is not an income, because it is subject to uncertainties in valuation and depreciation.
Income is usually measured in a set amount of currency, and is generally perfectly liquid, while capital can sometimes only be valued if there's a buyer.
So no, it is not also an income. This is one of the most common misconceptions here on HN (I often see wealth and income used interchangeably)
Besides the points raised by other two commenters, the difference is also that capital gains (i.e. income from liquidating capital) is often taxed at different (lower) rates than job income. I think that't patently absurd, but I guess our world works according to the "might is right" principle.
This article could have been a more researched. Currently the arguments seem to be more superficial than based on ground realities in India. The comparison with Nigeria also doesn't seem to be correct.
For a theoretical perspective on this, please see Kenneth Rogoff's theory on this in the "Curse of Cash"[1]
While there might have been implementation challenges, the Indian government did not a do a "cancellation" of the high denomination notes, as claimed in the article. It is at best a "currency swap" at a large scale. Whatever money is forced to come out from being stashed away or un-accounted for, will be replaced by new valid currency of 500/1000 Rs notes.
Agreed, a withdrawal or cancellation suddenly will undermine the currency. But, not in this case. On the other hand, even road side vegetable vendors and shops have started using online payment gateway machines in this period.
In the long-term, the shadow or parallel economy is going to be pushed and integrated with more mainstream and benefit everyone.
That's not the case now: an average middle class tax paying citizen cannot reliably invest in a real-estate (especially plots and independent houses) as half of the money is transacted in black. This is a vicious circle and pushes the prices of luxury goods, real estate etc., northwards.
> That's not the case now: an average middle class tax paying citizen cannot reliably invest in a real-estate (especially plots and independent houses) as half of the money is transacted in black. This is a vicious circle and pushes the prices of luxury goods, real estate etc., northwards.
I don't know if I am correct but hear me out.
I think these prices went up because people with hidden money were willing to invest more in comparison to someone with modest amount of honest income. Now when the gap between rich and poor has been narrowed down, prices has to come down to so that there can be more potential buyers which was not earlier possible as hoarders of black money were also investing their hidden money.
India is not getting rid of cash transactions. India is achieving two objectives with this move. Getting rid of unaccounted money and fake currency in circulation.
People can deposit as much money they have into their accounts if the cash was legally obtained. They can transact as much as they want in card/check transactions. Only constraints are in place for withdrawing cash in large amounts. Sure, there are long queues at banks and causes inconvenience but Rs.25000 cash limit per week is a lot for a regular family.
Mostly people who have cash and who can't prove the source (black money) are choked as they can't deposit the money and that cash becomes worthless soon.
Banks with tons of NPAs will have more deposits and they can decrease the interest rates, lend more and spur growth in the economy.
Artificially inflated real-estate prices will come down as there is reduced black money in circulation. So a regular family will be able to afford purchase of land/house. Before this, for example, if someone is selling a property they would want more than 60% of property value in cash so the seller can avoid paying taxes on the 60% amount. No regular person will be able to pay 60% in cash, so they can't afford buying real-estate.
> Artificially inflated real-estate prices will come down as there is reduced black money in circulation. So a regular family will be able to afford purchase of land/house. Before this, for example, if someone is selling a property they would want more than 60% of property value in cash so the seller can avoid paying taxes on the 60% amount. No regular person will be able to pay 60% in cash, so they can't afford buying real-estate.
You're being naive. Giving bureaucracies unhindered power to create a magical wonderland has never worked, much less so in a anarchic society like India (it's also deeply against personal freedoms).
If you study history, everyone and their mother was egging on Indira Gandhi at the outset of the Emergency, using very similar arguments (Indian Express uses them now in nostalgia, but that's a different affair). What did it lead to ? The License Raj that's what.
There is nothing stopping people from switching to BTC or other crypto-currencies (XAU and BTC can be exchanged pseudo-anonymously).
This is a terrible move, considering how abusive Govt. officials tend to be; bribe giving often stems from helplessness rather than for illegitimate gain.
> Sure, there are long queues at banks and causes inconvenience but Rs.25000 cash limit per week is a lot for a regular family.
Here is a list of ATMs and bank branches in Panaji, Goa: http://tinyurl.com/atmgoa 12 days after cash was supposed to be available in ATMs and bank branches. In effect cash is not available across smaller towns and villages across India. Yesterday there was a stampede at a bank in a small UP town (http://www.hindustantimes.com/cities/up-senior-citizen-dies-...)
These are not minor inconveniences. 25000 is enough for families, agreed, but nowhere near enough for small/informal businesses who must pay workers who don't have bank accounts. (That's if we don't count the amount of bribes that have to be paid in cash for everything from an uninterrupted power supply to letting your commercial goods past a police checkpost.) In a country where at least half the population is unbanked (http://www.bankofindia.co.in/FI-BOI/images/FI%20presentation...) this is a very substantial number of businesses that have ground to a halt.
> Mostly people who have cash and who can't prove the source (black money)
What about people who have been saving cash from tax-paid or non-taxable income at home over years and decades? Is there any sort of plan to distinguish such savings from black money? Or should we just agree to throw a certain percentage of people under the bus once in a while?
Edit: I'd like to explain how a stampede happens at a bank for those who are not familiar with this. Bank branches are supposed to receive a new batch of freshly-printed currency notes every morning. These notes are very limited in number, so it's first come first served. So people collect outside the locked gates of the bank from early in the morning (and have in some cases slept on the pavement outside all night). There is no queue, just a bunch of people pushing against each other. After cash arrives at the bank, the gates are opened and people run to form the actual queues for the bank counters. The branch will run out of currency notes before the entire queue is served, therefore it's every man for himself from the gate to the end of the queue.
For a family of 4 you will get 2.5 * 4 lacs exemption (from scrutiny). You only have to justify the source, right? Like if you are a farmer, you do not pay taxes and you can have cash or if you are a big businessperson you can justify the cash (if it matches your declared turnover) as the prerequisite to do your daily work.
If you are none of the above and chose to expose this big cash (more than Rs. 1000000 for a family of 4) to theft, decomposition, natural disasters, you would still be declaring your assets in your income tax, right?
Yearly income is declared, not assets, unless you're running for political office or something.
People do have lakhs in cash stored in houses from legit income because they don't have banks where they live. They've never kept records of sources because they've never been asked to by the government. All of a sudden we're telling them anything above one year's taxable income is suspect, and they may be thrown in jail for seven years if deposits exceed that amount.
I find it hard to believe that people with more than 1000000 in cash won't be bothered to deposit it in banks because they live somewhere where no banks and post offices exist. Government would be least of my worries with that much liability (theft).
This is an oversimplified view of things. One counterexample is house wives with alcoholic/abusive husbands who have been saving cash secretly. Another is people who are illiterate or otherwise too intimidated to walk into a bank. It's a sixth of the world's population; there are a million such stories.
You must be joking. We are a poor nation and you suggest poor people in India, living in backward areas with no banks have more than Rs. 1000000 in cash and there are millions of such "poor" people?
That's a straw man argument. I never said there are millions of families of four with 1000000 each. (By the way you can't deposit 250,000 in each of your kids' and family member's names under the new scheme; even if you gift them the money it is still assessed as the original earner's income). I said there are many, many exceptions that fall outside the half-assed line the government is taking - and in my point of view, it is not ethical to throw them under the bus even ostensibly to catch a few bad guys. In the meantime, the BJP is milking it for political mileage by splashing pictures of Modi on giant hoardings claiming he has destroyed black money singlehandedly (in rhyming verse!)
Ok I don't see how that was a straw man but ok, let me address the specifics then.
1) Housewives with abusive husbands -
No problem, just walk into a bank and deposit. Don't have a bank account? Open one on the spot, under Jan Than yojna you can have zero balance account.
2) Illiterate people -
They may be illiterate but they are not poor if they have more than 2.5 lacs cash. Open an account if you don't have one and deposit. I heard you will not be scrutinised for 2.5 lacs in each account (at most one per person) no matter what their age or whatever but I have no source for this right now.
3) Poor people -
If you have more than 2.5 lacs. You are not poor.
"even if you gift them the money it is still assessed as the original earner's income". Right and you don't have a problem because you saved up over time and so it is accounted money.
"the BJP is milking it for political mileage by splashing pictures of Modi on giant hoardings claiming he has destroyed black money singlehandedly". Come on, politicians will milk their perceived good deeds. I don't see anything wrong in it. I want to reinforce this mentality (do good get votes) through positive feedback.
You're making many assumptions about poor people having access to bank branches they can walk into (not always the case in remote areas, esp. now that co-operative banks are being left out of the process), about everybody having PAN cards (which you now need to open a new bank account), etc.
> Right and you don't have a problem because you saved up over time and so it is accounted money.
Here's the problem: I saved 5L over 10 years - reasonable, right? I don't have records of my expenses even if I have all my salary slips saved. How do I show the taxman that these are legit savings and not something I received as a bribe last month?
Let's not get into faith vs reason. I can accuse of you being closed to reasonable arguments since it is plain you haven't read or responded to specific points I have made, or are caught up on the news.
You need a PAN card as of Nov 17. No other card will do:
Your figure of 10 lakhs has no basis in fact. The threshold is 2.5 lakhs. You can't divide 10 lakhs into four family members (including yourself) with 2.5 lakhs each and be under the limit. This is not how income tax is computed. This kind of trick invites every depositee to be prosecuted under the Prohibition of Benami Property Act:
You can't even deposit more than 2.5 lakhs (cumulative) without a PAN card even if you had opened an account before. 20% of the country has PAN cards so far. What are the rest to do? Is there a guarantee that new cards will be issued in time to new applicants? Approx. time in the past has been 3 weeks to issue a PAN card. Edit: The deadline to deposit old notes is Dec 30. What choice do people without PAN cards have? Play dodge between the deadline and the issuance of a new PAN card, or find their nearest new-currency-launderer (changing old notes for new illegally, for a premium) and take a 30% hit on their savings, a percentage which will only go up as the deadline approaches?
My main take away from my economics degree was that every human created system is gameable. You need to have actors willing to participate in the system otherwise they will find a way to evade it. You cannot change a culture of corruption with a simple monetary trick (I speak as someone living in a country with relatively high corruption).
This column is a fine example of false financial reporting. The author has less than superficial knowledge of India and the country's recent demonetization of banknotes of certain denominations.
Some news agencies in an attempt to reduce costs resort to reducing original news-gathering, do not fact-check articles before publication, churn out such inaccurate stories, and wash their hands of them with their usual disclaimers.
> This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
What is Indian Government doing with all the money that has already been off shored into Swiss bank accounts? It feels like the richest have already figure out a way. I remember reading an article at some point which noted that India has the highest number of accounts in Swiss banks. Demonetization wouldn't help if you already figured out how to send money to offshore accounts. Can somebody please clarify?
From the article: "Norway and Sweden, for example, make all tax returns publicly available. It’s harder to enjoy your illegal gains when your neighbors can easily check your lifestyle against your finances."
Is the article advocating neighbors to check on each other by snooping on tax returns and other stuff? feels misguided.
Also note Prevention of Corruption Amendement Act which requires prior sanction to prosecute serving public officials and makes giving a bribe a specific offence [1][2]. This will probably pass in coming weeks.
Cash helps keep banks in check because people can take their money out of the banking system. If cash is eliminated banks are the only option and we should be prepared for a Kafkaesque trampling of the little guy. No amount of regulation ever ended corruption. Corruption can only be ended by providing people with a good standard of living and access to quality education.
It's not a war on "cash". If it were, govt would not be announcing new notes for 2000, 1000 and 500 INR denominations.
Cash and black money are overlapping circles. Govt wants to attack only one kind of hoarder (illicit ones) while trying not to inconvenience the other kind (people out of banking system because of poverty/illiteracy). Hence, this tightrope-walk.
I have a very pessimistic hypothesis that this event will trigger a recession and that India has effectively committed economic suicide.
My reasoning behind this derives from the question, why doesn't this happen in developed economies? Or, in other words, why do people in developed economies / less corrupt countries prefer official institutions over cash transactions?
From a first principles perspective, I suspect that the answer is the services associated with these institutions and channels.
When I make a business transaction anywhere within the developed world, I am exchanging money for the promise of goods and services - creating a form of contract which binds me and the entity I am transacting with. This contract is enforceable (at varying cost) through the court system, which offers a form of insurance in case things go wrong i.e. one side or the other reneges upon their promise. It is therefore rational to participate within that system for that reason alone - it's very hard (or at least harder) for someone to disappear with your money without some consequences associated with it.
Participation within the system also grants access to additional services and benefits from civic services to relatively low transactions costs. Further, there is an active system which punishes deflection. Therefore all of these factors combined with social shibboleths serve to prevent deflection.
India has none of this. The court system isn't functional, civic services are non-existent, and there is no punishment for deflection. Therefore, there is no rational reason why an actor within this system would transact via the official channels - it increases costs and provides no additional benefits in return.
From this perspective, I believe that the "black" or parallel economy actually serves like a decentralized gross settlement system. People create contracts with the strength of their social ties in mind and they transact accordingly. When these people demonetized 80% of the tender in circulation, [1] they actually disrupted this settlement system and wiped out the central mechanism through which most business transactions are done. The reason why I think this is the case is because it is actually highly irrational to hoard cash - especially in an economy that suffers from a high amount of inflation. Surely anyone with even a tiny bit of prudence would invest / consume their ill gotten gains?
If my hypothesis is correct, then this war on cash will a) never achieve its goals, b) disrupt supply chains, c) suppress consumer activity, and d) create other unpredictable economic repercussions. This may be equal to institutional failure to perform settlements [2] within a developed economy - the velocity of money has sharply dropped leading to an economic crisis.
I don't know what comes next, but it's likely to go down in history as a Bad Idea in a year full of Bad Ideas.
[2] Essentially the idea is that if one bank fails to settle payments within the system, then it could lead to a failure cascade due to how strongly all banks are tied together within a modern economy. http://www.econ.tcu.edu/quinn/crisis/Deleveraging/Bank%20Fai...
Why not put your money where your mouth is and short nifty options ? I think the formal economy will benefit and bought some indian etf's.
People in developed countries also use cash to avoid some taxes. But most of the money in the west moves among big players who are more interested in avoiding employee theft than taxes. Their effective tax rate is usually below 10% anyway.
This will hurt small business in india, but allow chains and corporations to flourish. Previously small business had a competitive advantage because of cash.
"India is conducting a big test of the idea that getting rid of cash can help address crime and corruption"
Demonetization is far from an 'experiment'. It's a fairly common practice: India did it in the 20s & the 40s, Nixon did it in the late 60s, the European Central Bank also did it recently.
> Demonetization is far from an 'experiment'. It's a fairly common practice: India did it in the 20s & the 40s, Nixon did it in the late 60s, the European Central Bank also did it recently.
The article is far from ground reality. Comparing India to Nigeria, just for the topic of corruption, is nonsense.
The main problem with the current demonetization is cash availability. If the ATMs had worked and the cash was available in lower denominations, demonetization wouldn't be such a big issue.
Living in Hong Kong, I don't quite understand why we're at the top of the list, given the prevalence of e-payment and the fact that most of the wealth here lies in property and finance.
A friend of mine says that demonetization should boost startup community quite significantly, you have a nice way to wash your savings. We should see many funding rounds.
I'm a taxpayer: I am paid electronically, so I must be scrupulous. My neighbour is a tradesman (americans would say 'contractor') - hence, all his invoices are cash. He has two brand new ford wildtrak's in his driveway: I can only assume he's paying little tax, and gets away with it due to being paid cash most of the time. I would welcome indian style laws here. Especially if it resulted in tax rates for honest people becoming lower due to more people were paying their share.
Indians have far too much trust on the state (well Modi, to be precise) - that's precisely why old-notes are quickly falling off of circulation. There appears to be plenty more possibly draconian measures in the pipeline.
Incurring a tax is the entire point of replacing the old currency. A large portion of the black untaxed money is untraceable in the form of cash, so getting them into banks and taxed is the first step.
This article is overly negative about some negative things that are part of the expected outcome, that even the people who are proponents of the change admit. Of course there are obvious drawbacks to invalidating most of a nation's currency at once, the point is how this process benefits the country.
A lot of poorer Indians barter or use smaller cash denominations anyways, and the government isn't trying to crack down on that; comparing India to Nigeria in that sense doesn't matter. And reducing the economy of the entire country temporarily is very intentional- if a big part of your country's business dealings is with illicit cash, cracking down on it will of course reduce the market.
The idea is to sacrifice some money in order to reduce corruption and increase the trust in government and business systems. If that is successful, then this move is very beneficial for India in the long run.