Demonetization 2016 and its effetcs

• There were no immediate gains to be seen from the Demonetisation 2016. The benefits, if any, they are to be had only in the long term. 
• There was one immediate outcome and this was the colossal amount of hardship experienced by the citizens of India. That most of the affected people did not openly express their unhappiness at having to bear this hardship does not reduce its severity.
• Indian economy had experienced significant damage from which recovery would be slow. As of mid-February, there was no evidence of any bounce back, but even if that happened, why cause a dislocation in the first place?
• All the disruption and distress, to what purpose? When assessed in terms of the objectives of Demonetisation 2016, the outcome was unclear.
• Dealing with counterfeit currency did not require the suddenness and consequent harshness of a design and implementation as contained in Demonetisation 2016.
• Demonetisation has not, as promised, turned ‘worthless’ the black money held in high denomination notes. By December 2016 most of the currency had already entered the banking system. Very little seemed to have been held back by holders of black money scared to enter the banking system. It can have no effect on the future flow of black money in the form of new currency notes. No strategy can succeed without proper systems in place.
• The new amnesty scheme, PMGKY, did not yield declarations running into lakhs of crores (trillions) of rupees. Now we are entering an era of tax harassment as government agencies set about trying to prove that Demonetisation 2016 was a major success in unearthing black money and improving tax compliance.
• An argument is that Demonetisation 2016 was not a good idea.
  (1) Very little of black money is held in the form of cash.
  (2) Even if the government did want to track down unaccounted cash, the best way would have been to collect, analyse and follow up on information on large cash withdrawals from banks and thereby identify possible flows of unaccounted cash.
  (3) In spite of all the risks and limited chances of success, if the government still wanted to go ahead with demonetisation, then the manner in which Demonetisation 2016 was designed and implemented was neither the only option nor the best one. There were other less destructive options available.
• ‘Formalisation of the informal’ emerged as a new rationale for Demonetisation 2016. Demonetisation and digitalisation might have dragged real estate, retail and wholesale trade, and professional services & economic agents into the formal sector leading to greater tax compliance. But much larger informal sector that ekes out its livelihood on the margins does not avoid paying taxes, it just earns too little to fall into the tax bracket. Formalisation of tiny enterprises in industry, road-side service establishments, and by small- and medium-sized farmers would not lead to any gain to society. It would, in fact, put an additional burden on these producers who are already struggling by earning low incomes.
• It was said that Demonetisation 2016 was war on wealthy & criminals hoarding black money. But wealthy & criminals did not experience any pain. It was those who had least capacity to cope who bore the entire burden. The colossal distress that Demonetisation 2016 caused will make it impossible for any future government to embark on a more serious war on black money. No society will be able to go through this suffering once again. The black money will remain in place.
• Some weeks after demonetisation was announced, its failure was confirmed and goal posts shited to digitalisation and cashless transactions. The focus now is on how to accelerate the adoption of electronic payments at all levels, from households upwards despite infrastructural and economic constraints. The main issue is, did the economy have to be put through the demonetisation wringer in order to drive it towards digitalisation?
• Digitalisation of payments is not a new invention by Modi boys. It has been underway in India for more than a decade and made considerable progress in transactions in the organised sector and among those comfortable with electronic/on-line forms of payment. The larger population is, however, right now outside the scope of digital payments. Major constraints in infrastructure and also issues relating to a lack of familiarity and unaffordability tell us that digitalisation cannot be hurried without running the risk of exclusion. Yet, the one major agenda that the government has been driving since Demonetisation 2016 has been digitalisation.
• The holders of black money will have experienced such a major shock but almost the entire stock of demonetised currency had entered the banking system showed the ease with which such individuals and organisations could get the better of the system. It also reflects the confidence they have of subsequently managing the system, in case there are to be investigations in the future.
• The psychological shock was a harmful one. The upheaval caused by the removal of 86% of the currency in circulation had unnerved ordinary people, the honest citizens. The trust they had reposed in the currency issued by the central bank and the government had been shaken. This is an unhealthy development in a modern economy.
• Soon after demonetisation had been announced, it was pointed out by many that this action by itself would do little to destroy black money and do even less to end the future generation of black money. The government in response said that demonetisation was neither the first nor the last measure to be taken to destroy black money. More steps were to follow in what was promised would be a larger war. 
• With out removing systemic pain that causes creation of black money by hiding legitimate transactions to avoid high taxes, attempts to eliminate black money by harassment of people would be futile.
• There was little of that kind to be seen in the next three months, save the limited measures on political party finance announced in the Union Budget for 2017–18. It appeared as if the promised action was not to follow. 
• The government is left with no option but to ensure an increasing supply of cash to quell the retail corruption while keeping a check on the discretionary power of tax and banks bureaucracy to avoid further damage to its credibility.

The government solution to a problem 
is usually as bad as the problem ... Milton Friedman

My View:
Even though everyone knows demonetization doesn't solve any problems and its results are unpredictable, Modi, advised by some quacks, resorted wildest gamble only to win forthcoming elections in UP, Punjab etc, followed by Rajya Sabha, President & Vice President elections. Giving undue importance to secrecy and without any preparation for this gargantuan task, he announced demonetization like a dictator keeping aside all democratic processes, he shot in his foot and instantly landed in a ditch. What Modi has done is commit a massive theft of people's property without even the pretense of due process of law, a shocking move for a democratically elected government. One man is trying to deliver on something that is undeliverable, against the advice of everybody else. This demonetization will go down as one of the most naïve, least thought through policy decisions ever, a massive man-made disaster. It is time to withdraw massive executive powers with one man replace them with robust processes, except during situation of war & emergencies. Executive should not be allowed to incur expenses or impose taxes without prior legislature approval.

Cashlessness is illegal & undermines citizen's liberty

• Cash is coined liberty, fundamental right of citizens.
• Cash is an asset, without any intrinsic value but guaranteed by Reserve Bank of India, for its full value. On other hand cashless transactions comes with a hefty transaction fees that impoverishes citizens.
• Cash is a form of wealth and citizen's right to hold any form of wealth can't be constrained except by a process of law.
• Banks are commercial enterprises and cash deposited in banks are never guaranteed beyond a certain small value by RBI. Government can't compel its citizens to keep their wealth with these commercial enterprises and violate constitution and principles of democracy.
• Cashlessness grants freedom to banks to use their entire cash as they like without any obligations to depositors, except showing credit/debit balances in their accounts. 
• The bank's Cash Reserve Ratio (CRR) obligation will gets nullified. It may reduce their lending rates but reckless advances will increase its NPAs and bankruptcy.
• Run on banks will gets eliminated no matter what ever non sense banks do. They would not be answerable to depositors at all.
• Emboldened banks will tend towards lower interest & negative interest regimes that will rob off depositor's wealth completely over time. 
• With cash banned, rulers & bureaucrats will get enabled to track citizen's activities, undermine privacy rights and have complete control on citizen's lives. Unthinkable in a democracy.
• Their justification to fight tax evasion, black money menace, fake currency, terrorism finances, smuggling etc by tracking transactions is just trash. There are many avenues to fight these menaces without intruding citizen's privacy and respecting individual rights. All these anti-social elements will just not give up or allow authorities to catch them but will modify their activities with much greater ingenuity and continue. They have their own godfathers among politicians and bureaucrats who will help them for a price.
• Finally, no democratic country will ever think off banning cash altogether. Only authoritarian regimes can ever think of such anti citizen moves.

Money is coined liberty, and so it is ten times dearer to a man 

who is deprived of freedom. If money is jingling in his pocket, 

he is half consoled, even though he cannot spend it. ― Fyodor Dostoevsky

Cashless transactions is a bane for Indians

It is natural for Government departments to expects citizens leave trail of transactions they make for the purpose of efficient tax realizations and crime investigations.

Cashless transactions offers the following advantages to Government and citizenry and results in higher investments in infrastructure and efficient fiscal management of nation.

• Leaves a long trail of transactions
• Efficient tracking for effective tax realizations and evasion of taxes
• Reduces expenses and burden of monetary system management
• Eliminates risk of carrying cash safely
• Helps businesses and people manage their financial transactions safely & with ease, efficiently and reduces reckless spending
• Reduces physical visits to Banks
• Eliminates black money menace 
• Reduces corruption
• Controls money laundering
• Reduces pick pocketing, robberies and thefts of money

But the disadvantages with Indian perspective are

• People are used to cash traditionally and over 90% transactions are in cash
• Unreasonable tax rates, corruption, reckless public spending, bureaucratic apathy & abuse, irresponsible politicians, lack of transparency & accountability in administration, business cheating etc justifies tax evasion and reinforces cash as a secure possession of wealth
• Need for a bank account, Aadhaar card & PAN Card for every person
• Requires higher levels of education & banking education
• Every person must have smart phone & data connection
• Internet & 3G spread must reach nook & corner of entire country
• Every transaction entails charges 1-2% apart from Data costs
• Non cash transaction results in increased tax payments
• Less secure internet and less secure banking systems exposes risks of hacking and losing money for customers
• Lack of privacy laws, grievance redress systems, high cost & inaccessible courts poses serious hurdle for acceptance & growth of cashless transaction systems.

Tax evasion, black money menace etc are largely urban phenomenon. Most rural habitants are with earnings that are within no tax or 10% tax bracket. With 90% of country out of internet/mobile map, 40% illiterate, 40% poorer classes, ineffective privacy laws & grievance redress systems, cashless transactions shall remain largely an urban phenomenon for few more decades.

My View:
With very low per capita income, poverty, illiteracy, citizen rights largely unprotected, weak infrastructure, poor privacy laws etc and Government suffering lack of citizen confidence (reflected by Mafia gangs resorting to quick settlements for huge cuts) and unreasonable tax regimes etc cash systems will prevail for few more decades. Modi in order to increase tax revenues resorting to autocratic methods, destroying institutions and unleashing police-raj will only create chaos & confusion and detrimental to stability & growth. Government attempting to force gullible & weak citizenry to adopt cashless systems is not only a bane and is bound to fail.

Cashless economy will be a disaster

Cash is empowerment, freedom, privacy & security.

Cashless society is at least 25 years away for fulfilment of following requirements:

• Basic education
• Banking education
• Technology education
• Smartphone requirement
• Electricity for charging
• Internet or 3G connection
• Net Banking wareness
• App to be downloaded
• Knowledge about secure operation
• Privacy and security cyberlaws
• Grievance redressal knowledge
• Awareness of perils
• Cost Benefit analysis
• Above all mindset

Fully cashless society would mean the end of privacy . There would be a digital trail of every action you take through your purchases and transfers. In the absence of robust privacy laws and data protection in India, it is a big worry every week as we hear stories of hacking.

A fully cashless society could mean the end of dissent. The government can use any data it gathers against you. Even if you commit no crime, there is much you may be embarrassed by. What's more, they could make any opponent a pauper with one keystroke, freezing your bank account while they investigate alleged misdeeds. Just the fact that they have this power could have a chilling effect on dissent. Would you want government men have that much power on you for presumptive reasons?

It is a myth that an advanced society must necessarily be cashless. In Germany more than 80% of transactions are in cash, as citizens safeguard their privacy and freedom. In the US, 45% of transactions are in cash. Even in advanced, wealthy & small countries like Norway & Singapore cashless transaction are just 60% only. In India, 600 million people have no bank account, and less than 20% of all Indians have a smartphone. Internet penetration is iffy. Trying to make India cashless is akin to putting a bullock cart in an F1 race.

Technologies, like any App, imperil our privacy. But those actions are voluntary, and we can choose to avoid them. That is the crux. Coercion towards cashlessness with deprivation of currency implicit in the demonetization is ridiculous. A cashless society would only be good if we evolve towards it, not if we are forced into it.

Digital payments involve transaction costs, are unreliable because of infrastructure issues. After demonetization who would trust an Indian banks and RBI? The beneficiaries of forced cashlessness are not consumers, but vested interests like banks and payment companies. This might be the largest redistribution of wealth from poor to rich in the history of humanity.

When the demonetization was announced, Modi & BJP said it was meant to attack black money and counterfeit currency. Once it became clear that those reasons were nonsense, they tried to change the narrative into a cashless economy. Within a fortnight of that, they are already backtracking and saying they meant `less cash' instead of `cashless'. The truth is that the demonetization was a humanitarian disaster that is crippling our economy, and no matter how many times Modi and gang try to rationalize it, it cannot be done. These men will stop trying when they cannot justify any more, they will distract.

The best government is that governs least.

My View:

Anything by force undermines individual freedom & rights guaranteed by constitution. When people see reason, benefits, security, affordability etc they themselves will adopt to cashless transactions voluntarily. Until then it is only a commodity with a price and government has no right to promote any body's business on its citizens forcibly. 

How government will enforce tax compliance is altogether different issue. This is no right way.

Cashless Transactions: Perils

Modi government had failed completely to provide replacement new cash consequent to demonetization of Rs. 500 & Rs.1000 notes on Nov 8, 2016. Instead of accepting the blunder and plunder, Modi relentlessly campaigning for cashless transactions as solution to cash shortage with an eye on increasing government tax revenues is a cruel joke on gullible Indians. Cash in circulation shrinkage is a hidden agenda item. These have devastating effect on overall economy and impacts employment growth.

Cashless transactions exposes innocent citizens to its perils of cheating and hacking apart from hidden costs ultimately payable them apart from privacy rights violation. The sudden push to cashless economy via demonetization is an arm twisting tactic in contrast to promoting technology for comfort & convenience. Anything by force is despicable in a civilized and democratic society.

The perils of cashless transactions are many:

• Data security breaches.
• Chips embedded on the cards reduces fraud on swipe machines, but it's not clear how much.
• Chips embedded on the cards don't help prevent online frauds.
• PoS machines are expensive and unaffordable for small traders.
• Every transaction will be loaded with 0.75%-2% charges payable either by merchant or customer.
• Going cashless means all your purchases are traceable and your privacy is up for grabs. 
• When governments have information they may attempt to use it in ways that are not fully vetted by due process.
• Since electronic payments can be traced, but constant government monitoring could turn everyone into a potential suspect, creating distrust between government and citizens.
• There are a number of cultural rites that we use cash for today, small donations, tips, religious contributions, and gifts. It's a lot more meaningful to give cash than a piece of plastic.
• It will be a fallacy to equate the ability of ordinary Indians to use a mobile phone with their willingness to replace their purse or wallet with their phone.
• Technology adoption is a complex process. Government orders or currency shortage can't force people to adopt to a new technology. Adoption of any new technology needs necessary infrastructure, awareness among citizens and their willingness to accept the change. 
• A favorable regulatory environment is also a prerequisite.

India is utterly unprepared at this point of time for switch to cashless economy: 

• Out of 139 countries ranked in the Network Readiness Index (NRI), India stood at 91. On two counts - availability of infrastructure and level of skills among people - India ranked even lower (114 and 101 respectively). In terms of individual use of information technology, India's rank was 120 out of 139 countries.
• China got an overall rank of 59. Singapore topped the global ranking. 
• One third of the Indian population is still illiterate and a third of our youth are not enrolled in secondary education. Technology penetration is pathetic - only 15% households have access to the Internet and mobile broadband just reaches a few.

People take to new technologies when they see clear benefits, trust the providers, find it convenient and can afford it. The mobile wallet is a long way from fulfilling these basic criteria. As things stand now, cashless transactions is going to be an urban phenomenon.  Rural population adopting cashless transactions is decades away.


My View:
Informal economy including agriculture provides employment to about 90% population and is 55% of GDP that are mostly either unskilled or semi skilled without any meaningful qualification. This sector is 100% dependent on cash for all its transactions. Majority of the people are with earning far below Rs.250,000 per annum which is income tax free limit. It is important  to note that income tax (direct tax) is one among many other taxes (indirect taxes) collected by government. All sections of people pay all indirect taxes. Informal section pays very less income tax. Modi government attempting to shrink cash in circulation and weaken informal economy seemingly appear "in larger interest of the nation" but organised sector is not in a position to provide such a large number of jobs to unskilled or semi skilled people with relocation issues. Cashless transactions is an attempt to collect taxes from this section is futile. Collecting small tax from large number of people is an uphill task and at the end expenses far outstrip the income apart from promoting corruption. For Indian informal sector, cash economy benefits far outweigh meager cashless economy benefits.