Economic freedom, informal economy, ethics and corruption

 

Austrian-British economist Frederick Hayek foresaw more than 60 years ago, economic freedom is required in all aspects of economic life in order for countries to improve their economic efficiency and the living standards of their people. 

• Corruption is a symptom of over regulation, lack of rule of law, a large public sector and not the root of the problem. 
• Morality and ethics are hard to measure. Economic freedom removes opportunities for corruption and promotes ethics not just for its moral implications, but also because of its economic value.
• Ethics is defined as 'rules of behavior based on ideas about what is morally good and bad'. In general, we call unethical those actions for which there is a social consensus that they are a bad thing. 
• Corruption has several meanings and for most people corruption is something unethical, something considered a wrongdoing. A closer look at human behavior in economic life suggests that corruption does not reflect lack of ethics as it reflects a lack of economic freedom.
• Economic freedom is defined as “the absence of government constraint or coercion on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself.”
• The Index of economic freedom provides a framework for understanding how open countries are to competition; the degree of state intervention in the economy, whether through taxation, spending or over regulation; and the strength and independence of a country’s judiciary to enforce rules and protect private property. 
• Corruption does not always reflect inherent unethical behavior especially for those who are forced out of the formal economy into the informal economy through burdensome regulations, taxation, and weak property rights.
• As economic freedom vanishes, the informal economy takes a larger share of GDP. The size of the informal economy in economically unfree and repressed economies is almost three times the size of the informal economy in free economies.
• The economic repression has its perverse effects on the ethics of ordinary people and on the perpetuation of their poverty conditions. 
• In most developed countries, people have a better standard of living due to credit access.  In USA, without credit, most people would not have a house, a car, a TV, a vacation, or many of the products that add comfort and convenience to my life. Credit makes it possible for middle-class people, to improve standard of living in many ways.
• To have access to credit, you need to have income or property. To prove that you have income, you need a formal job, and to prove that you have property, you need a property title.
• The availability of formal jobs depends on ease for people to invest and do business. The friendlier the business environment, the more formal jobs will be available. In most low to middle income countries, it is extremely difficult for small and medium investors to operate, both because of the regulatory environment and because of the lack of a strong rule of law. 
• In developing economies, the problem with the legislation is that it assumes that all employees are equally good, equally responsible, and equally productive, which is not true. The burden of regulations compels small and medium businesses to create jobs in the informal sector, where the benefits are negotiable and tied to performance, and not forced by law.
• The rules of the state creates perceived unethical behavior by private employers and employees when what is really in question is the ethics of such a regulatory burden.
• If they do not have a formal job, poor people can still get access to credit if they have a property title to use as collateral. The poor own many things that they could use as collateral, but it is bureaucratically impossible for them to validate their property rights. As a result, they are unable to raise credit and their standard of living.
• In the developing world many of the poor people have property but the bureaucracy they have to go through in order to get a property title is huge. The poor own many things that they could use as collateral, but it is bureaucratically impossible for them to validate their property rights. As a result, they are unable to convert what they own into capital and, therefore, raise their standard of living. For example, in Peru, “to obtain legal authorization to build a house on state-owned land took six years and eleven months, requiring 207 administrative steps in 52 government offices. To obtain a legal title for that piece of land took 728 steps.”
• Informality is a response to economic repression, not to something inherently unethical in those who circumvent legislation. What is most unethical about informality is the condition in which the  government forces the poor to live. Informally employed people are condemned to a standard of living that is significantly lower than that of formally employed people, who have credit access. Informality creates a culture of contempt for the law and fosters corruption and bribery in the public sector as a necessary means to navigate the bureaucracy.
• As economic freedom vanishes, corruption flourishes. The level of perceived morality in economically free countries is almost four times the level of perceived morality in the public sector in most unfree or repressed economies.
• Weak rule of law adds to the level of corruption in the public sector as well as the amount of informal activity. A weak judiciary is a 'blind eye' on anything done outside the law. With a weak judiciary, corruption goes unpunished and informality flourishes.
• In 2003, 108 of the 161 countries received bad scores in both regulation and property rights, undermining the efforts to improve the living standards of the poorest.
• The unethical behavior stems from the environment and convoluted regulations and weak rule of law foster a culture of corruption and informality both in the private and public sectors.
• In the public sector, convoluted regulations and weak rule of law provide ample opportunities for public officials to accept bribes without punishment. In the private sector, those two factors push some people to do business informally as a means to survive and others to profit far more than they would if the possibility of bribery did not exist. Both result is an increasingly unequal society, in terms of the opportunity to create wealth and improve living standards.
• To fight corruption and informality, it is essential to understand that corruption is a symptom--of over regulation, lack of rule of law. A large public sector is not the root of the problem. The real problem is the government action/regulations causing undesired behavior of the private sector. The unethical/corrupt behavior of the private sector, leads to the government to press more on private-sector activities. The solution is to eliminate burdensome regulations so that unethical behavior does not occur.

Countries must advance economic freedom in all possible areas of the economy, with particular emphasis on regulations affecting small and medium business, in order for corruption and informality to decrease. Countries must also preserve the independence and effectiveness of the judiciary to punish corrupt actions. Economic freedom with a strong rule of law will foster a culture of investment, job creation, and institutional respect in massively improving the living standards of ordinary people.

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Let no young man, choosing the law for a calling, for a moment 

yield to the popular belief  that lawyers are necessarily dishonest. 

Resolve to be honest at all events; and if, in your own judgment, you 

cannot be an honest lawyer, resolve to be honest without being a lawyer. 

Choose some other occupation, rather than one of which you do, 

in advance, consent to be a knave ... Abraham Lincoln

The observations in the article are highly theoretical but the reality in India is some what different. The most unethical, corrupt and tax evading people are rich, highly educated, well placed & well connected.  The poor people are ethical and law abiding. The middle classes are torch bearers of traditions although corrupt & unethical. The small bribe paid by a poor man for obtaining birth certificate etc is understandable, the corruption by businessmen in collusion with politicians & bureaucrats, escalating project costs siphoning of funds to tax havens etc burdening the whole nation is a criminal act and deserves harshest punishment. Corruption & lack of ethics is so rampant that today it hard to find and ideal person.

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.

Informal economy in India, is going to stay

The informal economy is in opposition to formal economy, meaning it included all income earning activities beyond legally regulated enterprises. This sector produces and distributes legal goods and services. The informal sector does not include the criminal economy that produces illegal goods and services. People of all societies regularly adjust their activity within economic systems in attempt to evade regulations.

In India, for historical reasons, informal economy is most prevalent where most transactions are CASH based, has GDP share of 55% and provides livelihood to over 90% of people who are less educated and less skilled and are not employable in formal sector. They are perfectly legitmate but are neither regulated, nor monitored and most doesn't pay income tax with most people's earnings at below free limits of income tax slabs. Most women workers work in informal sector.

Although the informal sector makes up a significant portion of the economies in developing countries it is often stigmatized as troublesome and unmanageable. However the informal sector provides critical economic opportunities for the poor and has been expanding rapidly since the 1960s. As such, integrating the informal economy into the formal sector is an important policy challenge.

The components of informal economy are:

1. Agriculture
2. Construction
3. Contract workers
4. Trade services
5. Bullion markets
6. Cinema production workers
7. Retail shops
8. Self employed professionals & skilled workers
9. Street vendors
10. Small industrial workers
11. Domestic helps, drivers etc
12. Garment workers working from their homes
13. Informally employed personnel of formal enterprises
14.   ... and many more

Workers in the informal sector typically earn less income, have unstable income, and do not have access to basic protections and services. Informal businesses lack the potential for growth, trapping employees in menial jobs indefinitely. On the other hand, the informal sector can allow a large proportion of the population to escape extreme poverty and earn an income that is satisfactory for survival. Some people would earn more money through their informal sector work than at a job in the formal economy. Even if workers made less money, working in the informal sector offered them more independence, the chance to select their own hours, the opportunity to work outside and near friends, etc. While jobs in the formal economy might bring more security and regularity, or even pay better, the combination of monetary and psychological rewards from working in the informal sector is appealing for many workers. Some people who are formally employed also choose to perform part of their work in the informal economy to make some extra money for their family well being.

Governments feel that their inability to collect taxes from the informal sector is hindering in financing public services is devoid of any merit. Collecting small amounts of taxes from very large numbers employed in informal economy comes with huge expenses and doesn't make much sense or profitable. Informal economy doesn't pay direct taxes bwhich anyway is only a fraction of the indirect taxes they pay on goods they consume. On the contrary informal economy mitigates unemployment issues by providing casual work to unemployed laborers. Government needs to recognize that the informal economy produce significant goods and services, create jobs, and contribute to imports and exports which is critical for governments.

Poverty, illiteracy and lack of skills are the prime reasons for booming informal economy and their reluctance to regulation & taxes at all costs. As country becomes more educated and more prosperous, over time, automatically informal sector will migrate to formal economy for protection and benefits it provides.

In capitalism man exploits man; in communism it is the other way round. 

No good man has ever made fortune in this world.

 In general, amassing of wealth is associated with exploitation of people or 

looting governments or destruction of ecological assets.

My View:
Modi having thoroughly mismanaged and messed up economy during first half of his tenure, despite favorable GDP growth and low oil prices, brought the country to near junk status and public sector banks to the brink of collapse. Desperate he was, saw an opportunity to rob off the wealth from 'cash hoarders' running into several lakhs of crores of rupees with a stroke of pen, secretly planned without consulting any one and without even pretense of process of law, demonetized Rs.500 and Rs.1000 notes, plundered and laded the nation into instant disaster. Of course, he was more eyeing on publicity it could generate as a lone crusader against the evils of corruption & black money, to win UP & Punjab elections. Even though several countries considered demonetization as a weapon to fight corruption and black money menace but didn't dare to venture due to its complexity, size, uncertainty, collateral & pernicious damages and unintended consequences. Which ever country did demonetization in the past had bitter experience and faced disastrous consequences. While Modi could generate much publicity for himself but the problems faced by poor, vulnerable and rural masses put him in dilemma of converting publicity into winning much needed in UP & Punjab elections votes. His leadership ability is in a big question now.

Migration of informal economy into formal sector is a matter of policy challenges for the governments and for a populous, poor, illiterate and underdeveloped country like India it is long road, which will happen steadily overtime with development, prosperity & education. What Modi has done is carpet bombing and destroying the existing informal economy and all its working capital now with banks attempting to expand formal economy ignoring its adverse impact on livelihoods of poor & vulnerable people destroying their stable livelihoods, will not work anyway. He will go down in the history as a worst leader India ever had.

Modi in war with common man

Not withstanding the stated demonetization objectives by Modi such as black money, fake currency, corruption and terrorism financing, Modi's eyes were only on expected unreturned black money estimated at 21% of demonetized currency i.e. Rs.3.19 lakh crores, as detailed below. After demonetization expenses, the clear profit was expected to be Rs. 3 lakh crores. In his affidavit Attorney General informed Supreme Court that they expect about Rs.5 lakh crores of black money which would not be deposited by black money hoarders during the period Nov 8 - Dec 30, 2016.

Cash in circulation Rs.17.65 lakh crores
Demonetized currency 86% i.e. Rs.15.18 lakh crores
Extinguished currency 21% i.e. Rs.3.19 lakh crores

Modi needed this much money to induce funds into cash strapped public sector banks whose NPAs doubled in the previous one year and their day to day operations are under jeopardy and also to reduce budget deficit since their lobbying for ratings upgrade by agencies from near junk status was rejected and declined to budge citing concerns over the country's debt levels and fragile banks and stated that ratings upgrade for India was some years away, depending on the progress on reforms.

After ascending to power in 2014, riding the 'anti congress' wave, Modi with charismatic and dramatic speeches had engulfed 'middle class segment', who generally live in total disconnect with the realities of rural and lower strata's of society, made them believe that he is Messiah to save save the nation of all its ills and steer it in the direction of development. But in the past 30 months he didn't do anything except hammering past blunders of Congress and enjoying foreign jaunts. Now saddled with all round political & economic failures and, midway he is under pressure to unleash some daring action to win forthcoming five state elections and President & Vice President elections. He was impressed with a 'quack economist' presentation of demonetization and tax reforms, with out getting it evaluated by experts for its veracity and impact on the common man, he saw an opportunity to resolve all his problems in one go and unleashed secretly hatched, unprepared, high risk & wild gamble of demonetization within two months bypassing and destroying institutions like RBI, Ministries and Departments, without even pretense of process of law. Ironically, demonetization was not an economic tool to achieve any of these objectives which would seemingly do good but inflicts unbearable direct and collateral damages.

These were the main reasons and all other things told rhetorically by Modi was 'bakwas'.

After dramatized high pitch announcement by Modi on Nov 8, 2016 that with demonetization he would save the country from the menaces of black money, fake currency, corruption and terrorism financing, but with in days it was clear that it was a monumental debacle with inept cash replacement arrangements resulted in crores of poorer section people loosing their livelihoods and ending up in serpentine bank queues. Stunned with this Modi invoked 'patriotism' like a scoundrel and demanded that people bear the brunt for 50 days. Some days later he shifted goalpost from 'black money, fake currency, corruption and terrorism financing' to 'cashless economy' which would expand 'formal economy' and shrink 'informal economy' and higher tax realization would accelerate development.

• What he has not told is that informal sector will stand to lose at least one third of its working capital (from black sources) and how that informal economy (with 45% GDP share and 90% employment share) would survive and get funded by banking sector.
• What he has not told is that 'cashless economy' which is at least 10-20 years away, due to 'infrastructure defects & constraints' and will involve holding and usage costs unaffordable by lower class people of India.
• What Modi has not done is that the moment he realized demonetization landed in fiasco subjecting crores of poor people to hardships he should have initiated mitigation measures and instead went ahead with resolution at least six months away. All that he has done is demanding suffering for 50 days, in the name of patriotism. Except some hollow speeches, nothing else.
• He was remorseless for people sufferings, 100+ deaths of aged and women in bank queues and 10+ bank employee deaths consequent to abnormal work stress.
• Over 60 circulars from RBI, often contradicting, indicates thoughtlessness, unpreparedness, panicky management by concerned authorities. Fortunately riots haven't erupted and that is no credit to government.
• Modi instead of participating in the mandatory & obligatory parliamentary debate and explain the nation, abstained from parliament and chose to address public meetings, where he need not have to answer any questions, flabbergasted the nation that after short term pain (to poor), long term gains (to rich) will start pouring in, is nothing but audacity of an arrogant tyrant.
• Dramatized speeches blaming opposition parties is OK for a political leader to win elections, but as Prime Minster addressing nation must desist from dramas or blame gaming and harping on blunders of previous regimes, but must be truthful to people of the country exhibiting honesty & sincerity of purpose, upholding principles of democracy and defending constitution and laws of the land.
• This demonetization which is under the purview of RBI and Parliament, was done with a mere televised announcement by Prime Minister, himself and followed by a notification of Ministry of Finance and without undergoing even pretense of process of law. Purposeless secrecy was taken as a shelter for violation of all constitutional processes.

As PM and leader of parliament, he was responsible for proper conduct of both the houses more than any body else. He took no step for resolving the parliament logjam on demonetization issue except blaming Congress etc. He neither intervened with any statement nor replied to opposition leader Manmohan Singh criticizing the demonetizing process as 'monumental mismanagement, organized loot and legalized plunder'.

Now after passing Dec 30, 2016, it was clear that 97% i.e Rs.14.82 lakh crores of cash has gotten deposited with Banks & RBI leaving just 3% i,e Rs. 46,000 crores, unreturned black money. With NRI's having time upto June 30, 2017, the final figure would be much less.

The expenses for the 50 day period, direct & indirect, are estimated as below:

1. Direct expenses to RBI & GOI Rs.16,800 crores.
2. Banks to bear an estimated cost of Rs.35,100 crores.
3. Cost of queues to exchange currency is estimated at Rs.15,000 crores
4. Enterprise* losses are estimated at about Rs.61,500 crores.
   * includes all businesses, farmers, input suppliers, transporters, wholesalers, retailers, manufacturers, stockists and distributors, malls and other retail outlets, restaurants, entertainment and other enterprises.
5. Total cost of demonetization, during 50 days period, is estimated at Rs.128,400 crores
6. Total amount confiscated during raids is Rs. 4,000 crores.

With gain of Rs.40,000 crore or less and 50 days expenditure at Rs.128,000 crores, inestimable collateral damages to economy, and crores of workers thrown out of livelihood, bringing informal economy to standstill and impact stories surfacing incessantly for next 1-2 years, leaving all stated problems intact & unsolved with some respite, demonetization is a senseless, politically motivated, one man made, economic disaster.

Insanity is defined as doubling the speed in wrong direction

My View:
Modi's ascending to power in 2014, with a massive campaign expenditure of about Rs.10,000 crores funded by his industrialist friends is not without having made massive and horrendous economic & moral compromises. He is neither a saint nor a statesman but a low class politician with deep roots of RSS ideology. Therefore his secret decision of demonetization even though seems to be in national interest is primarily aimed at deriving political benefits. Ironically, it has become a war with gullible common man.

RBI Governor Urjit Patel's perplexing silence sacrificing his & institution's reputation for probity, competence and independence is in tatters indicating that he was not consulted but just asked to implement. Any institution can be independent in its functioning to the extent elected executive desires. In this case Modi & co just bulldozed them.

A 'good policy badly implemented' is worse than a 'bad policy well implemented'. In short, we are in a massive mess. Demonetization move would not have any lasting benefits. No politician or upper class person was seen in any of the bank queues and for them life and business were as usual. They just exchanged old notes with new notes through paid agents and several other ways & means. Middle classes armed with with plastic cards and habituating living in total disconnect of realities of rural & poor of India, were not much effected and it is the poor which suffered most losing livelihood and ending up in serpentine bank queues for exchanging paltry sums after several hours of indignity. Even the raids, mostly with political underpinnings, conspicuously excluded politicians and officers. 

Modi suffers from worst possible type of corruption: an insatiable desire for personal glory at any cost, an extremely deep moral and spiritual corruption. He also represents the worst aspect of democracy: a demagogue who caters to an irrational populace’s cravings for self-identity and release from self-responsibility. Any difference of opinion is tarred quickly as unpatriotic and anti-national by the troll brigade.

It is not that easy to flush out the black money. Projecting that demonetization will resolve issues of black money and corruption is misleading the gullible masses of the country. Reforming the tax administration and tracking data would have given good and lasting results. Modi's inaction during the past 30 months in this matters speaks volumes about his real intentions.

Modi's unprecedented act of demonetization, is not only damaging country's economy and threatening destitution to countless millions of its already poor citizens but is also breathtaking in its immorality. What Modi has done is committing a massive theft of people's property without even the pretense of due process; a shocking move for a democratically elected government.

The scale and speed of Modi’s scheme has more in common with the failed experiments of dictatorships which led to runaway inflation, currency collapse and mass protests. Demonetization was supposed to be a fight against black money but now it seems like a war against the people. Instead of making surgical strikes against corrupt & black money hoarders, Modi has carpet bombed the whole economy destroying informal economy resulting in crores of poor people losing their livelihoods. Shifting the goal post to 'cashless society' indicates Modi's acceptance of failed operation and it is also suspected at creating economic devastation and usurping of an individual's economic liberty.

Modi would have truly walked the talk if he had attacked the nexus between the big business and politics which truly nurtures the black money ecosystem. BJP is the most cash funded party these days. So far the pain has been largely borne by the ordinary people. Modi burned down country's economic house in the disguise of eradicating the pest of corruption? Modi has shot himself in his foot and India fell.

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.