At the onset, let me clear that I have been an "almost cashless" citizen ever since digital wallets were invented. Since the "dramatic" night of Nov 8th, I am absolutely cashless without even one rupee in my Titan wallet. Government of India subsidised my engineering and management education at NIT and IIM with the hope that I will pay back as a tax payer, an obligation which I think I have lived up to in my life.
According to finance ministry data of 2014-15, 48 million Indians or 3.81% of population pays taxes and bank rolls this country. This number has gone up from 1% in 2012 after government started tightening the noose with a mix of policy and technology interventions. The number is this low not because we have got 97% poor people in country, it is because a large majority of Indians don't pay taxes and accumulate wealth as what we know today as black money or unaccounted money or tax unpaid money. Like most of the 3.81%, I also feel bad when I see a large majority who makes manifold times money than me pay nothing in taxes and happily blame their behaviour on the poor public services and inefficient bureaucracy which are not worth paying for. Honestly any tax paying Indian today will be happy to evade taxes if given an opportunity seeing how easy it is to have black money and still lead a "respectful" life. The black economy has become so ubiquitous that it's taken as a given today. Try buying a property in any leading city of the country and you will see people blatantly quote you 2 different rates when paid in cash and when paid through bank instruments. Today, people paying their taxes correctly is the most ill-treated minority of this nation- they work hard, they bank roll this country, they pay tolls at the toll booths, they stand in queues for a government certificate and a good majority of them don't even enjoy post retirement benefits. So like the PM, I think it's high time that the scrouge of black money is removed from the system.
Now let's understand a bit more about these 'black' money hoarders. There are a lot of different estimates for black money. If I follow what RBI estimates, there is 2.5 lac crore worth black money hoarded by Indians. Out of this, 65000 crore was declared during the recent window for declaring tax unpaid money. Another estimate by government says 1.2 lac crore is stashed abroad. That leaves us with 65000 crores of money available still in the domestic market currently. If we assume that all this money is stashed under the bed, inside the walls and below the floor of hoarder's homes which is extremely unlikely as black economy is a highly developed parallel channel in India and these individuals have figured out mechanisms to convert unaccounted money into appreciating assets. So the chance is that most of this money is invested in property, stored as dollars or share certificates or advanced as loans to small businesses which don't have access to modern banking. Anyway, let's assume 65K crore is under the carpet as cash. That means to recover 65000 crore, we just junked 14 lacs crore worth 500 and 1000 notes. So to fix 0.45% of the 14 lac crore, we just burned the entire hoard. No wonder Raghuram Rajan left without pushing for a second term (assuming RBI governor along with Economic advisor were the 2 people aware of the move 6-8 months ago). Reminds of a adage in Malayalam "Eliye pedich Illam chuttu" ie to fix the rat problem at home, I burned my house.
The notion that black money will be stored as cash by people who have been taking the government for a ride for last 60 years is naive. Naive part was the exact word used by RBI governor IG Patel when Janata Party moved to demonetise currency in 1978. The Modi demonetisation of Nov 8th however is just not a fight against black money as it is made out to now, it is also targeted at counterfeit currency and terror/corruption network which provides a mechanism to use the black money and get returns. With one shift move, government has starved these networks for at least an year providing the security forces and administration with a golden chance to nip it off. Will the administration be able to do it, is something only time will tell. The move now being made out to be a fight against black money is nothing more than a PR blitz to save the face after the disastrous implementation of the process.
However well intentioned the move, if the execution is a disaster, the outcome leaves a sour taste. If anyone has been put at inconvenience through this move that is the common man and businesses which all runs on cash. Even a new age business like e-commerce came to a standstill since almost 70% of the orders are CoD. Just imagine what would have happened with factories and small enterprises and their workers who were given daily or weekly wages. On top of all this, only Rs 2000 notes were given to people who queued in front of banks to exchange money; an usable denomination in an economy starved for smaller denomination notes. I don't understand what difference it could have made if announcement was made giving 2 weeks window when old notes are usable. In these 2 weeks:
1. ATMs would have got recaliberated to dispense new Rs 500 and 2000 notes
2. Exchanges of notes would have happened without effecting daily livelihood and businesses
3. Banks would have got enough time to exchange notes preventing people from wasting their office time to queue in front of banks
Also don't understand why Rs 2000 was launched before Rs 500. Government's explanation is that it is find people who have changed a lot of notes. I fail to understand how they will track Rs 2000 notes now if they have not been able to track Rs 1000 notes earlier.
The dramatic nature of the move is supported by saying black money hoarders would have found a way to hide their wealth if a window was given. This is the most ridiculous argument I have ever heard. The government claims it will find out people who have deposited large wealth in banks till Dec 30th and charge them 200% fine. Why is it that the same government would not have been able to monitor and find out who were moving their wealth out from cash to some other instruments or abroad in the window of conversion given. Every possible mechanism of moving money outside is controlled and monitored by government. The way GoI has gone about such an important activity seems to be ill planned from the word go.
Interestingly this move was done by a PM unilaterally whose party was against demonetisation of all currency issued before 2005 proposed by RBI in 2014. If Congress had done anything like that, BJP would have brought the country to a standstill. Protests all over the country would have forced the government to backtrack the operation. Thanks to the state of opposition or should I say lack of opposition, the idea has just sailed through and every voice against it is being stifled.
I want to reiterate that the idea to make all money in the economy accounted for is great and the use of electronic currency for everything is inline with the fantastic vision for our future but such poorly planned authoritarian decisions are only going to hurt the law abiding citizens. If decisions effecting the entire nation is going to made by 2 or 3 people at the top, dissolve the overpaid policy makers and think tanks and save some money of the honest taxpayer. After the demonetisation move, our finance minister came on TV proclaiming that such moves can't bring down tax since we are still a 5% deficit economy. When companies make losses, we look at cost cutting, why can't the nation do the same? Go for retrenchment and reduce the government expenditure by dissolving the policy makers/think tanks who are anyway not consulted on anything.
According to finance ministry data of 2014-15, 48 million Indians or 3.81% of population pays taxes and bank rolls this country. This number has gone up from 1% in 2012 after government started tightening the noose with a mix of policy and technology interventions. The number is this low not because we have got 97% poor people in country, it is because a large majority of Indians don't pay taxes and accumulate wealth as what we know today as black money or unaccounted money or tax unpaid money. Like most of the 3.81%, I also feel bad when I see a large majority who makes manifold times money than me pay nothing in taxes and happily blame their behaviour on the poor public services and inefficient bureaucracy which are not worth paying for. Honestly any tax paying Indian today will be happy to evade taxes if given an opportunity seeing how easy it is to have black money and still lead a "respectful" life. The black economy has become so ubiquitous that it's taken as a given today. Try buying a property in any leading city of the country and you will see people blatantly quote you 2 different rates when paid in cash and when paid through bank instruments. Today, people paying their taxes correctly is the most ill-treated minority of this nation- they work hard, they bank roll this country, they pay tolls at the toll booths, they stand in queues for a government certificate and a good majority of them don't even enjoy post retirement benefits. So like the PM, I think it's high time that the scrouge of black money is removed from the system.
Now let's understand a bit more about these 'black' money hoarders. There are a lot of different estimates for black money. If I follow what RBI estimates, there is 2.5 lac crore worth black money hoarded by Indians. Out of this, 65000 crore was declared during the recent window for declaring tax unpaid money. Another estimate by government says 1.2 lac crore is stashed abroad. That leaves us with 65000 crores of money available still in the domestic market currently. If we assume that all this money is stashed under the bed, inside the walls and below the floor of hoarder's homes which is extremely unlikely as black economy is a highly developed parallel channel in India and these individuals have figured out mechanisms to convert unaccounted money into appreciating assets. So the chance is that most of this money is invested in property, stored as dollars or share certificates or advanced as loans to small businesses which don't have access to modern banking. Anyway, let's assume 65K crore is under the carpet as cash. That means to recover 65000 crore, we just junked 14 lacs crore worth 500 and 1000 notes. So to fix 0.45% of the 14 lac crore, we just burned the entire hoard. No wonder Raghuram Rajan left without pushing for a second term (assuming RBI governor along with Economic advisor were the 2 people aware of the move 6-8 months ago). Reminds of a adage in Malayalam "Eliye pedich Illam chuttu" ie to fix the rat problem at home, I burned my house.
The notion that black money will be stored as cash by people who have been taking the government for a ride for last 60 years is naive. Naive part was the exact word used by RBI governor IG Patel when Janata Party moved to demonetise currency in 1978. The Modi demonetisation of Nov 8th however is just not a fight against black money as it is made out to now, it is also targeted at counterfeit currency and terror/corruption network which provides a mechanism to use the black money and get returns. With one shift move, government has starved these networks for at least an year providing the security forces and administration with a golden chance to nip it off. Will the administration be able to do it, is something only time will tell. The move now being made out to be a fight against black money is nothing more than a PR blitz to save the face after the disastrous implementation of the process.
However well intentioned the move, if the execution is a disaster, the outcome leaves a sour taste. If anyone has been put at inconvenience through this move that is the common man and businesses which all runs on cash. Even a new age business like e-commerce came to a standstill since almost 70% of the orders are CoD. Just imagine what would have happened with factories and small enterprises and their workers who were given daily or weekly wages. On top of all this, only Rs 2000 notes were given to people who queued in front of banks to exchange money; an usable denomination in an economy starved for smaller denomination notes. I don't understand what difference it could have made if announcement was made giving 2 weeks window when old notes are usable. In these 2 weeks:
1. ATMs would have got recaliberated to dispense new Rs 500 and 2000 notes
2. Exchanges of notes would have happened without effecting daily livelihood and businesses
3. Banks would have got enough time to exchange notes preventing people from wasting their office time to queue in front of banks
Also don't understand why Rs 2000 was launched before Rs 500. Government's explanation is that it is find people who have changed a lot of notes. I fail to understand how they will track Rs 2000 notes now if they have not been able to track Rs 1000 notes earlier.
The dramatic nature of the move is supported by saying black money hoarders would have found a way to hide their wealth if a window was given. This is the most ridiculous argument I have ever heard. The government claims it will find out people who have deposited large wealth in banks till Dec 30th and charge them 200% fine. Why is it that the same government would not have been able to monitor and find out who were moving their wealth out from cash to some other instruments or abroad in the window of conversion given. Every possible mechanism of moving money outside is controlled and monitored by government. The way GoI has gone about such an important activity seems to be ill planned from the word go.
Interestingly this move was done by a PM unilaterally whose party was against demonetisation of all currency issued before 2005 proposed by RBI in 2014. If Congress had done anything like that, BJP would have brought the country to a standstill. Protests all over the country would have forced the government to backtrack the operation. Thanks to the state of opposition or should I say lack of opposition, the idea has just sailed through and every voice against it is being stifled.
I want to reiterate that the idea to make all money in the economy accounted for is great and the use of electronic currency for everything is inline with the fantastic vision for our future but such poorly planned authoritarian decisions are only going to hurt the law abiding citizens. If decisions effecting the entire nation is going to made by 2 or 3 people at the top, dissolve the overpaid policy makers and think tanks and save some money of the honest taxpayer. After the demonetisation move, our finance minister came on TV proclaiming that such moves can't bring down tax since we are still a 5% deficit economy. When companies make losses, we look at cost cutting, why can't the nation do the same? Go for retrenchment and reduce the government expenditure by dissolving the policy makers/think tanks who are anyway not consulted on anything.
