Thursday, 10 November 2016

Cash may longer be king in India

In a surprise announcement late Tuesday, Prime Minister Narendra Modi banned 500-rupee and 1,000-rupee notes effective midnight, sweeping away 86 percent of total currency in circulation. 

The fact is that  that this is a great move completely selfless and no conflict of interest whatsoever by the prime minister and if anybody could do it, it would be Narendra Modi who could pull off such a massive scheme 

Here’s what the funds could offer Modi:

  • 1. The chance to slash by more than half his projected 5.3 trillion rupee budget deficit for the year through March 2017
  • 2. The opportunity to double expenditure on defence and   energy
  • 3. Or increase three-fold federal spending on social services such as education, health and housing

  • Another good news here is that there could be a considerable drop in interest rates over the course of the next three to six months
However there is also a flip side to the same 
India is risking about $211 billion of purchasing power to make a leap into a cashless future. India's economy has become increasingly reliant on physical money. Currency in circulation is now nine times what it was 17 years ago
Most currency in circulation is in the form of 500 or 1,000 rupee banknotes, which aren't legal tender now.

Few flip points of the policy decision are as under

  • The drop in consumption is fairly easy to predict. About 69 percent of employment in urban India -- and as much as 75 percent in rural areas -- is informal. And this doesn't include household help. Wages are mostly received and spent in cash since banking is still a luxury despite a massive government campaign to give a no-frills account to every family. Naturally, there will be a scramble among employers to hoard small notes, which could lead to a shortage.

  • Real estate will be the most obvious loser. DLF Ltd., the largest Indian builder by market value, fell as much 24 percent on Wednesday. A freeze in land and property transactions, which act as parking lots for income that has evaded taxation, could lead to a significant drop in prices. That would hurt developers.

  • Not only developers who can be blamed by Government for non-disclosure but shall hurt lower middle class who have been already waiting for possession of their dream home. The same has already been delayed and now cash crunch in the hands of builders shall delay it further. So where was the fault of these honest tax payers who accumulated every penny to own their house and now shall bear double brunt of EMI as well as Rent 

  • Global giant Inc.’s India unit said it would no longer accept the scrapped notes for existing orders. Cash-on-delivery has been the preferred payment method for more than half of total transactions in India’s e-commerce industry. So for those who recently invested as first line entrepreneur in E-Commerce shall suffer as their sales shall slide. Remember E Commerce already sitting on piles of losses.
  • The impact also risks hurting rural India, where demand has just been recovering after healthy rainfall this year following back-to-back droughts. About 75 percent of the population live in villages, mainly earning daily wages in cash. Last year farmers were witnessed committing suicides and now when they have cash in hand they shall be more bothered about exchange rather than concentrate on harvest season

  • Children who have run away from abusive homes with some cash shall land up on roads or talented kids who have started to earn from age of 11 by way of tuitions and proudly saved the money because their parents inculcated this habit have no choice but to deposit this money in guardian account and now start collecting those small receipts for daily tuitions. Remember one specialised class is charged at Rs 1000 per class. Is this right step to encourage skill development in teens?

  • Sex workers are paid by their clients by way of cash only and the same is stored by them in high denomination for ease of transport and saving. How are they expected to disclose the income they earned over past years as they shall not have any receipts? A big injustice to already struggling working class

  • Hijras whose blessings have been a part of Indian tradition are always paid by way of cash. They don’t carry bank ID’s or accounts in the gender they self-identify as. Now this is another blow to them when transgender is already a controversy in our society. How will they generate receipts for donations they received?

  • Housewives who have been abused at home but continued to survive and made small savings of the limited money provided to them for daily chores for years together stand completely isolated as neither do they have been permitted to hold bank accounts and now on disclosure of these savings shall further add to abuse.

  • Inter-caste and inter-religious couples who have to run away to get married for fear of honour killing and are hiding from families holding cash which they accumulated by selling gold. They have no option but either to return back and get punished or start begging for every penny.

  • Imagine the plight of elderly parents who live in remote villages where the nearest bank is 10 KM away. They sitting with cash sent to them by their urban migrant children shall now travel the distance as well as if amount is accumulated over years look for source of funds.

  • Also where there is no basic infrastructure for disabled people to visit banks and ID offices shall be forced to go through painful journey of opening accounts and their dream to live financially autonomous life of dignity seems to be shattered as they shall now have to rely on others to get them out of this mess.

  • Not to forget the nomadic people  ,Hawkers and daily wages guy who make their living in cash and carry no ID or accounts with them. Not to forget money saved by them to bribe police/gangs to police/gangs to let them carry on their daily livelihood.

There can be a long list to above. To add following can be major fallouts on economic and political level
  • Any political party shall now accept the old denomination at nominal a good rate of discount and then deposit the same with RBI from January to March with crores of small fake receipts generated from voters all over India as donation money. So ideally the tax money that should have come to exchequer shall instead go in the hands of powerful political lobby

  • Government shall have to amend the amount a political party can accept as anonymous donation or ask political parties to deposit cash in hand immediately with RBI . Else political parties will be biggest beneficiary

  • Any large deposit accepted with the bank shall be backed by sufficient book entries (easily available in market) and in case the assessing officer in Tax department raises an objection shall be easily managed as is there in most of cases in India as by that time new currency would be easily available. So generation of black money starts again

  • The Government shall have to keep a strict vigilance on revenue  department . All Assessing officers handling assessment case to deal online without any Chartered Accountant to negotiate and all communication transparent

  • Gold which is being transacted currently in grey market at double or thrice the price is being exchanged for old currency notes as those gold dealers already have purchase in their book of accounts. So gold dealers minting money out of deal and not Exchequer.

  • To conduct surprise raids on grey market Gold and Forex dealers and keep a check on sale of gold post few months

  • There are other loopholes also being generated where the basic beneficiary is not government but brokers in the market. 

  • Chartered Accountants are having the last laugh.However the above reform could have been much more game changer had government kept few things in mind


Respected prime minister  move could have been timed along with a voluntary disclosure of income scheme (VDIS), so had they done that I think the VDIS scheme would have been manifold compare to what they eventually ended up netting which is about Rs 65,000 crore - - had the two been clubbed people would have been incentivised to declare more on the VDIS simply because there would be no other alternative or the money basically becomes useless. I think that is something which the government in it wisdom did not do

Also what if they had issued 0% coupon bonds for infrastructure or health sector for a period of five years with acceptance of cash (no questions asked) everyone would have forgone five year returns as they would have been assured of all money in books after five years. For exchequer they would have accumulated huge free money for infrastructure which has broken down the backbone of our country.

Another option could have been financing of start-up who are sitting on brilliant ideas but are not financed by banks. What if government issued notification that start-up vetted by government or reputed Chartered Accountants can be funded in cash with no questions asked provided the same have to report to government for every penny with proofs quarterly. The same would have made Digital India dream successful at faster pace.

There can be a long list to this too. So in my opinion by scrapping high currency notes Government may not benefit as much as others in financial sector. This was a brilliant opportunity for government to convert this to compulsory VDIS where everyone would have been forced to disclose or to direct black money to infra, hospitals, start-up and many more.

My opinion strong relationship of Finance Minister with Bank lobby has prompted this move as banks are sitting on huge NPA and this shall increase cash in banks. He had proved the same by taxing Mutual fund debt schemes redeemed before three years that too retrospective.

I urge Mr Modi to relook at above options for people to divert their money for development of country rather than throwing it into GARBAGE



  1. Well researched and with clear suggestions too

  2. Very nice article...I agree that govt shud have come up wid telling people to invest money in startup India so that Money wud enter in economy rather than being thrown in garbage but then this wud create dissatisfaction among General masses who paid taxes honestly & also the fake currency which is circulated wud have entered in Economy in large nos thereby damaging economy

  3. Yes there are two sides to the story always.. Very well analysed.

  4. Very nicely researched and written.The suggestions are really good. Mr Modi should consider this immediately.

  5. While I agree to many of your views on your “Flip points” I would like to state that the hurdles being caused by people are temporary and have to be borne with on national interest/cause. I have observed in my town that although, there are some difficulties being faced by people by standing in the que and wasting their time, over all, they are prepared to face such sufferings for a good cause. In any reform measures, such endurances of sufferings are bound to happen and people should be prepared to bear with it. Think of people standing in a long que for hours together in pilgrimage centers, free bee distribution centers, Govt offices etc. etc. but they are mentally prepared to face that.

    However, commenting on your views of “major fall outs” I think, as suggested by you, Govt can take adequate strict measures immediately to curb such fraudulent and clandestine dealings of political parties, Gold merchants, business groups etc.

    I have certain reservations on your suggestions under “Food for thought” and my comments are as follows :

    • Compulsory VIDS would have definitely attracted more revenue but remember the power of black money remains strengthened as white money which is not going to arrest the inflation in asset investments.
    • The effect of issue of 0% coupon bonds will also be similar to above but at a later date with temporary stagnation till the maturity of the bonds. This can arrest the inflation to a certain period but speculation & assumption power will remain on the strength of bonds.
    • Further, investments with the unaccounted black money in entrepreneurship like start ups is not solving the price rise menace with black money but it on the contrary, strengthens the hands of black money generators without arresting the inflation.
    • Over all allowing the black money to be made white would not have stopped flow of money to terrorists. Rather, by encouraging employment and profit sharing in enterprises the existing menace of terrorism and anti India and Hindu evangelical services will grow unaffected in new cloths.

    Therefore, in my view, the steps taken by Mr. Modi is appropriate. However, the state enforcement machinery should be properly geared up to curb any malpractices by black money hoarders in circumventing the very purpose of the present steps taken by Mr. Modi. No doubt, this will be definitely a major hurdle and challenge to enforcement authorities and the Govt.

  6. Excellent article. Even with needs of common people, you had explained very clearly and the possible solutions can be.

  7. If VDIS was timed with demonitization then it would encourage black money.People will think they can get away by paying 45% tax if something similar happens in the future.

  8. "incentivised to declare more on the VDIS simply because there would be no other alternative or the money basically becomes useless" not even an iota of fin expertise with self, however as a layman,the currency not deposited/burnt/blowen away is not a liability for GoI. & it could get those in govt coffers by merely printing the said amt.