
India's Misguided War on Cash - walterbell
https://www.bloomberg.com/view/articles/2016-11-22/india-s-misguided-war-on-cash
======
jychang
> 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.

~~~
sschueller
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.

~~~
jychang
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.

~~~
whowalrus
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.

~~~
sterex
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.

~~~
whowalrus
> There will be a cap on the maximum transaction that can be done using cash.

Thanks, I've been hearing rumors about this too [1]. Would be a welcome step
if and when the govt. implements it.

[1]:
[http://economictimes.indiatimes.com/news/economy/policy/demo...](http://economictimes.indiatimes.com/news/economy/policy/demonetisation-
govt-mulls-limits-on-cash-withdrawals-and-transactions-for-both-individuals-
and-companies/articleshow/55484949.cms)

~~~
wav-part
That could have been done gradually without banning notes. Introducing higher
denomination make even more less sense.

~~~
whowalrus
> 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?

~~~
wav-part
1\. _As per a recent estimate, only 6% of black money is kept in the form of
cash_ [1].

2\. 33 Death count as of Nov 18 [2].

3\. New notes are just as easy to counterfiet as old ones and now with 2x
yield [3][4].

You can make your own conclusions.

PS: If you are aware of any stats/study governmental or independent, please
let me know.

[1] [http://economictimes.indiatimes.com/news/politics-and-
nation...](http://economictimes.indiatimes.com/news/politics-and-nation/view-
narendra-modi-takes-a-great-leap-backwards-mao-would-
approve/articleshow/55522309.cms)

[2] [http://indianexpress.com/article/india/india-news-
india/demo...](http://indianexpress.com/article/india/india-news-
india/demonetisation-suicides-heart-attacks-and-even-a-murder-among-33-deaths-
since-decision-4378135/)

[3] [http://www.hindustantimes.com/india-news/rs-2-000-notes-
foun...](http://www.hindustantimes.com/india-news/rs-2-000-notes-found-on-
militants-killed-in-encounter-in-kashmir-s-bandipora/story-
ggbNgM5HclIFPj5jXANVyN.html)

[4] [http://timesofindia.indiatimes.com/city/ahmedabad/first-
fake...](http://timesofindia.indiatimes.com/city/ahmedabad/first-fake-
rs-2000-note-surfaces-in-gujarat/articleshow/55557803.cms)

~~~
whowalrus
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?

From what I've read, I would agree with that.

~~~
wav-part
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

[http://economictimes.indiatimes.com/news/politics-and-
nation...](http://economictimes.indiatimes.com/news/politics-and-nation/view-
narendra-modi-takes-a-great-leap-backwards-mao-would-
approve/articleshow/55522309.cms)

 _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].

And I say this as someone who voted for Modi.

[1] [http://economictimes.indiatimes.com/news/politics-and-
nation...](http://economictimes.indiatimes.com/news/politics-and-
nation/private-sector-bribery-under-proposed-anti-corruption-law-
parliamentary-committee/articleshow/53672937.cms)

[2] [http://indianexpress.com/article/india/india-news-
india/brin...](http://indianexpress.com/article/india/india-news-india/bring-
private-firms-under-anti-graft-law-rajya-sabha-panel-2972049/)

~~~
msh
The size of the government is not the deciding factor.

Example is Denmark with one of the largest governments in the world but still
among the countries with lowest corruption.

~~~
wav-part
> 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.

~~~
msh
I am not sure I agree completely but you do have a point.

------
chdir
"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..

[1] [http://indianexpress.com/article/india/india-news-
india/demo...](http://indianexpress.com/article/india/india-news-
india/demonetisation-black-money-scam-sitaram-yechury-winter-session-poor-
suffer-rich-enjoy-4379505/)

[2] Untaxed money, undeclared income, ill-gotten money via bribery, fraud
etc..

~~~
shubhamjain
> 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.

~~~
chdir
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.

------
linux_devil
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.

~~~
sumedh
What is stopping the corrupt people to ask for bribe in 2000 Rs notes now?

~~~
ak39
Exactly.

However this move isn't without immediate benefits.

1\. Forces all participants in shadow economy to declare cash assets. So it's
a data point from which to baseline total cash asset census.

2\. Data collected about individuals with most cash declared will allow for
revenue services to target those individuals first.

3\. The introduction of serious risk for hoarding cash in the future. The
government followed through with this threat so it's a precedent.

BTW, I'm a foreigner and I am traveling to India in a week's time and I hope
the impact on tourists is all but dissipated by now!

------
anilgulecha
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.

~~~
hedonistbot
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.

~~~
anilgulecha
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.

~~~
hedonistbot
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].

[1] -
[https://en.wikipedia.org/wiki/Informal_sector](https://en.wikipedia.org/wiki/Informal_sector)

[2] - [http://www.ibtimes.com/india-has-second-highest-rate-
shadow-...](http://www.ibtimes.com/india-has-second-highest-rate-shadow-
businesses-world-study-1590949)

~~~
anilgulecha
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?

------
filereaper
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.

~~~
filereaper
The author's twitter
[[https://twitter.com/eiaine](https://twitter.com/eiaine)] seems to suggest a
very strong bias towards Bitcoin-like cryptocurrencies.

This is a poor way to promote her biases towards technology.

~~~
kranner
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.

~~~
ethbro
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._

~~~
kranner
Fair enough but I still don't think ad hominem arguments should be encouraged.

------
sschueller
This war on cash is disturbing especially from governments and financial
institutions which have zero transparency.

UBS is calling for the removal of the 100 bill in Australia[1] and the same is
happening in other countries.

Thankfully no matter if they manage the kill all cash. Cryptocurrency is in a
way digital cash.

These institutions don't realize that their power grab is pushing people more
and more into currency which they have zero control over.

[1] [http://www.theaustralian.com.au/business/financial-
services/...](http://www.theaustralian.com.au/business/financial-services/ubs-
analysts-call-for-australia-to-dump-100-notes/news-
story/de5a6d38a536c9a29042d6863a23bb30)

~~~
gnipgnip
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.

------
shekhar101
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.

[0] [http://thediplomat.com/2016/11/indias-fight-against-fake-
cur...](http://thediplomat.com/2016/11/indias-fight-against-fake-currency/)

~~~
gnipgnip
That's true. However, what's also not mentioned is that there isn't much
preventing the counterfeiting of the current notes. See,

[http://greatgameindia.com/de-la-rue-blacklisted-company-
paki...](http://greatgameindia.com/de-la-rue-blacklisted-company-pakistani-
links-supply-rs-10-plastic-notes-india/)

[http://greatgameindia.com/secret-world-indian-currency-
print...](http://greatgameindia.com/secret-world-indian-currency-printers-de-
la-rue/)

[http://webcache.googleusercontent.com/search?q=cache:FLhDdjQ...](http://webcache.googleusercontent.com/search?q=cache:FLhDdjQ68bwJ:www.thehindu.com/news/national/demonetisation-
of-rupee-notes-no-time-to-add-new-security-features-in-notes-says-
official/article9335159.ece+&cd=1&hl=kn&ct=clnk)

(Take conspiracies with a hint of salt; the cited links seem rather solid).

~~~
shekhar101
Thanks. BTW, what conspiracy are you talking about?

------
zac99
Author need to do more research

This process already started 2 years back

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

~~~
wav-part
Has government published any stat ?

------
kasinath
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.

~~~
MusaTheRedGuard
Thank you! I am also Nigerian and seeing these inaccuracies was extremely
irritating

------
rm2889
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](https://news.ycombinator.com/item?id=12902817)

~~~
gnipgnip
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.

------
chdir
Some stats on Income tax payers from India :

"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.

\- Source : [http://indianexpress.com/article/india/india-news-
india/data...](http://indianexpress.com/article/india/india-news-india/data-
shows-only-1-of-population-pays-income-tax-over-5000-pay-more-
than-1-crore-2779065/)

~~~
tomp
Judging from experience from other countries, people don't become billionaires
by earning income (but rather by growing capital).

I think it's unfair that income is the primary base for tax, not capital, but
that's life.

~~~
mangamadaiyan
Honest question: isn't the growth of capital also an income? And if it is, it
should get taxed, no?

~~~
antisthenes
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)

------
tmbsundar
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.

[1] [http://blog.press.princeton.edu/2016/11/17/kenneth-rogoff-
in...](http://blog.press.princeton.edu/2016/11/17/kenneth-rogoff-indias-
currency-exchange-and-the-curse-of-cash/)

~~~
aq3cn
> 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.

------
kc10
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.

Overall, I think it's a good move.

~~~
gnipgnip
> 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).

~~~
wav-part
Looks like noone is noticing government is in progress to make prosecuting
public officials more difficult and bribe-giving a criminal offence [1][2].

[1] [http://www.prsindia.org/billtrack/the-prevention-of-
corrupti...](http://www.prsindia.org/billtrack/the-prevention-of-corruption-
amendment-bill-2013-2865/)

[2] [http://timesofindia.indiatimes.com/india/Govt-servants-
may-g...](http://timesofindia.indiatimes.com/india/Govt-servants-may-get-
shield-from-prosecution-agencies-will-need-approval-to-
probe/articleshow/55356435.cms)

~~~
gnipgnip
This is a terrible move, considering how abusive Govt. officials tend to be;
bribe giving often stems from helplessness rather than for illegitimate gain.

------
hedonistbot
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).

------
happy-go-lucky
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._

------
perseusprime11
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?

------
perseusprime11
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.

------
woof
The editors at Bloomberg should do their job (edit)!

Read this FT article instead:

[https://ftalphaville.ft.com/2016/11/21/2180031/the-curse-
of-...](https://ftalphaville.ft.com/2016/11/21/2180031/the-curse-of-indian-
cash-scrapping/)

------
wav-part
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.

[1] [http://www.prsindia.org/billtrack/the-prevention-of-
corrupti...](http://www.prsindia.org/billtrack/the-prevention-of-corruption-
amendment-bill-2013-2865/)

[2] [http://timesofindia.indiatimes.com/india/Govt-servants-
may-g...](http://timesofindia.indiatimes.com/india/Govt-servants-may-get-
shield-from-prosecution-agencies-will-need-approval-to-
probe/articleshow/55356435.cms)

~~~
wav-part
Since I cannot edit my parent comment...

The bill is in Rajya Sabha (Upper House). It will likely take longer. But
still it has support from Center.

------
jcoffland
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.

~~~
gnipgnip
> access to quality education

Indeed.

[http://www.forbes.com/sites/realspin/2014/11/06/the-
problem-...](http://www.forbes.com/sites/realspin/2014/11/06/the-problem-with-
the-english-language-in-india/)

------
nickff
The same technology which allows banks and governments to cut cash out of
money will allow cryptocurrency to cut government out of money.

------
nileshtrivedi
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.

------
todayiamme
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.

[1] [http://www.reuters.com/article/us-india-modi-corruption-
idUS...](http://www.reuters.com/article/us-india-modi-corruption-
idUSKBN13804P?il=0)

[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...](http://www.econ.tcu.edu/quinn/crisis/Deleveraging/Bank%20Failures%20Systemic%20Riskpdf.pdf)

~~~
naveen99
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.

~~~
todayiamme
You're assuming that I haven't already done that. :)

------
avighnay
Here is a financial expert view on it
[https://www.youtube.com/watch?v=W-Bjw_SFNdM](https://www.youtube.com/watch?v=W-Bjw_SFNdM),

There are multiple opinions and counter opinions but no one seems to know
exactly how this is going to turn out. Its wait and watch for now...

------
findjashua
"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.

~~~
gnipgnip
> 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.

Context:

\- India 20's 40's : Rs. 5000, 10000 notes

(current prices: ~$ 15k , 30k resp.)

\- Nixon : Gold & Silver exchange stopped.

\- ECB : 500 Euro notes out.

------
ara24
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.

------
pcr0
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.

------
nshm
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.

------
chubs
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.

------
comments_db
"...many tax-evaders and corrupt public officials were believed to have their
wealth in real estate and gold."

------
tn13
This article stinks of bias.

~~~
woof
And ignorance.

Surprised Bloomberg accepts that kind of nonsense...

~~~
tskarthik
Missed a major point... It can target terrorist funding and block duplicate
currency printed from across border of India.

------
gnipgnip
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.

See,

[https://www.youtube.com/watch?v=429jrPupdDY](https://www.youtube.com/watch?v=429jrPupdDY)

P.S: Nigeria's per-capita income is higher than India in nominal terms (so is
Africa's as a whole).

