
One Year After India Killed Off Cash,  What Other Countries Should Learn - ahamedirshad123
https://hbr.org/2017/11/one-year-after-india-killed-off-cash-heres-what-other-countries-should-learn-from-it
======
product50
The author is a known critic of the demonetization policy. This was a
complicated decision and it is still unclear whether it worked or not. I
personally know a lot of business owners and merchants who really hate Modi
for this move - which I feel is a good sign given these are the very people
who kept the so called black money hidden from the govt and were negatively
affected. Of course, the GDP would fall given economic activity got affected
at the grass roots level.

That said, there were some benefits 1) people would think twice before
hoarding onto cash and keep it hidden from the govt 2) more people would use
banking facilities as the govt basically forced a lot of people to create bank
accounts and deposit cash there for easy tracking. Also, there are long term
tax benefits for the govt too given now it has a snapshot of who exchanged how
much black money (in old notes) with the new notes. As such, the answer isn't
black or white here.

~~~
TheArcane
> it is still unclear whether it worked or not.

Didn't they report that almost all the cash came back - proving that there was
basically no black money returned and the only people they inconvenienced was
ordinary citizens with their hard-earned cash reserves?

~~~
ashwinm
In india two third economy was unaccounted. With demonetization everyone had
no other option but to deposit it in to bank accounts. Which made a money
trail.

\-- 2$-3$ billion worth of old currency IT department last year.

\-- The total tax base is increased. Evidence of this is that PAN card
applications have increased 3x (Daily Issuance of PAN Nearly Triples Post
Demonetisation), number of people filing tax has grown a lot [Income tax base
expands by 9.1 mn people after note ban) and net tax collections is also
significantly up. This is good for a lot of reasons. It makes the taxation
fair and also can help government increased budgetary allocations.

\-- Economy is able to run normally with 20% lower currency levels.Which makes
it harder for households to hoard money. When money is not hoarded, it makes
for greater efficiency in the economy.

\-- Bank deposits have grown significantly

\-- Digital banking became a way of life atleast in the urban India.

~~~
ShannonAlther
> Which makes it harder for households to hoard money.

In other countries, we call this 'saving for retirement.'

~~~
seanmcdirmid
If you are saving for retirement by hoarding cash and not investing it at
least in bonds or the very least a savings account with some interest, you are
doing it wrong, or you have breaking bad problems I’m not familiar with.

------
amrrs
While I wonder what makes HN interested about India's demonetisation, The
biggest irony of Demonetisation is not how the ruling government started
listing down auxiliary benefits as the intended objects, It's how rural Indian
is always being ignored by the people who celebrate the success of
Demonetisaion. We who live in Cities like Bangalore have got Card swiping
machine with every merchant, Imagine a village where there is only a few ATM
machines, That's where the real impact - the failure is. It may not be even
captured by a metric like GDP but when you travel across the country - not
just hopping from Station to Station but actually to places, you'd find it
out!

Edit: Ppl celebrating demonetisation doesn't refer to HN but a broader group
in India.

~~~
mos38
Travel to rural India and talk to a money lender. There was a nice much needed
shake down. They were all sitting on cash that had to be pushed into bank
accounts. This is a long term net positive in shedding light on the shadow
economy which has been exploiting the unbanked rural poor for the longest
time.

~~~
ahamedirshad123
just don't lie, for god sake

[http://www.thehindubusinessline.com/money-and-
banking/indias...](http://www.thehindubusinessline.com/money-and-
banking/indias-rural-economy-hit-hard-as-informal-lending-breaks-
down/article9391669.ece)

~~~
hu61
Wow so in your reality what was reported about money lending one year ago, one
week after demonetization still holds? All the money lenders in India went
into retirement is it?

Go find an article on what moneylenders are doing today. They are still
lending. But from their bank accounts not from under their mattress.

Just blind reactions without knowing how the world works has become very
fashionable today.

~~~
ahamedirshad123
This is after a month - [http://www.business-standard.com/article/economy-
policy/10-i...](http://www.business-standard.com/article/economy-
policy/10-interest-rates-money-lenders-make-a-comeback-due-to-currency-
shortage-116122601048_1.html)

------
NiklasMort
The only winners are the credit card companies and the banks here. Getting rid
of cash is the final step of their financial prison for the average Joe.

~~~
brianwawok
So large chunks of a country not paying any taxes is an OK place to be?

Unclear what the right solution is but clearly there was a problem.

~~~
NiklasMort
", the cash component of undeclared wealth in India was estimated to be only
about 6%. In other words, the policy instrument was aimed at the wrong target:
most undisclosed wealth is held in noncash assets. " And this is not only true
for India.

~~~
sliverstorm
That's wealth, not transactions. Digital could still bring to light "under the
table" taxable transactions.

~~~
NiklasMort
The problem is that its a digital prison for normal people. If there is no
cash then bank accounts, CC and transactions should be free, as cash is free
itself. But they are not. It's just a money making machine for banks and CC
companies. Furthermore if people want to hide something they'll manage,
especially if it about big money.

~~~
sliverstorm
Technically paper money is not free either, people support the paper money
machine with their taxes and in the cost of goods. Money must be printed &
reclaimed & replaced, bills must be counted & sorted & transported, etc. Any
currency system has overhead, the paper money overhead is just very hidden.

So if the fees are appropriately low, a system of private banks and CC's could
be ultimately similar in cost to normal people.

------
gwbas1c
The most relevant quote:

> Third, in a recent analysis of income tax probes, the cash component of
> undeclared wealth in India was estimated to be only about 6%. In other
> words, the policy instrument was aimed at the wrong target: most undisclosed
> wealth is held in noncash assets. All of this data was readily available and
> should have given the policy makers pause.

Assuming the data is correct, demonetization was flawed from the beginning.

------
thriftwy
When I was riding my kick scooter, I had this recurring thought: What would my
trajectory be if I would to roll my steering handle by 180 degrees?

I never got to try, but India did.

~~~
TheArcane
Best part of demonetization - the free policy lesson for every country.

~~~
thriftwy
Well, North Korea did similar things five years prior, with similar results.
Not everybody got the memo.

------
knowThySelfx
The title itself is a misnomer. No one checking stuff in HBR? Only
denominations of 500s and 1000s were made illegal. This was replaced with new
500 and 2000 Rupee notes. All the other denominations remained valid
throughout.The intent was to control counterfeit currency. It also appealed
the public to use more digital transactions.

Today, in TV there was news about a district in Kerala (Malappuram) having
50000 crores worth of old currency in the hands of various people there. The
person whom the reporter interviewed was an agent who sold these old notes to
some people for a percentage of the value of the old notes. They didn't say
for what purpose the old notes are bought. A friend of mine who knows some
Gujrathi cloth merchants in Kochi's main market was told these old notes are
bought so that its thread can be taken for counterfeiting new notes.

~~~
intended
5000 crore. in Kerala.

Theres so many things that raise flags there.

Thats a non trivial percent of the missing cash, whihc is very unlikely to be
in one place.

Kerala gets most of its money via remittances, the idea that they would be a
store of cash, especially when most of people convert it into gold around
India anyway, makes it extremely hard to accept just from the face of it

~~~
knowThySelfx
It is not in one place, but in the hands of different people. Hawala
([https://en.wikipedia.org/wiki/Hawala](https://en.wikipedia.org/wiki/Hawala))
is very active in certain northern districts of Kerala.

I agree, its a fairly non-trivial amount of money.

~~~
intended
Heh, even hawala couldnt account for those numbers.

Total amount demonitized is 15.44 lak crore, 15.28 returned.

thats .16 lakh crore - or .16 * 100000 = 16000 crore missing.

and 5k of that is in Kerala.

It stretches my credulity.

~~~
knowThySelfx
Even I am not sure who is correct here. Either the guy is lying about the
amount or the Govt is lying about amount received. Things aren't quite clear
here.

There's this thing which goes by the name "Kunjalikutti fund" which isn't that
trivial from what I heard ;)

~~~
intended
The govt isnt lying - if they were the economy would lose altitude and correct
at a much lower level - thered be no reason to keep faith in any of the govt
numbers, and we would have moved much closer to banana republic status.

If the govt wanted to lie, they would have put up better numbers - meaning a
_larger_ gap between money demonitized and money received.

~~~
knowThySelfx
An old report on Hawala:
[http://www.frontline.in/static/html/fl2123/stories/200411190...](http://www.frontline.in/static/html/fl2123/stories/20041119002903301.htm)

------
otakucode
Lesson one: Payment processors are taxing bodies. The degree to which your
society operates without cash is the degree to which your governing bodies
lose all control over the supply of money in your nation. Value of your
currency is handed over to payment processors who do little beside moving
numbers from place to place, and charge a percentage cut of every such
movement on the fictional basis of moving larger numbers somehow costing more
or being a harder service to provide. Should the payment processors wish your
currency to be in greater supply, they will lower their rates. Should they
wish to restrict the supply of money, they will raise them. Their influence is
more flexible and has many fewer restrictions than stodgy old things like
'central banks'.

~~~
coldcode
So a digital Fed. Who says a government can't regulate the payment processor?

~~~
otakucode
They certainly could. And I would argue that in the USA right now they
absolutely should. If not providing a modernized federal ACH system that can
handle realtime funds transfers, then at least by absolutely and criminally
forbidding charging a fee which scales based upon the amount of money changing
hands (a small flat fee would be warranted, the problem is that they charge
more just because the numbers are bigger which is nonsensical, we're not
talking about them extending credit or doing the liability hot potato that
credit card transactions are, this is just pure transferring from one account
to another). Ideally the government would establish their own cryptocurrency,
but I think that ship has sailed. Society in general has accepted that the
standards of cash - anonymity, non-traceability, non-freezability, etc - are
simply too dangerous to trust people with.

------
patrickg_zill
Wasn't something like 99% of the targeted cash, ultimately redeemed at par
value? If so, it was quite ineffective...

~~~
rtx
That was the goal.

~~~
patrickg_zill
No, that was not the original goal, which was to strand and demonetize the
black money.

After that failed, they changed their stated goal (after the fact).

------
bufferoverflow
You can't kill off cash or other forms of anonymous payment. Humans will
always find a substitute. Stamps is an obvious choice.

And then there are cryptocurrencies, which are about to teach the world
economists all kinds of lessons.

------
nocoder
This is one of the largest transfer of money from individuals & small
businesses to corporate sector. Since notes were denotified, people had no
choice but to move to businesses which could support digital payments. This
led to huge loss of business for smaller players who were dealing in cash and
a drop in economic activity. And the small businesses are the ones which
employ highest number of people, so the subsequent job loss. Additional domino
effects is loss of man hours spent in exchanging the notes and the general
anxiety it caused amongst people. Moreover data shows [1], the whole exercise
only caused a temporary change in behaviour & cash in back in vogue, so
essentially a pointless & damaging exercise.

[1] -
[http://www.livemint.com/Industry/S0AwBRAYuGbJw0SoXOaUaO/One-...](http://www.livemint.com/Industry/S0AwBRAYuGbJw0SoXOaUaO/One-
year-after-demonetisation-cash-is-still-king.html)

~~~
mabbo
Those small businesses were the ones taking cash only, paying employees in
cash, and generally continuing the trend of no one paying any taxes what-so-
ever.

Of course they could employ more people- they were unfairly competing with the
companies that were following the law. I have a hard time sympathizing.

~~~
intended
Unfairly competing?

Thats the weirdest example which doesnt describe India.

~~~
rtx
It does, not paying taxes is unfair competition.

~~~
intended
against who?

Most of those firms earn less than the barrier for payment being required. So
which taxes and who?

~~~
mabbo
How would anyone _know_ if they're below the taxable level?

Paying taxes shouldn't work on an honour system. Not reporting income is tax
evasion, which is what the Indian government wants to stop.

------
known
All the destruction that was unleashed in its aftermath, could have been
avoided, if PM Modi had heard the best economist he had at his disposal, and
not an accountant masquerading as one.

[http://www.huffingtonpost.in/2017/11/07/a-year-later-it-s-
sa...](http://www.huffingtonpost.in/2017/11/07/a-year-later-it-s-safe-to-say-
this-if-only-modi-had-listened-to-the-economist-he-had-at-his-
disposal_a_23268888/)

------
wtmt
If I were to make a statement on this, I’d say that other countries shouldn’t
attempt such an exercise, and if they do, they should certainly look at how it
was done in India as a classic case study of “how not to do it.” There’s close
to nothing that came as a benefit from this exercise. But the so called
“collateral damage”, that the richer classes ignore, on people’s livelihoods,
their very lives (many people died) and the economy was significantly bad.

The “first cashless village in India” touted during that time has gone back to
using cash. [1]

Dreams about digital money alone won’t do. There’s a long, long way to go on
telecom/Internet infrastructure improvement, availability of electricity,
availability of devices that are easy to use, education and awareness on
security, etc.

I believe any future government in India would be downright foolish to
consider doing such a thing again. Now all that the government has done by
eliminating the Rs.1000 note and introducing the Rs.2000 note is made it
easier to hoard and transport large sums of cash.

[1]: [https://www.bloombergquint.com/demonetisation-one-
year/2017/...](https://www.bloombergquint.com/demonetisation-one-
year/2017/11/07/cash-is-king-again-in-indias-cashless-village)

------
known
BBC nails it better.

    
    
      Invalidating 90% of the stock of currency notes to catch 6% of illegal wealth was a clear case of using a hammer to kill a fly. 
    
      The rationale of a crackdown on counterfeit notes was also misleading since India's central bank's own estimate was that fewer than 0.02%
    
      India's stock of high-value currency was growing in line with GDP and the share of such currency in India's GDP remained constant at around 9% for half a decade
    

[http://www.bbc.com/news/world-asia-
india-41896865](http://www.bbc.com/news/world-asia-india-41896865)

------
known
Narendra Modi fulfilled just 9% of his poll promises
[http://www.electionpromisestracker.in/governments/central-
go...](http://www.electionpromisestracker.in/governments/central-government)

------
known
Slipping GDP growth, declining private spending and investments, falling jobs,
decreasing industrial production, rising inflation, and rising current account
deficit. [https://qz.com/1090478/no-matter-how-hard-the-government-
tri...](https://qz.com/1090478/no-matter-how-hard-the-government-tries-it-
cant-sell-indias-growth-story-to-the-world/)

------
Feniks
I live in a country that is rapidly becoming cashless.

This was not a government program. It happened naturally and was deemed to be
in the best interest of all. At every purchase people can freely choose to use
cash or a card/phone.

An advanced economy, low corruption, efficient banking system, top level
infrastructure and supreme faith in civilization are not things you can just
implement.

------
rahulpandita
>"It most recent GDP growth figure has fallen to 5.7%, and part of that, too,
can be attributed to the policy move from last November."

It would be interesting to quantify what "part". AFAIK GDP growth has many
contributing factors both short term and long term. It would really help
readers to better comprehend the affect and also help policy makers to be
cautious going forward.

>Lesson One: Choose Your Experts Carefully : Agreed, we must choose our
experts carefully. However, author is silent on "how". Instead what author
presents is his take on who are experts. I am not questioning the authors
credentials but as HBR article, I expected authors to present a methodology
instead of what seems a subjective view to me.

>Lesson Two: Don’t Ignore Basic Data : Authors criticism that basic data was
ignored seems more of a speculation. No concrete sources that such data was
not consulted at all.

>Lesson Four: Beware of Digital Silver Bullets : Here I feel author
selectively uses the citation to benefit his narrative. The very citation
states the following verbatim.
[http://www.moneycontrol.com/news/business/economy/digital-
pa...](http://www.moneycontrol.com/news/business/economy/digital-payments-
growth-dips-27-in-aug-from-peak-bhim-upi-to-take-charge-2380617.html) >"Still,
it is appreciable that the numbers have not come down by a large amount. There
are many who have permanently moved on to digital, which is a bigger benefit."

------
mankash666
The article axiomatically attributes demonetization as the reason for a
reduction in GDP growth, even 3 quarters after the event. Is it that obvious
as I don't see the direct connection - more currency flowing through official
channels = increased GDP and taxes. What am I missing?

------
vita17
I don’t think anyone should be learning from India until they fix with their
massive list of problems.

~~~
dump121
Can always learn, what not to do.

------
amriksohata
Many in India consider demonetisation a great thing, it's mostly the political
opponents of Modi trying to defame it

~~~
TheArcane
Who does? Source?

~~~
webbrahmin
BJP winning election in UP with huge margin is an indicator.

~~~
sidchilling
It's not... elections are not won by good policy. It's won by populist
policies.

~~~
amriksohata
Yes but the argument for those who didnt like demonetisation (the corrupt ones
with things to hide) was that poor people were badly affected. However one of
Indias poorest states still went with BJP. The statement that poor people were
affected was political spin, everyone was affected.

------
m23khan
kuddos to Indian Govt. for taking this step. South Asian economies are rife
with black money and small vendors and regular citizens rarely pay taxes.

Any attempt to rectify this menace is a welcome step -- hopefully regional
countries like Pakistan and Afghanistan can implement similar measures.

------
oarla
Seems early to declare demonetization as a failure.

------
DonHopkins
1) Lesson One: Choose Your Experts Carefully

The Trump administration would never make a mistake like that, would they?

