How does this prevent it from happening again with the new notes? Tax system is still broken.
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.
I hope there are measures being taken in that account.
On the other hand, there is something to be said about Joe Public in the emergency ward who cannot afford the fee simply because the ATMs run out of money within hours of being restocked, and he doesn't have the luxury of waiting in long lines. Not sure if the government has anything in place for such a scenario.
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...
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?
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...
[2] http://indianexpress.com/article/india/india-news-india/demo...
[3] http://www.hindustantimes.com/india-news/rs-2-000-notes-foun...
[4] http://timesofindia.indiatimes.com/city/ahmedabad/first-fake...
Moreover, if you stub out this 6%, you will arrest leakage of that black money getting converted into land, gold, assets etc.,
See an interesting discussion here, (though this conversation concludes both parties not conceding their point:-):)
https://www.reddit.com/r/india/comments/5cilgj/cash_has_only...
For a good argument in favor of the move, and for a theoretical perspective on this, even in a developed economy with less paper money %, please see Kenneth Rogoff's blog post and also his book - the "Curse of Cash" (I've not read his book though only his posts and tweets on this)
http://blog.press.princeton.edu/2016/11/17/kenneth-rogoff-in...
From what I've read, I would agree with that.
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...
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...
[2] http://indianexpress.com/article/india/india-news-india/brin...
Example is Denmark with one of the largest governments in the world but still among the countries with lowest corruption.
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.
Part of this is teaching people to USE banks. A comparison would be how a lot of westerners don't understand how credit cards work and just think they'll get into huge debt. Then they use one and realize it simplifies life and is easy to maintain
But it sounds like there are follow-up actions planned. The President (?) of India is rumoured to be expected to give everyone 100 bucks worth of rupees next year as a "Sorry for the inconvenience" celebration with the stipulation that it goes into a bank account.
And I suspect there are a lot more steps planned. Likely benefits to using direct deposit rather than being paid in cash and other options.
The NDA government has finally come up with GST which will replace majority of these taxes while making the tax compliance significantly easier.
The current sweep has increased the risks for keeping lot of cash in hand FOREVER. Just like how 9/11 has changed the air travel forever. I already see the trends where people are now focusing more on Gold, Hawala, Casinos and other means of investing their cash.
> what stops someone from starting to accumulate black money again, lets say a few months from now?
This is exactly what I've been concerned about. There's a high chance of acceleration in corruption in next few months to a year. There are no working solution that prevents corruption in the first place.
Indian has a problem with large hoards of cash being used to evade taxes. This is basically a come to Jesus moment for tax evaders with these hoards.
It is a pretty crazy policy, but this article glosses over some major points.
Most day-to-day cash transactions work perfectly fine using $20 bills.
See e.g. https://www.washingtonpost.com/news/wonk/wp/2016/02/16/its-t...
> [...] illicit activities are facilitated when a million dollars weighs 2.2 pounds as with the 500 euro note rather than more than 50 pounds as would be the case if the $20 bill was the high denomination note.
The ECB is getting rid of the €500 note[2]
[1] http://www.npr.org/sections/money/2014/08/14/340356790/shoul...
[2] http://www.nytimes.com/2016/05/05/business/international/ecb...
And ? I don't want my large or small transactions traced, monitored and monetized upon the untouchables called banks and I don't understand anyone who agrees with this but otherwise supports freedom and anonymity in tech.
The whole thing is just an excuse for more control.
The burden would fall heavily on illicit transactions, while only slightly impacting most cash users, if at all.
(I’m not advocating for this, merely linking it as topical to the discussion.)
See Ken Rogoff’s NBER paper http://scholar.harvard.edu/rogoff/publications/costs-and-ben...
> India recently executed / implemented a nationwide biometrics id scheme which has now allowed the govt. to create bank accounts for a very large fraction of the population that previously didnt have access to banking.
The untaxed / cash based transaction system has distorted multiple facets of the Indian society and economy: from vote buying to a distorted realty market. This also blocks investment. When 20% of your net economy is sitting in closets, it is a large wasted opportunity.
> Apropos the fragmented tax system, the Indian parliament finally passed a monumental tax reform pack (first proposed by the opposition parties when they were in power and then opposed by BJP, the current dispensation in power, but I digress).
> This bill, among others moves the country to a digital transaction / electronic payments based tax & transaction system.
> The govt has clearly established a desire (and has now demonstrated the will) to move towards an electronic payment / transaction system, the benefits of which are obvious, especially in terms of minimising pilfering of welfare money, etc. (The national ID scheme now allows for direct cash transfers without middlemen, corruption, etc.)
(You can see where this is leading..)
86% of the Indian currency is high value (denominated in the ₹500 and ₹1000 notes that have now been banned).
The govt has stated that the new high denomination notes that are being issued will not replace the entire 86% in physical cash. It will be a smaller fraction.
This does two things:
a) people who deposit old currency notes will now, perforce, have to move to electronic / card based transactions.
b) it forces individuals to declare their "black" or untaxed money and also move to the electronic payments system.
So, I think this move helps significantly since it is part of a larger push towards electronic transactions etc. In conjunction with the changes in the tax system (and expected / anticipated reduction in income tax rates / increase in exemptions), this move, while painful in the short term, is potentially transformative for the Indian economy and society.
There was an amnesty window leading up to this. Until Sept 2016, all black money could have been deposited in bank accounts in India, no questions asked, taxed at usual income rates.
The people suffering now are the ones who took the Indian Tax system for granted.
>> How does this prevent it from happening again with the new notes? Tax system is still broken.
Fear of losing more than half your net-worth again.
There are rumors of bigger and more hard-hitting changes by the Govt. down the line, but yes, as it stands now, the system is still broken.
6% is cash (as an estimate from last year's tax data), not a large portion.
Source: http://www.hindustantimes.com/india-news/cash-has-only-6-sha...
Even this 6% is not all going to end up in bank accounts and taxed, because the government is insisting on a 200% penalty on the computed tax. So if you do declare your sacks of cash at this point, you'll be charged 90%, on top of which there is no guarantee that the Income Tax department will not go over the rest of your life with a fine-toothed comb. They probably will.
So IMO a large chunk of this 6% will be laundered (including converting to new, valid notes) for something like a 20%-30% loss.
Personally, this is where all arguments for demonetization go to dust for me.
now back to the articlw in question. you have to understand the mechanics of it all. for 60 years India has had the rule of cash & a very powerful people have amassed a LOT of it. it stands to reason that these people will have fair bit of influence over media (think Murdoch). if they are going to lose a majority of their fortune how do you suppose they are going to fight back? Hence all the talk about pain of a common man & oh-my-god some old people collapsed standing in line.
In my view this short term pain is very empowering for India in long run. Because it frees up the locked up resources from mattresses. also as a second order effect it reduces the venues 'black money' can find home. Also it makes almost all of terrorism funding traceable, Hell you can design machine learning algorithms to identify this kind of money movement from raw transaction data. lastly IMO it will be great for Indian stock market in long run as really there are no other places left to park large sums of money ('cause real estate is going to suffer for a bit now).
You make some other remarks about all non-salary income being unreported, and people complaining about the common man because they have unreported income to hide that are too outrageous to bother refuting.
Most people who did have unreported income have already converted it into new notes or bullion. The economy is not going cashless anytime soon. All we've done is show the common man his place and screw up the national economy for the foreseeable future.
> You make some other remarks about all non-salary income being unreported, and people complaining about the common man because they have unreported income to hide that are too outrageous to bother refuting.
I am sorry if this does not gels with your modern sensibilities but growing up in indian small town you see sh*t. and one thing clear as day is Income taxes are a joke for most mom & pop shops outside of major metropolis. in fact thats reflected in IT revenue collections regional breakdown (its heavily skewed to metros). Almost the entirety of non metro economy runs on cash & its very common for small business to maintain 2 sets of books. so if you think somebody has an opportunity to avoid paying taxes without repercussions and they are just going to do that for 10% of their revenues then I do have a nice bridge to sell you.
> Most people who did have unreported income have already converted it into new notes or bullion. The economy is not going cashless anytime soon.
this is just too much. How did you come by this information? stop spreading this kind of BS. the entirety of replacement notes arent even printed as yet as their goal was new year release. and there is not enough bullion in indian market to cover the amount of cash conversion not even at already skyrocketing price.
Also, economy does not has to go cashless just that the money needs to be traceable. plus if to take away venues to park this money like real estate then you have heavily disincentivised its accumulation. & looking at his temperament I think its amply clear that Modi is serious about fighting black money. hence the popular support despite the pain. its only the armchair economists that are suddenly worried about hardships of common man in line.
1. I'm a shopkeeper in 2017 and all my black money is gone: burnt it, paid a fine on it, whatever. A customer comes in and makes a purchase on a new currency note. What prevents me from not reporting this to the tax authority _because_ of 2016's demonetisation? Note that there is no tracking of cash.
2. I'm a corrupt government official and I want some 'mithai' to select your tender application. I want to get paid in new 2000 rupee notes. What stops me from accepting a cash bribe?
No.
The very rich repatriate their money through Foreign banks and investments.
Middle class and Upper middle class has long in India parked their money in lands and houses.
Lower middle class typically goes with gold.
Poor barely have money and whatever little is in cash savings.
People who think rich Indians sleep on mattresses filled with cash have no clue what they are talking about. That whatever cash the rich you seen throwing in lakes and streets is more like pennies left in a long forgotten pant in some old wardrobe. There are thousands of such pants those people own.
Nothing is achieved in past 2-1/2 years, and blame it on others and play poor. Hide the promise of bringing black money from outside India under the rug and target the small 20% common people.
Lucky author of article is not in India, otherwise there will retribution as it happened all across with critics in India.
Asking 50 days suffering without providing any solid research for its effectiveness. Based on how previous RBI governor was forced out of office, there is little room for discussion. Its just if you are not with me, you are an enemy of country that is what game played by current govt and its leaders in India.
A large portion of the black untaxed money is in the form of gold, land, properties, swiss accounts, and other means.
The current action may help catch many, but most of them not.
The only thing that is not clear is what steps if any the government will take to make sure black money hoarding doesn't start again. I am hopeful we will see something by the budget session.
So you want government to change the entire Indian mindset. While addressing nothing about why that mindset exists?
Hoarding or investing call it whatever you like these things look differently from everybody's personal perspective.
Indians save wealth because there is a inherent feeling of scarcity. You can pass as many laws as you want, but you won't be able to force people to spend money they think they need for the future. This is simply because they don't want to spend it.
It just comes down to the fact that you can't force anybody to some thing they don't want to do.
Beyond that the government did try some gold investment schemes, which were extreme flops.
With the current move I see gold buying at a never ending high in India.
Demonetization may turn out in hindsight to be a master stroke, but there are too many variables that are hidden.
There remains anonymous routes such as p-notes that are still open for "black-money" routing. Hawala is likely to be hit very hard by this. See Swamy's latest lecture,
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.