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.

That's a very valid point, and at the moment, I don't think anything is being done in that regard. However, the difference between the Have's and the Have Not's in India is enormous. Defying-belief levels of enormous. There were reports of people burning suitcases full of money, or just throwing it away in sacks because they couldn't figure out what to do with it. Given this fact, even this first step has the potential of reinjecting a lot of money back into the economy. We have this rule of thumb in India, for instance, that when buying real estate, only about a quarter of the actual price is paid in "white money" (legally) and everything else is under the table. We have a staggeringly bad corruption situation, and I think it's a good first step.

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.

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.

> 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...

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

> 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?

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...

[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...

6% is only the official estimate based on IT department raids. In reality, this will be more.

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...

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.

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...

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...

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.

> 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.

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

In addition to what others have mentioned:

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.

A lot of tax evasion is because of the complexity of Tax code. If you are in Mumbai and if you are selling an assembled PC you have to pay around 10 different taxes and 2 cess.

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.

(Reply to be deleted)

> 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 logic, in a nutshell.

Thank you, that explanation worked better than mine. You pretty much hit the nail on the head.

Except Govt is making more harder to prosecute corrupt public officials. See my other comment here [1].

[1] https://news.ycombinator.com/item?id=13012515