Demonetisation and black money - Bodhi 1

Demonetisation in India - brave or brash? Our analysis, Part 1.

PM Modi and the big announcement


The demonetisation decision by PM Modi's government, announced on the evening of 08th of November, has brought this issue in sharp focus. In a series of three Bodhis starting with this, we will analyse the entire issue of black money in totality, giving a objective perspective on this technical matter. As hassled crowds struggle to cope up across India, many interesting questions are popping regarding the future!

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    • Demonetisation and black money - Three-part Bodhi Booster analysis
      • Bodhi 1 - Concept of black money, history of demonetisation, India - cash - corruption, unholy nexus, global situation, Modi's stepwise strategy  Bodhi 2 - Monetary system structure, money-laundering, tax to GDP, exchange rates and inflation, legal provisions, unanswered questions  Bodhi 3 - The unfinished agenda, post-demonetisation what, citizen's role, holistic change needed

Introduction

For any healthy economy, ensuring a steady flow of legal currency into the system to be used by citizens to power their multifarious day-to-day activities is a must. As levels of literacy and education improve, most citizens can move to online or plastic transactions over time, as one observes in Europe and elsewhere. Of the entire monetary system, currency in circulation is a very small part indeed, but for a normal citizen, it can be the key to a smooth daily existence!

[Read this Bodhi in Hindi, here]

In developing nations like India which have still not fixed some major issues like honest and transparent funding of large scale elections - held regularly for multiple bodies - large currency notes are the route to systematic and institutionalised corruption that eats at the very roots of the system. Due to its scale and regularity, it has the potential to make a mockery of most other attempts at zero-corruption in government and day-to-day life. And with the floodgates of corruption in election funding open, enter other evils - tax evasion, financial crime, apathy, terrorist finance, narcotics trade, underworld, and more.

With the spread of online awareness through social media and the proliferation of mass media post 2005, most Indians have become acutely aware of the systematic corroding of nearly all institutional mechanisms, which were originally designed to provide transparent governance and a high quality of life! Anger at the runaway monetary grab of opportunities through political corruption have hence multiplied. Indians are no longer content to sit and watch meekly as politicians make hay, and the multiple Court decisions plus the rise of political ideologies like the A.A.P. bear testimony to this. Sadly, the debate on this topic has become so polarised that no camp is willing to even listen to the other's perspective, which is not a healthy sign. So eradicating black money has acquired a deep political tone and carries huge political mileage for anyone who honestly pursues it. There's the aspirational value also - go cashless, go digital, go modern! And there's the GST regime being rolled out, hopefully before September 2017.   [Read GST Bodhi here]

Money, black money, demonetisation


Money, more than anything, is an expression of the confidence people living in a complex society have in each other and in a common rule of law. This singular fact makes money a common store of value, means of exchange and a scale of measurement. Money makes everything simple by reducing it to one scale. Of course, philosophers have maintained that money is the root of all evil (actually, desire is!).

Any financial transaction kept out of the purview of the authorities, to evade tax, is black money. It can be done for simply hiding one’s income to save more, or to indulge in actual illegal activities like terror, human trafficking, drugs and narcotics, corruption and financial crimes. This is what makes black money truly dangerous, and even the most corrupt of politicians realises this ugly side of the hydra-headed monster. Black Money can be unethical (earned through proper means but hidden from the government) or it can be dirty (earned through crimes). Remember, a lot of black money is not unethical but need-driven as the micro stores of cash with mothers and wives of India prove.

Demonetisation is the legal act of rendering existing currency notes invalid, and replacing them by new currency notes of same or different denominations. It is a shock therapy intended to destroy accumulated illegal cash (which is not legal wealth) and restore the faith of honest taxpaying citizenry. India has witnessed demonetisation in 1946, 1978 and now in 2016. But given the 132 crores+ population of India now, and the massive scale of cash economy, it is glaringly apparent that the ATM-refilling operations were simply ill-planned, ill-executed and grossly mismanaged. The real danger is not this - it will be when crores of fresh white economy entrants - paying taxes out of hard-earned revenues and incomes - will start demanding good quality government services from all Departments and Ministries, central and state. Are we anywhere close to that revolution in government's work-efficiency?


[ Running updates on Demonetisation, here]


The importance of cash is indeed reducing in most nations, including India, but it is happening at a slow pace, and for most Indians below a certain income level it just does not seem to be happening at all. For women in lower or middle income groups, it has definitely not happened so far.

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    • ##inr## History of demonetisation in India
      • ##chevron-right## First Round It happened on January 12, 1946 - for Rs.1000 notes - done by the High Denomination Bank Notes (Demonetisation) Ordinance, to destroy illegal wealth accumulated during Second World War ##chevron-right## Second Round It was done on January 16, 1978 - for all notes above Rs.100 i.e. for Rs.1000, Rs.5000 and Rs.10,000 notes - done by the High Denomination Bank Notes (Demonetisation) Act, 1978 by Janata Party government to destroy black money of smugglers and mafia (Rs.1000 notes brought back in 2000-01) ##chevron-right## Third Round Carried out on late evening November 08, 2016 - for Rs.500 and Rs.1000 notes done through a TV announcement by PM Narendra Modi to break the backbone of corruption, illegal election funding, terror financing etc.
Most legitimate transactions of any worthwhile size hardly use currency notes of whatever denominations. Payments are made and received through official channels – banks, institutions, online transfers etc. Cash is king for daily life of most citizens. Currency notes and coins are a small part of overall money supply. In the US they make up about 10%, in India, they are 12% of M3 (broad money), and in UK about 3%. The concept of money itself is quite a technical issue, and a grasp of the basics can help you see the issue in totality. For that, watch our detailed session on “The concept of Money” right here - 2.5 hours of wonderful inputs. It'll help you understand this issue in totality.


The concept of Money (a detailed lecture)





India and cash


Importance of cash is diminishing in most countries including India, but very slowly, and not for most Indians below a certain income level, and definitely not for most women from lower or middle strata of society. 

Why do Indian love cash? Four prime reasons - (a) Omnipresence of informal structures, (b) Lack of trust in mainstream system (banks/FIs/financial markets), (c) Vulnerable position of women in Indian society, and (d) the free distribution of cash in almost every election by candidates.

(a) is because banks and FIs have failed to penetrate across social strata due to lack of large-scale formal employment. Small businesses happily remain outside the formal economy, which leads to another disease - lack of quality expectations from the system. Only strong political will and huge initiatives can make them formal. An example - Jan-Dhan Yojana, which coupled with Aadhar and Mobile may work wonders in a decade.
(b) is because people trust their own cash in their own hands much more than formal systems, and because illiteracy and lack of awareness reinforces the inertia against change.
(c) is because despite 7 decades of 'freedom', women remain the most vulnerable section of society. So, almost all wives and mothers know by instinct they need to hoard small amounts over a lifetime for emergencies and desperate situations. In fact, they should be congratulated for that, not pilloried. The shameless manner in which mainstream system has failed our women, they literally have no other choice.
(d) is the acid that has corroded our national character like none other. The Association for Democratic Reforms (ADR) has repeatedly pointed out the enormity of this disease.


[Read this Bodhi in Hindi, here]


Amazing Courses - Online and Classroom :



 Continued on Page 2 

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India is a society totally swamped by cash, and that means any political leader showing the spine to change its dynamics should be ready to bear the most vitriolic criticism for a long time.

Here are the latest figures, courtesy the RBI databases. Naturally, there is a nationwide inconvenience panic due to the sheer scale of operations involved in demonetisation.


www.BodhiBooster.com, www.PTeducation.com, www.SandeepManudhane.org, demonetisation of currency in India

Another view of this data is beautifully presented by The Economist magazine, here



[इस बोधि को हिंदी में पढ़ें, यहाँ]

Corruption - the mother of cash


Post 1947, when the Britishers left, a common fear was that the white sahibs will just be replaced by brown sahibs, and nothing will change. That hasn't been the case, but the promise of a good life hasn't materialised for most Indians either. The visible modes of corruption are :
  1. Large scale cash corruption for fighting elections, that happen at an alarming regularity (in the absence of a simultaneous election system that broke down post 1967) - yet to be solved
  2. Day to day petty corruption in government offices & by officers of every type, scale and sector (the petty adds up to a huge amount annually!) - this is the unfinished agenda today
  3. Corruption by illegally cornering resource rights (mining, telecom, other resources) & minting them to the fullest - partly tackled
  4. Hiding of income through manipulation of accounts (large number of ways) - widespread
  5. Generation of pure cash in many sectors (either untaxed by law or otherwise) - widespread
  6. Criminal corruption of many varieties, including counterfeiting of currency - widespread
  7. Money laundering through a vast range of means, including round-tripping in FDI form - huge


Those questioning our decision to demonetise claiming it has brought hardships, should tell the nation what good they did while they enjoyed power for decades.  -  Amit Shah, BJP National President

[ Running updates on Demonetisation, here]

Indian politics, elections and black money

 - the unholy nexus - explained

www.BodhiBooster.com, www.PTeducation.com, www.SandeepManudhane.org, demonetisation of currency in India


As the image indicates, decades of inertia, corruption and poor quality have rendered many aspects of our national character hollow. Most Indians expect nothing from the government except poor services, and meekly feed into the system's negative momentum, as this image shows. Many would be happy if their lives went on unhindered, irrespective of what's happening in the big picture. Politicians couldn't be happier!
  • Since the 1950s, the unholy nexus of corruption, black money and terrorism has been created in India, which impinges on our democratic setup directly.
  • Free and fair elections are the bedrock of Indian democracy – the largest in the world.
  • However, elections in India have lost all sense of proportion and propriety over the decades. While a very powerful and independent (and honest) Election Commission of India – often supported by the Judiciary – cracks down on offenders, everyone knows how tonnes of black money have corroded the whole fabric of democratic elections.
  • In 2014, the RBI had announced a phasing-out of all currency notes issued prior to 2005, and gave a 3 months window to exchange the old notes for new. At that time, most fake notes were from pre-2005 vintage. Experts opine that perhaps the political pressure on RBI must have been immense that it allowed relaxation beyond May 2014.
  • Candidates spend far in excess of prescribed official limits. Early in 2014, late Mr Gopinath Munde (An analysis linked here) declared he had spent Rs.9 crores in his 2009 campaign, well in excess of the Rs.40 lakh limit! He later said he was misquoted. This was a rare admission of guilt in a thoroughly rotten system.
  • All excess election spending = Black money
  • The higher the denomination of currency notes, the more convenient they become



 Continued on Page 3 

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 Page 3 of 3 

(link to Bodhi Prabodhan lecture excerpt included in this part)

[इस बोधि को हिंदी में पढ़ें, यहाँ]

If not cash, then what


What is replacing cash? Plastic and electronic money in the form of credit and debit cards, prepaid cards, digital wallets, and online money transfers. Some pointers to the same -
  • The value of transactions settled electronically more than 90% - says RBI
  • Indian Railways’ online ticketing portal handles more than 30 crore passengers’ electronic transactions annually
  • Toll Booths across highways in India will turn electronic soon
  • Payments bank licences have been started recently, and along with the spread of Internet will create significant digital and mobile payments
  • The Jan-Dhan Yojana with over 20 crore bank accounts is a foundation for things to come. It is Prime Minister Modi’s pet scheme, which shows a certain grandness of scale
  • Direct Benefit Transfers (DBTs) are making cash redundant gradually
  • Once GST comes into play, things will further get online through the GST Network (GSTN). Read a detailed Bodhi on GST here
     
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Since 2005, the author has been reminding his students that the day is not too far when everything will happen through plastic cards or online or mobile - even daily vegetable purchases. It seems to have arrived.

Global moves to curb black money

International criminal syndicates of a horrendously vibrant and ever-growing range have always prompted many governments to initiate crackdowns on cash generation and use.
  • The G-20 took a lead in it, but despite a global push on anti-money laundering measures, and improvement in transaction surveillance systems, less than 1% of illicit financial flows are seized worldwide. Obviously, the black economy is thriving.
  • The Panama Papers Leak in 2016 was a telling reminder of the huge distance the world needs to travel to bring unreported incomes into the tax net.
  • The ECB decided to demonetize the € 500 currency note. On 4th May, 2016, the European Central Bank decided to permanently stop producing the € 500 banknote and to exclude it from the Europa series, to stop its funding illicit activities. Issuance stops end 2018, when the €100 and €200 banknotes of the Europa are planned to be introduced. The other denominations – from €5 to €200 – will remain in place.
  • In 2016, the former Standard Chartered Bank CEO published a paper at the Harvard Kennedy School proposing to take high denomination notes out of circulation.
  • Kenneth Rogoff of Harvard University says that 50% or more usage of cash is to hide from the tax authorities. Cutting off the supply of high denomination notes is the first step to stop this – and this is precisely what Modi has done. How many Indians use the Rs.1000 note daily for minor purchases?
  • In a prescient article, economist Ajit Ranade gave the argument in Feb 2016 – “Ordinary US citizens rarely use the 100 dollar bill. This face value is roughly 0.25% of the US per capita income. Using that as a thumb rule and adjusting for purchasing power parity, the highest face value in India should then be Rs.250. Thus, prima facie, we have a case for phasing out both the 1,000 and the 500 rupee notes. Since the rupee is not yet an international currency, so discontinuing the 1,000 rupee note has many benefits, is feasible, and will surely make an impact on the black money stock. The time has come to say goodbye to the big note. And one hopes that RBI does not blink this time (as in 2014 prior to elections).


Modi's stepwise strategy


On the evening of 8th of November, PM Modi pressed the reboot button to crack this unholy nexus. While one may question him for not heralding Achche Din, he surely seems to have heralded Bure Din for black money. With the benefit of hindsight, we can now see the complete picture spanning some years.

Modi’s preparation for present demonetization – stepwise flow 

Step 1. Establishing a Special Investigation Team (SIT) to trace illegal foreign bank accounts
Step 2. Massive push to universalise access to bank accounts (Jan Dhan accounts)
Step 3. Pushing the use of Aadhaar in transactions, and creating JAM trinity
Step 4. Pushing the idea of a cashless economy, new licenses for Payment Banks
Step 5. Unified Payments Interface (UPI) built on the India Stack (of technologies) given a serious forward push
Step 6. Two friendly offers for black money holders to come clean, coupled with warnings.First was in 2014 itself - announced a 90 days amnesty-like window for foreign black money holders charging 60 % tax, and Rs.4,147 crore of undeclared wealth was declared. Government got Rs.2,500 crore. When the government’s second black money window was closed in September 2016, a paltry Rs.65,250 crore worth black money was declared from 64,275 declarations.
Step 7. Modi announces demonetization of high denomination notes on 08 Nov 2016.

A relatively little-known organisation named "ArthKranti" (economic revolution) claims the PM's demonetisation move was a result of their strategic presentation in 2013 (when Modi was the Gujarat CM). But they are sad he did not implement all 5 suggestions together. We will analyse their ideas in the third and final Bodhi on this topic.


[ Running updates on Demonetisation, here]

  • [message]
    • Chinese media responds to Modi's demonetisation move
      • India's decision to demonetise Rs 500 and Rs 1,000 currency notes was "bold and decisive" but the "risky" move is far from delivering a corruption-free country, the Global Times China said. It also said "The hard truth is that the corrupt and fraudulent won't just conduct shady deals by using cash, but with gold, real estate and overseas assets." It is worth nothing that China's President Xi Jinping has been personally leading a massive anti-corruption drive since he took charge in 2012. Link of news here


To view multiple video analyses on DeMo, welcome to Bodhi Shiksha channel.


In the second Bodhi on this topic, we will go deep into understanding the monetary system structure, concept of money-laundering, tax to GDP ratio, legal provisions to curb black money and impact of demonetisation on inflation and exchange rates. And in the third and final Bodhi on this topic, we will tackle the most critical aspects - the unfinished agenda, post-demonetisation what, citizen's role, and holistic change needed. Stay tuned, and keep commenting!

We will keep updating the latest development in fresh Bodhis from time to time. Stay tuned! And do share your views in the Comments thread below. It gives us motivation to see that readers have benefited, and further adds value to this Bodhi.

Coming up soon - Second and Third parts on this topic


[Solve Bodhi Prashn ##question-circle##]





This Bodhi will be regularly updatedKeep visiting. And do share your thoughts in the Comments thread.

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    • ##link## Bodhi Links (for deeper study; Caution: some may be external links, some large PDFs)
      •  ##chevron-right## European Central Bank demonetising €500 notes here ##chevron-right## The cost of scrapping Rs.500 and 1000 notes LiveMint here ##chevron-right## A radical idea to eliminate black money once and for all Huffington Post here ##chevron-right## Ajit Ranade advocates demonetization of Rs.500/1000 notes here ##chevron-right## RBI - Indian currency here ##chevron-right## Latest currency statistics India - RBI here ##chevron-right## AAP's Kejriwal senses scam here ##chevron-right## Demonetisation not a solution here ##chevron-right## The Hindu guide on demonetisation here ##chevron-right## Violence in J&K stopped? here ##chevron-right## ArthKranti homepage here ##chevron-right## Withdraw all taxes, says ArthKranti here  ##refresh## Running updates on this topic, here
Demonetisation - [Bodhi 1]  [Bodhi 2]  [Bodhi 3]  [A letter to the PM]  [Bodhi on GST]



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Bodhi Booster: Demonetisation and black money - Bodhi 1
Demonetisation and black money - Bodhi 1
Demonetisation in India - brave or brash? Our analysis, Part 1.
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