Here are 10 of the most prominent reasons why I say so.



1. Cash is an insignificant component of black assets



The effect of this move on the black economy will be limited because

cash comprises only a tiny part of black assets. This is borne out

both by facts and reasoning.



Cash recovery has been only 6% of the undisclosed income seized from

income tax evaders, according to data from tax raids from 2012-13

onwards.



This fact only affirms what is already apparent upon the application

of reasoning. Opening foreign accounts anonymously is child’s play

today and given the anonymity it provides, it is a widely preferred

option for those holding black money. Investments in gold and property

are also preferred for a variety of reasons. Firstly, wealth stored as

cash decreases in value with inflation while other types of assets

appreciate with inflation. Secondly, storing large sums of cash is

much more problematic (occupies more space, vulnerable to hazards)

than storing the same value in gold. Finally, security problems with

cash are much greater.



Thus, illegitimate cash is just the tip of the iceberg and dealing

with it does not mean taking down the mammoth black economy.



2. Counterfeit currency is more molehill than mountain



Much has been made of the “fact” that taking out higher denomination

notes will render worthless the bulk of counterfeit currency in

circulation today. But contrary to popular perception, the value of

counterfeit currency is quite insignificant.



According to a study done by the Indian Statistical Institute,

Kolkata, in 2015, the only reliable and comprehensive exploration of

the subject, at any given point of time ₹400 crore worth of fake notes

were in circulation in the economy. This is merely 0.025% o f the

total budget outlay of ₹19.7 lakh crore as announced this fiscal.



In comparison, just the printing cost of notes being taken out of

circulation is approximately ₹12,000 crore. Is it sensible public

policy to flush ₹12,000 crore down the drain to purportedly remove

about ₹400 crore of fake currency?



3. Information may have leaked—rise in bank deposits



While the news of the withdrawal of notes caught most people by

surprise, leading many to hail the government’s success in keeping it

a closely guarded secret, it is now emerging the information—or at

least a rumour of what was to come—had already reached several ears.

Firstly, in April this year, SBI had said that people were withdrawing

cash in large amounts in smaller denominations due to rumours of

demonetization of ₹1000 and ₹500 notes. Secondly, in the past few

weeks, local dailies in Gujarat and elsewhere had also reported that

such a move might be in the offing. Thirdly, the BJP’s (Bahuth Jiyadha Psychopaths) West Bengal

unit deposited an unusually large cash amount of Rs 1 crore just

before the move’s announcement. All these factors indicate that

information of the action may well have leaked.



Is it sensible public policy to flush ₹12,000 crore down the drain to

purportedly remove about ₹400 crore of fake currency?

While those who don’t have black money may not have paid attention to

rumours and speculations, those that did have something to hide

probably took action right away to protect their spoils, thereby

reducing the efficacy of the eventual demonetization.



What most strengthens the suspicion that many with black money were

warned in advance is the sudden spike in bank deposits in the last

quarter. Data from different banks shows that last quarter most of

them reversed the trend of declining deposits and witnessed healthy

growth. This rise in bank deposits happened despite the decline in

industrial production and in the absence of any facilitating factors

in the economy. In the absence of an upturn in economic parameters,

the sudden rise in deposits just before demonetization decision is

definitely fishy.



4. Whitewashing of whatever little black cash there is



Even the insignificant black assets in cash that remain with people

(even after prior information) are likely being whitewashed through

various loopholes. Backdated buying of gold and exchanging through the

new black market for exchange of notes are prominent ways in which

those with black cash are getting it laundered or changed to smaller

notes.



5. The root problem of black money generation is untouched



The move is also questionable as it does little to address the root

problem of black money generation. The annual black economy is

conservatively over 20% of our GDP. This means that the annual

generation of black money is over ₹30 lakh crore which is greater than

the entire amount of ₹17.77 lakh crore of cash in circulation (86% of

this cash is in the form of withdrawn ₹500 and ₹1000 notes). So, even

if half the value of the withdrawn notes was black wealth and none of

it was whitewashed, the black money destroyed would still be much less

than the amount of black wealth generated yearly. It’s clear from this

that demonetization cannot do any long-lasting damage to the black

economy since the roots of it remain untouched.



6. The government’s politically motivated sensationalism has spread panic



In a bid to derive maximum political mileage out of the move, BJP

sensationalized the move and announced with great drama for maximum

impact. Many myths were spun around it, which made people panic. This

panic is leading to untold miseries with ATMs reporting long lines and

various establishments refusing to offer change; some hospitals are

even denying treatment. Had the BJP been more sombre and pragmatic in

its narrative and execution, rumour mongers would not have had such a

field day and the move’s implementation would have been less painful

for the people.



7. In poll-dictated hurry, government was woefully under prepared



The government is visibly unprepared for the move.



Firstly, the RBI didn’t have enough supply of smaller denomination

notes and is supplying soiled 100 notes to meet the demand. Secondly,

the new ₹2000 notes being released are smaller in size than the old

notes and ATMs have not been modified to dispense them. Thus, ATMs are

storing less cash and thus running out faster as they can only

dispense ₹100 notes.



The annual generation of black money is over 30 lakh crore which is

greater than the entire amount of ₹​​​​​​​17.77 lakh crore of cash in

circulation…

Thirdly, the new ₹2000 notes are being released without any additional

security features as the hurried decision by the government didn’t

allow for the provision of such features. It is reported that the

government pushed through the action in six months, although over

three years or so are usually needed to introduce new notes. Perhaps

as a result of such haste, many errors are being reported in these

notes. Because of the absence of additional security features (and

presence of mistakes), the task of counterfeiting will become easier.

Also since now there is a higher denomination, it is more profitable

to counterfeit. Thus despite spending so much of public wealth, the

hasty manner of the move will deprive us of any benefit in reducing

counterfeit currency which would have occurred if the new currency had

additional features.



So, why did Modi act in such a rush despite knowing the

associated downsides? The theory is that as the Uttar Pradesh elections

and the model code of conduct are round the corner, the government

decided to implement the move so as to milk the issue before the

polls.



8. Reintroducing higher denominations facilitates future hoarding of black cash



Another pitfall of rushing through the decision is that it left

government with no choice other than to reintroduce higher

denominations as today India doesn’t have the infrastructure for a

primarily cashless economy. Doesn’t it make more sense to first focus

on transitioning to a cashless economy and then completely withdrawing

these larger denominations?



By introducing ₹2000 notes, the government has made it easier for

those who want to hoard black money in cash as they will need only

roughly half the space they needed earlier for their ₹1000 notes.

Thus, in this sense this move will give a boost to black economy.



9. Where is the infrastructure for a cashless economy?



The argument that the move will spur a cashless economy is flawed .

First, how does replacing ₹1000 notes with ₹2000 ones help make the

economy cashless?



How does replacing ₹1000 notes with ₹2000 ones help make the economy cashless?

Secondly, merely depriving people of cash doesn’t make an economy

cashless. With only 46% banking penetration, only 22% internet

connectivity, 19% of population without electricity connection (and

others with unreliable connection) and only 1.2 million of 14 million

merchants having point of sale devices, India simply doesn’t have the

infrastructure for a cashless economy. Another problem is the low

level of digital literacy in India. Unless these real challenges are

addressed, withdrawing the bulk of cash only creates chaos as we can

now see.



10. Economic activity is taking a beating



The gross under-preparedness of the government, the sensationalism of

the move and it being inherently economically imprudent, have all lead

to the move creating extreme chaos.



Firstly, the people are desperate for cash, so much of the workforce

that should be productively working is wasting long hours in unending

queues at the banks and ATMs .



Secondly, the abrupt call-back of 86% of cash, has brought the

informal economy to a standstill—this sector is the worst affected,

with the most marginalized suffering the most.



Thirdly, the wide speculation on property and gold pricing will also

undermine economic stability and reduce investors’ confidence in

India.



***



Thus for the variety of reason discussed above, there is no hesitation

in calling the move an unmitigated disaster. It’s simply a case of

headline management trumping sound economics. The government in its

attempt to win brownie points on the black money issue has rushed into

a decision that is poor economics and may ultimately prove to be poor

politics too.

Mayawati said  Modi should stop the “emotional blackmailing” of the people on currency ban.

Four people died in Kerala yesterday, due to the mayhem unleashed by
Modi. One person jumped from the top of a bank building, after he came
to know that he can’t withdraw the money he loaned from his PF account.
Two people collapsed to death after standing long time in the queue in
the hot sun. One woman was hit by a vehicle as she crossed the road to
go to bank to deposit Rs 2000.

Thousands of people are queueing
up before banks and ATMs for much needed cash. Much of them are not
functional yet. I went to 10 ATMs today morning and found that none is
working.

Cashless villagers in Madhya Pradesh’s Bardua village
looted a public distribution system shop (PDS) after its owner refused
them to accept the now-defunct Rs 500 and Rs 1,000 currencies for
groceries.

In the capital city of India, an urban mall was looted
by cashless people needing urgent food items. Where will this all lead
to is anybody’s guess.

http://www.hindustantimes.com/…/story-EqYMsbzYbhDOtNgocROfN…

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