My take on the high denomination note ban

There are few things in Indian governance and administration that come as a complete surprise and the banning of the high denomination notes was definitely one of the rare examples. Irrespective of which end of the political spectrum we support and whether we agree with the merits of the move, it will have to be said that the speech by the PM on 8th November took the whole nation by storm. The impact has been such that most people affected by it have been shell shocked and ended up behaving rather irrationally.

How do I see it? Well, I personally think it is a great move. Consider the facts – only 3 % of the Indian population pay any kind of income tax. Even out of this meager number, the majority pay taxes of less than 1 lac every year. Any logical person should be able to see that this is an absurd situation. In reality, only the people who are absolutely unable to evade paying taxes, namely the salaried class end up paying it and almost everyone else avoid it to some extent or the other. The amount of undeclared income in the system is not only creating huge fiscal losses to the exchequer but also resulted in a parallel cash economy where almost 25 % of our GDP is unrecorded.

The first thing to understand clearly is that we are talking about undisclosed income by cash dealing, not about whether one can take cash or spend in it. For example, if a Doctor takes cash from his patients in a rural area and then declares it as his income and pays taxes on it, there is absolutely no problem. However, we all know that most people who receive large amounts of cash either do not report it at all or under-report it to a large extent. If the number of people living in the urban centers were really earning less than the permissible tax exempt income then the living standards we see around us in these places would be significantly lower. Elections and political parties almost exclusively deal in cash and all parties are guilty of this.

The second thing to understand here are the ills of the system :-

  • The obvious one is less money available to the government for carrying out a lot of development work that the country is badly in need of.
  • Such income streams are clearly inflationary as there is too much unaccounted money in the system chasing too few goods that are available.
  • The real estate sector prices have reached astronomical levels and a big contributing factor has been unaccounted and undeclared money availability with buyers.
  • Even people who are honest about paying taxes are also guilty of one or many of the following practices:
    • Paying for services in cash with the hope of a cheaper rate.
    • Not reporting interest income in their annual returns.
    • Not showing rental income partly or fully.
    • Not reporting capital gains in the right fashion.

The third is to understand that our society is already unequal in terms of income and spending ability and this has only accentuated it over the years. The vulgar display of wealth in weddings, the bribes demanded for almost getting anything done and the compromise of the moral fiber resulting in widespread corruption can all be traced back to the dealings in cash. If unaccounted cash was not an acceptable option, all this will not go away completely but there will definitely be a great reduction to the perverse extent we are facing today in such situations.

I went around a bit and checked with a few people I know, in real life and through the blog to see why there is so much panic in the system. Here are some real life examples :-

  • An Uber driver earning 50,000 on an average per month – never paid taxes.
  • A local milk booth earning more than 1 lac per month in profits – never paid taxes.
  • A Doctor who had more than 15 lacs in unaccounted cash. When I asked him why he had not taken advantage of IDS, he told me he was saving it for buying an apartment.
  • A CA friend who has been inundated with offers of sharing black money if he could help in conversion to white.
  • Some friends of my son, whose fathers are in business, were worried as soon as the speech was made. Clearly shows their awareness about how much cash is at home !!

As they say, the road to hell is paved with good intentions and, despite the good intent, the implementation could have been much better managed. The non-availability of the new 500 Rupee note has been the greatest dampener as the ATM money is getting over soon and replenishing it takes too long. Also, the verification could have been just on the basis of Adhaar card, both for deposits and withdrawal. The general public has been put into serious inconvenience and the poor with little experience with banking system have been really the worst affected.

However, with the release of the new 500 Rupee note and the initial rush being over the situation will now become a lot better. I think in another couple of weeks, things will be back to normal. The impact of the aftermath would have been several times worth the inconvenience that many of us have gone through.

So what are the likely impacts of this move? Let me address that in the next post.

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3 thoughts on “My take on the high denomination note ban

  1. Sir , one question is unanswered though, how will the black money with ministers and politicians be brought to justice through this process ?obviously they wont come forward and they cant waste that money , how will govt handle this situation or will they have blind eye towards such people ?

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    • Well if they do not deposit it in bank accounts then it is wasted for them. The govt can then print new money which can be used for development purposes.
      If they deposit it in their accounts, they will have to account for it.

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