Demonetization - My thoughts

Now that it has been nearly 2 weeks since the demonetization scheme has been introduced, it is time to take stock of what exactly this scheme purports to achieve and how it empowers the people of India. According to this scheme, 500 and 1000 rupee notes that are used currently will be removed from circulation and people having this denomination should convert/deposit this money at banks. Also there are limits on how much you can deposit and how much you can withdraw in a single transaction. The rules keep changing everyday and it is becoming very hard to keep track of them. There are conflicting reports from the ministers as to how much minimum deposit amount will be tracked by the government and IT department and the entire thing has turned into an unmitigated disaster. The trumped up excuse for this scheme is that black money has been plaguing the Indian Economy and this money is being used by the terrorist groups to fund nefarious activities. People are explained that this move strikes at the heart of the money illegally horded and will strengthen the economy in the future causing short term pain though.

I believe this is a fiasco in every which way imaginable and it will have negative repercussions going forward. I should tell you though, I am not an accountant and I don’t have basic training in finance expect the rudimentary knowledge of addition/subtraction. So don’t blindly accept my words but use it as a base to start a dialog and better understand what’s going on here.

Now don’t get me wrong, curbing black money and bringing large transactions under the purview of the government will reduce illegal activities to a large extent but who are we kidding, the idea that this government is all about the common man is complete bullshit. The idea is that people have no recourse but to deposit the denomination that they hold in 500, 1000 rupees in banks and going forward that transactions can be tracked is not true. There are a lot of ways by which the black money can be converted to legal cash is known to everyone and especially the government and yet the government has not plugged these holes before introducing this scheme. Here are some of the ways that I can think of.

Political party and religious donations. Any donation below Rs 20,000/- can be accepted without any id proof and an analysis by Association for Democratic Reforms and National Election Watch in 2011-12 revealed that nearly 75% of donations amounting to Rs 3,600/- crore to the national parties were from unknown sources. Now these political parties can deposit the amount in banks(you know since you cannot hold this much safely by yourself) and withdraw as needed. When Modi’s demonetization scheme was introduced, this issue was not fixed and it is unbelievable that the great leaders trumpeting the scheme did not know about this. Now people who have black money and who are well connected to political parties can convert the black money to into a legal tender and be on their merry way. You make donations in less that Rs 20,000/- under different names and you have an understanding with someone in the party and then a contract is awarded to you for maintaining order, providing water for a party function and viola your black money is converted to legal money. Of-course nearly 10% of this money will be taken by the party person who helps you in this endeavor and you don’t care anyway because this is not something you hard earned but accepted as a bribe or tax evasion money.

The same discussed above will apply to religious donations also but for the fact there is no minimum amount beyond which valid id is required for donations.

These things are possible to only the well connected though. For those left behind, we have cottage industries that have come up after the scheme has been introduced where you can convert the 500, 1000 rupee denomination into 50, 100 rupee denomination at a cost.

Update 1: This Government also made a small amendment to the Foreign Contribution Regulation Act (FCRA), 2010 on February 2016 which will now allow political parties to receive foreign donations and completely bypass Government Scrutiny. This amendment was not discussed in the Parliament.


Round Tripping. A scheme where money is saved to offshore accounts and then invested back in India through FDI to prevent paying the Government on Capital Gains Tax. I am not an expert on this so use this word as a base to gather more information. It seems Mauritius, the tiny island near East Africa is the biggest investor of FDI in India. Here is the RBI report about the same for more information.

When foreign investors want to invest in India but maintain anonymity, we have registered foreign institutional investors who invest on their behalf and issue Participatory Notes(PI Notes) to those individuals. The Special Investigation Team’s suggestion that disclosure to regulator of the final owner of the PI Notes must be made mandatory has been put to sleep.

This is a big form of Black Money. Paper bills that we constitute as money by themselves are not black or white. Money becomes Black Money when we don’t pay tax on the money earned. This is what is achieved with round tripping. Corporations earn money in India but do not pay the 35% capital gains tax but rather invest them in shell companies in Mauritius and Singapore which then is invested back in India through FDI and the investor’s anonymity is protected through PI Notes. Do you see how Black Money has become legal money now?

Of course these practices will not be reformed by the Government because you know, there is no news cycle when this is done. There will be cries from multi millionaires who will be affected but this will not turn into lakhs of votes.

More information on Round Tripping can be found in the book Treasure Islands: Tax Havens and the Men Who Stole the World by Nicholas Shaxson.


Real Estate. This is one area where there is a huge amount of unaccounted money at play. But wait, here also after the scheme was announced, there was a rush of property buyings but their maturity(when the house is delivered) is expected in the next 2 years. The government cannot not know about this by the simple fact that even I can reason about this. This could have been avoided easily by the government. Any property that is bought or sold should be registered using documents of title so that the buyer/seller can track the details about the property and proceed. The central government could have easily stopped providing documents of title for sale till the year end(when this scheme is expected to complete) and they did not. It also helps that public works department branch of the government is one of the most corrupted. So black money can be converted into valid properties by this way.

Also, I don’t know where the idea that people hoard the ill gotten gains in the form of paper cash came into being? If you have 100 crore rupees in black money, no one holds on to the 100 crore but the money is invested in real estate, converted to other country denomination, stored in Swiss accounts(I don’t know in which denomination though) and a small part like 10% will be held as cash for bribery and such. So the idea that this demonetisation scheme will curb the black money is complete hogwash.


Now let us talk about who is adversely affected by this scheme. Not the crorepathis, not the twitter hogging software professionals, not the Bollywood and Kollywood personalities but the common man(who make up 60% of the population) who earns less that Rs 5,000/- a month($83 approximately). 100 rupee denomination is used by these people for daily transactions, their savings is in 500 rupee denomination, transactions between street vendors happen in 500 rupee denomination. 1000 rupee denomination is used to a lesser degree. The point is the 500, 1000 rupee denomination is used commonly today by everyone in one way or other because of the inflation. Small farmers who make a profit of Rs 50,000/- a year will keep the money as cash and use it for trading, hospital bills, functions. There are the people who are given the middle finger right now by the government. The point is that 500, 1000 rupee denominations are used extensively by the common man and these denominations are not limited only to the rich.

Nearly 60 crore people don’t have a bank account. In that ~30 crore people don’t have id proofs. How are these people expected to change the 500, 1000 denominations into 100, 50 rupee denominations? Cash is central to nearly 80 crore people(don’t forget the middle class people living in towns which is a cash based economy) and this move has brought the economy to a complete standstill. So these 60 crore people can directly change their savings to 100 rupee denomination before Nov 24th in banks and post offices, but you can change only upto Rs 4,000/-. After Nov 24th, you will have to open a bank account and can deposit your money. You will need a ID proof to open a bank account, so those 30 crore people are left in the rut. Well, yesterday in HDFC bank, HSR Layout, you cannot directly change the money but only deposit it in the savings account. I don’t know how it is with government banks though. I expect it to be much much worse where the speed of the bank employees will be at a snail pace and to cap it off, you will be treated like a complete piece of shit by the employees there.

So to summarise, the government has announced that your hard earned money is completely useless going forward and you the common man has no easy recourse to change your life savings into a legal tender. If there is ever an example of big government overreach, this is it.

The cash based finance at the bottom of our economy pyramid is a rich, pulsating economy where there is no black money, no corruption and this scheme drives a stake through the heart of this ecosystem. I don’t see any good from this.


There is a much more insidious thing going on here. India is a savings country by nature. We save nearly 50% of what we earn and use that money for our immediate need without resorting to a loan. If someone wants to start a business, the initial capital always comes from one’s savings and from relations. We avoid loans as much as possible. In fact, getting a loan is considered a bad form in many towns and villages. It is considered by many people that having a loan is akin to living in sin. This move by the government strikes at the very heart of our culture. For all the greatness of the developed countries, bad policies, irresponsible activities of the banks and apathy of the people has their economies reeling right now with no stability in sight. Both USA and Europe are in a major crisis mode and the situation is no different than it was in 2008 and it is mathematically impossible to get better.

We the people are forced to use these banking institutions and encouraged by the government to use plastic cards for our transactions. The problem is, transactions on those cards incur a charge of 2% of the transaction to the seller. The seller is not going to bear the cost but it will be forced down the ladder so that in the end, it is the common people who will pay this transaction fee. For example, I sell a product for Rs 5,000/- and my profit is Rs 2,000/-. Now when the transaction is done using the card, I will have to pay Rs 10/- to the card provider but I will raise the price of the product to Rs 5,010/- so that my profit remains at Rs 2,000/-. I remember the time when I first started using online transfer facility of my bank. It was free and I was advised by the banks to use this facility because this reduces the costs of the banks. The expectation is that using this facility reduces the need for collectors, tellers in banks and thus reduces the cost of running the branch. Now after 7 years, I am getting levied Rs 5/- for each online transfer. Do you remember the time when withdrawal in ATMs were free? Again the same explanation was provided. Now though, if you make more than 5 transactions in bank ATMs, you will be charged Rs 20/- for each transaction. Also there is a limit on how much you can withdraw. Effectively, you are being robbed of your hard earned cash by the government and banks in the name of transaction fees and charges. Welcome to the new economy.


This move makes much less sense when you consider the fact that new 500, 1000, 2000 denominations will be introduced very soon(500, 2000 are out now) and life is limp back to normalcy(corruption, black money) very soon.

All power tends to corrupt and absolute power corrupts absolutely.

Lord Emerich Acton

One of the campaign slogans of Modi in 2014 was minimum governance and this scheme is the government in the opposite direction. We the people are getting sucked dry by our humble public servants and we are told it is good for us. Oh, the irony. When the government tells me my hard earned money is effectively a paper overnight, forced to queue up in line to withdraw, on which limits are placed which are changed every night, it signals that the government has come to resemble the socialistic soviet dream of Nehru and don’t you realize what happened here? I just lost the trust that I had in this system and it is not going to be easy to earn my trust back.

Maybe the people who tell me to suffer now can update on the status of the operation to bring the black money from Switzerland? If my memory serves, that was one of the campaign slogans of Modi in 2014. Any update on that will be great.

We don’t have to wait till 2019 but next year to see how people are warming up to this scheme which is turning into a blunder of epic proportions.

PS: Remember Vijay Mallaya who conveniently flew to UK just days before the government entities brought charges against him. We have no news of any investigation on this coincidence or if there is an investigation on who tipped him off at the right time. The bankers who approved the loan are not being investigated on whether the loans were provided with valid collateral or if there is any back rubbing involved in the deal. Some days back, SBI announced they were writing off bad loans to the amount of Rs 7,016/- crore and it will be fun to watch Modi respond to this news. I can’t wait. Also, there is the issue of the BJP party worker who tweeted the 2,000 denomination note on November 6th.

My thoughts on going cashless.