Moving towards cashless economy

Demonetization drive has been successful to the large extent as people supported it despite facing difficulties and felt it to be beneficial for the country in long term. This has been made possible due to two reasons. First is the people’s will to sacrifice their comfort for the sake of nation’s interest and second is because of their trust in PM and believing that he is honest and whatever decision he is taking, will take India forward and make it prosperous. But demonetization was the necessary but not the sufficient step to reduce corruption and crime from India. To make India truly cashless economy so that it leaves no possibility of future generation of black money, government needs to take strategic steps in planned manner. Now, the next challenge is to achieve three objectives to make it a complete success. First is to recover the black money deposited in the accounts. Second is to move towards cashless economy so that more back money is not generated in future. Third is to recover black money parked in other areas like real estate, gold and bullion etc.

Unique identity

The UADAI project where everyone is given a unique number called Aadhar number based on his unique biometric marker like thumbprint, is commendable since it would greatly help in checking the corruption in the system by eliminating anonymity, which is the primary factor responsible for generation of black money. It is easy to forge birth, address and other documents but it won’t be easy to forge biological unique markers and it has been seen in reports that how people like illegal immigrants, scammers etc. get these forged documents. ref Also, existence of such documents where the forgery could happen does promote corruption. But, I believe that there is need of some modifications in how Aadhar is used.

First, at present the person needs to provide other documents to prove his id and address which is not logical since many fraud people arrange forged documents through corruption and Aadhar just validates it. ref Instead, I believe that Aadhar should be the fundamental id document with basic details like Name, DOB, gender, photo and parent’s Aadhar number. All other documents would have Aadhar id as identity along with additional info e.g. address proof will have Aadhar id as identity of the person along with the person’s address details.

Second, there is no need of address in Aadhar card and presence of address in Aadhar isn’t credible since it could come from forged documents.

Third, at many places both address and id proof is taken where I think that only id would suffice. Like, while opening bank accounts, there is no need of providing address proof since the person is giving his money to bank and not taking any loans where the bank needs to know his address to recover it. Similarly, in prepaid connections etc.

Fourth, government should make Aadhar mandatory for bank accounts by either amending Aadhar bill or by passing a separate money bill by mentioning that in addition to direct benefit transfer, Aadhar would also be required for all such transaction where tax is applicable and since interest earned on cash deposits is taxed, so every account would need to have mandatory Aadhar number.

Fifth, there should also be mandatory biometric verification to activate the account to check benami account opening as no one would be able to open account on someone else name by arranging his documents.

Sixth, there is no need to have separate PAN card and it should be replaced with Aadhar number. The forged documents like PAN etc. are largely responsible for all kind of scams, tax evasions etc. and linking unique id with all bank accounts would check this practice e.g. there are 170 million genuine PANs issued as of 2014 when income tax payers in India are only 30 million in number, thus indicating large number of fake PAN cards which are usually used for all kind of financial scams. 1 2 3

Recovery of Black money

The black money has come into banks through two means, either with the involvement of bank officials or without the involvement of bank officials. Both cases should be dealt differently since tricks and recovery method used in both would be different. The number of black money transactions would be large but tricks would be limited since not everyone invents their own tricks. Also, money changers only changed money for the people referred to them by someone whom they knew, to avoid information leak to taxmen but the same strength would become the weakness when even a single person caught will give the details of all other people involved who would further reveal additional people and thus unravelling the whole network along with the tricks used for money changing.

For the case of individual misuse, many people have opened multiple accounts and distributed their money in them. This has been made possible either by opening multiple accounts through forged documents or by opening the benami accounts. Many Jan Dhan account remained unused as people already had alternative accounts and such unused accounts should be closed to avoid future misuse. To check the misuse and catch the corrupt people, the following steps would be helpful.

1. First, include all the cash exchange transactions happened in the initial phase in the person’s bank account as deposit and withdrawal transactions. That will also indicate that how many people provided fake documents and whether bank officials were involved.
2. Second, seed all accounts with Aadhar no. after passing the bill and freeze those accounts which don’t have Aadhar number till they are linked to Aadhar. That would freeze all the benami accounts.
3. Third, then make people submit the document declaring all their accounts and their last year income tax return along with the copy of list of transactions happened post November for all their accounts along with signed stamp paper declaring that they forfeit any other account if opened in their name and approving it through biometric verification. Find through video footage, who opened and deposited money through which bank officials in those benami accounts, if possible.
4. Forth, aggregate the transactions of all bank accounts per unique id and then count number of transactions and the amount transacted after November and blacklist those whose number cross the threshold mark by comparing it with the older value for those accounts. E.g. deposit and withdrawal of 1k rupees would result in two transactions with amount of transactions equals 2k. Since, many money changers created fake accounts for shell companies and transferred their money through them to convert into white so identifying such accounts would recover the trail of many other scams as well. Also, exploring the option of using classification algorithms in data mining to identify the accounts with irregularities might also be helpful.

 

For the cases where bank officials are involved, this is a different problem which should be tackled differently. Since majority of bank officials are honest, so these people could be helpful in finding all the corrupt people. Perhaps, other bank officials might know what is happening in their bank branch but don’t reveal it either due to fear or not having any benefit in it. To motivate such people, government should provide them protection on information disclosure and 1% of all the recovered black money as the reward, if they provide all the evidences of irregularities.

Assemble a special task group with people from tax, audit, data mining departments with separate speedy trails courts. Since, the tax objective here is for short duration and would result in huge financial gains so creating such team by spending extra money would have desirable if cost benefit ratio is considered. Also, the usual time taking process of black money recovery and cases lingering for extended period gives many corrupt people the will to engage in such unlawful activities.

The government should also investigate if the new currency is disbursed correctly and if there are any irregularities anywhere ranging from printing in mints to distribution like in Telgi scam. I believe that cash exchange process was prone to massive irregularities in disbursal so it is quite important to include all such transactions in bank accounts. Also, checking the amount of money exchanged for each branch could indicate irregularity since the amount should be roughly equal with other nearby branches as every branch worked full time and distribution of people was similar.

As many people used Shell companies with benami directors to transfer black money so the government should reactivate all director ids only after linking it with unique ids and biometric verification. There were cases of even high profile people holding multiple DIN numbers. ref

Real estate clean-up

Digitize the whole map of India and label every piece of land as either public or agricultural or industrial or residential. Digitise all the land and flat registrations with the compulsory mention of unique id of buyer and seller as unique id would be mandatory for taxes. Then, link every piece of land on map to the digital registration record. And finally publish the list of owners of land on the government website and allow people to report irregularities. Those who fail to digitise their registry by providing their unique id in the given time period would lose their possessions.

The digital record would also act as the permanent address proof of a person, if the person is direct owner or in direct lineage of owner or living on someone’s property by furnishing the proof of stay by such owner. This address proof document would be difficult to forge unlike what happens at present.

The recovered benami land would go towards government land bank which would help in industrialisation and building homes for the poor under housing for all scheme. The windfall would be huge considering high real estate prices and it won’t be possible to transfer the properties the way currency and gold could be transferred. Further, there would be a link between black money and benami properties as well so whoever is caught in one case would also be pursued in other. Since, Benami land holding is the place where lot of corrupt and criminal wealth is parked, so recovering that land would also make such people powerless.

There is need of reducing stamp duty and registrations taxes as increasing taxes isn’t a way to solve real estate crisis. The right way is to have better land policies, no black money transactions, advance urban planning and establishing new smart cities as the land is limited in Urban areas.

Cashless Economy

First it should be deliberated that why cash is used. It is because of its characteristics i.e. anonymity, portability etc. If those characteristics ceases to exist, then cash will automatically be rendered useless. We’ll see how we could remove such characteristics from cash in phased manner to eliminate it from the system. Also, in India there are more than 75 crores debit and credit cards in around 25 crores families and out of total cards, around 45 crores are active, more than 100 crores mobile phones, 109 crores Aadhar card numbers i.e. 99% adults and 99% households have bank accounts. ref So, good part of digital foundation is ready and the need is to build on top of it.

Portability: The cash is portable as it could be transported from one place from another. This could be made difficult if cash either ceases to be remain secret as it’ll become riskier to carry it or becomes difficult to carry because of its weight or volume. This could be done if the currency is in the form of coins and in small denominations.

Anonymity: Cash provides ability to make anonymous transactions. That enables evasion of taxes and unaccountability regarding source of money. If every transaction is stamped with the person involved through unique id, then it could also reduce this characteristic. This is possible if one of the two sides doing transaction has either no incentive or way to indulge in cash transactions without recording the id of other side.

Liquidity: Allowing cash to be exchanged with any asset make it the most liquid instrument. This could be checked if not every asset couldn’t be transacted with cash. The introduction of 2k notes without introducing any intermediate note is an example of reducing liquidity of 2k currency note.

Instant settlement and cheaper: Cash also allows quick settlement and is also cheaper as there is no cost of using cash in transactions. This could be checked if there is alternative which is quick and if getting cash and transacting in cash carries some cost.

So as to tackle the cash by weakening its strong characteristics, we need to move in planned manner.

Phase I

Banning cash across India in all such transactions where internet is used somewhere in the whole process of transaction. The assumption is simple that if a person knows how to use internet and he could also use alterative system of payments. Also, many online companies must provide cash settlement mechanism because of competition otherwise collecting cash is quite costly and banning it would bring everyone on same level. All e-commerce businesses transactions like online shopping, traveling through cabs, planes etc., hotel booking etc. should be made completely digital with mandatory full payment through digital mode.

Ban use of cash across India for payment for amount exceeding Rs. 20k and submission of unique id along with all cash transaction above 5k for auditing purposes.

Charges for cash withdrawal from other bank’s ATMs in Tier I cities.

Stop cash withdrawal at bank branches in Tier I cities. In future, the only thing bank branches will do with cash is deposit alone.

Completion of BHIM app where payment could be done using fingerprint authentication by linking it through Aadhar.

Remove all taxes and service charges on card usage for amount less than 2k.

The government could also consider launching pre-paid card (both in physical and digital form and linked together) which could be used for all government services across India for amount capping Rs. 500 daily for small ticket transactions like bus, metro, train travel etc. and which could only be recharged through bank account. This could be considered if implementing the use of BHIM app in all such areas comes out to be either costly or complicated or time taking.

Phase II

Rollout BHIM app with fingerprint authentication and take help of party workers of all supporting parties to educate people about its use. First train party workers at the party centres and then they will further train people at grassroots levels. That would speed up the adoption of digital transactions.

No need to have cash transaction charges and just implementation of cash withdrawal charges from ATMs at the rate of 1-2% in Tier I and Tier II cities would suffice. A study by MasterCard shows that the cost of using cash i.e. printing, transporting, storage, soiled notes, etc. is almost 1.5% of GDP so people should be told to pay for it.

Charges for cash withdrawal from other banks ATMs extended to Tier II cities.

Extend the stop of cash withdrawal at bank branches in Tier II cities.

Ban use of cash for payment for amount exceeding Rs. 12k and submission of unique id along with all cash transaction above 5k.

Stop use of cash at all petrol pumps in India.

Phase III

Make digital payment compulsory for all public services in Tier I, II and III cities.

Cash withdrawal charges extended to Tier III cities.

Charges for cash withdrawal from other banks ATMs extended to Tier III cities.

Extend the stop of cash withdrawal at bank branches in Tier III cities.

Ban use of cash for payment for amount exceeding Rs. 8k and submission of unique id along with all cash transaction above 3k.

Payment of labour only through bank transfers.

Ban all B2B cash transactions.

Demonetise 2k notes.

Phase IV

No cash withdrawal at any bank branch in India.

Cash withdrawal limit tied to unique id instead of bank account along with cash withdrawal charges all over India.

Promote digital payments in small towns and villages.

Demonetise Rs. 500 note.

Stop cash in all Bullion transactions of any amount.

Ban use of cash for payment for amount exceeding Rs. 2k.

Phase V

Lower ATMs withdrawal limit to 2.5k per day and 15k per month per unique id.

Demonetise al existing currency notes and bring coins for small denominations.

This would be the last step in checking the use of cash and becoming cashless society and would end the era of enabling crime through black cash. Also, the above planned manner of moving to digital economy wouldn’t cause difficulties to the citizens and government could decide when to take the next step based on the preparation.

Privacy

Since, every single transaction done by a person would be easily traceable so there is no doubt that this would give immense power to the government. So, this information should be strongly guarded to prevent its misuse and leak. Strong accountability and transparency of those who would use it would be required.

During the passage of Aadhar bill, it was unfortunate that the Rajya Sabha returned the Aadhar bill with certain amendments which if would have been made, would have not only diluted the spirit and objective of the bill but would have also compromised the privacy of the citizens by freely providing the biometric information to different departments, which was attempted through suggesting several amendments and one being regarding the Clause 33 to change it to public emergency and safety from national security, which could have certainly led to easy availability and misuse of personal information. ref

Conclusion

If no actions are taken, then cash will return as the preferred medium of transactions and demonetization exercise will be regarded as unnecessary trouble for everyone. ref 1 ref 2 Though all the efforts are appreciated for going cashless but opting for lucky draws to make people move towards cashless transactions without looking at the fundamental reasons towards cash usage by people shows the lack of original thinking and mere wishful thinking of PM advisers. PM should have advisers who are smart and have new ideas, which doesn’t seem to be the case by looking at the way demonetization exercise was handled. Mere degree is no proof of person’s smartness and who could understand this better than PM Modi himself.

White money is gradually transformed into black after cashing it as it could be anonymously hoarded and used. This makes corrupts and criminals rich and powerful and enables the scams. So, instead of directly fighting with criminals, it is better to end such means which enables these criminal to indulge in such activities and the crime and corruption would automatically ebb.

The huge amount of black money returned to the banks indicate the possibility of many loopholes in the banking sector. Since in future of digital economy where banks would be backbone, so they should be robust, accountable and clean. The formation of separate regulation body like SEBI for banks might be helpful.

Real estate and property prices are simply inflated and would crash as what has happened is irreversible and holding won’t improve the situation. Implementation of Benami act would further lower the real estate prices. Gold price won’t drop quickly but since India is the largest consumer of Gold so prices would come down if all Gold transactions are mandatorily tracked after implementation of GST where Gold will lose it objective of holding illegal wealth and thus reducing its consumption.

Government should consider passing a financial bill declaring unique id being compulsory for trading of any financial instrument so that participatory notes kind of instruments couldn’t be easily created in future.

The fact that PM could have taken this demonetisation step post release of BHIM app having biometric feature, shows that there are long term plans and this move was required at this point of time. Implementation of Benami prohibition act could be expected after the upcoming elections.