Cash may no longer be king in India – Brilliant Constructive Criticism by CA Renuka Jain with Alternative Solutions!

Cash flow as part of GDP
Cash flow as part of GDP
A reputed CA, CS & Tax & Financial consultant wrote about the effects that demonetising cash notes of Rs. 500/- & 1,000/- will have on the common man.

In a surprise announcement late on Tuesday, Prime Minister Narendra Modi banned cash notes of Rs. 500/- and 1,000/- effective from the very same midnight; sweeping away 86% of the total currency in circulation amounting to some 14 Lakh Crores.

The fact is that this is a great move! Completely selfless and no conflict of interest what so ever by the Prime Minister! If anybody could pull such a massive scheme off , it is Narendra Modi!

Here’s what the funds could offer Modi:

  1. The chance to slash by more than half, his projected 5.3 Lakh Crore Rupee budget deficit for the year through March, 2017.
  2. The opportunity to double the expenditure on sectors such as defence and energy.
  3. Increase by three-fold, the federal spending on social services such as education, health and housing

Another good news here is that there could be a considerable drop in the interest rates over the course of the next three to six months.

The Flip Side

India is risking about $211 Billion (over 14 Lakh Crore) of purchasing power to make a leap into a cashless future. India’s economy has become increasingly reliant on physical money. Currency in circulation is now nine times what it was 17 years ago.

Most currency in circulation is in the form of 500 or 1,000 rupee bank notes, which aren’t legal tender now.

The flip side of this policy decision are as under:

  • The drop in consumption is fairly easy to predict. About 69% of employees in urban India – and as much as 75% in rural areas – are informal. And this doesn’t include domestic help. Wages are mostly received and spent in cash since banking is still a luxury despite a massive government campaign to give a no frills account to every family. Naturally, there will be a scramble among employers to hoard small notes, which could lead to a shortage.
  • Real estate will be the most obvious loser. DLF Ltd., India’s largest builder by market value, fell as much 24% on Wednesday. A freeze in land and property transactions, which act as parking lots for income that has evaded taxation, could lead to a significant drop in prices. That would hurt developers.
  • This will hurt not only developers, who can be blamed by Government for non-disclosure; but shall also hurt lower middle class who have been already waiting for possession of their dream homes. These have already been delayed and now, cash crunch in the hands of builders shall delay it further. So, where was the fault of these honest tax payers who accumulated every penny to buy their own house and now shall bear double brunt of EMI as well as Rent.
  • Global giant Amazon’s India unit said it would no longer accept the scrapped notes for existing orders. Cash-on-delivery has been the preferred payment method for more than half of total transactions in India’s e-commerce industry. So for those who recently invested as first line entrepreneurs in e-commerce shall suffer as their sales shall slide. e-commerce companies are already sitting on piles of losses.
  • The impact also risks hurting rural India, where demand has just been recovering after healthy rainfall this year following back-to-back droughts. About 75% of the population live in villages, mainly earning daily wages in cash. Last year, farmers were witnessed committing suicides and now when they have cash in hand they will be more bothered about exchange rather than concentrate on the harvest season.
  • Children who have run away from abusive homes with some cash shall land up on roads or talented kids who have started to earn from age of 11 by way of tuition and proudly saved the money. Because their parents inculcated this habit, they have no choice but to deposit this money in guardian account and now start collecting those small receipts for daily tuition. Remember specialised classes are charged at Rs. 1,000 per class. Is this right step to encourage skill development in teens?
  • Sex workers are paid by their clients by way of cash only and the same is stored by them in high denomination for ease of transport and saving. How are they expected to disclose the income they earned over past years as they shall not have any receipts? A big injustice to already struggling working class
  • Transgenders (hijras) whose blessings have been a part of Indian tradition are always paid by way of cash. They don’t carry bank IDs or accounts in the gender they self-identify as. Now, this is another blow to them when transgender is already a controversy in our society. How will they generate receipts for donations they received?
  • Housewives who have been abused at home, but continued to survive and made small savings of the limited money provided to them for daily chores for years together stand completely isolated as they were never permitted to hold bank accounts. And now, on disclosure of these savings, they shall further add to abuse.
  • Inter caste and inter religious couples who have run away to get married for fear of honour killing and are absconding from families holding cash which they accumulated by various means, such selling gold. They have no option but either to return back and face the punished or start begging for pennies.
  • Imagine the plight of elderly parents who live in remote villages where the nearest bank is 10 km away. They are sitting with cash sent to them by their urban migrant children; but shall now travel the distance as well as the amount they accumulated over the years to look for source of funds.
  • Also, where there is no basic infrastructure for disabled people to visit banks and ID offices shall, they be forced to go through painful journey of opening accounts and their dream to live financially autonomous life of dignity seems to be shattered as they shall now have to rely on others to get them out of this mess.
  • Not to forget the nomadic people, such as hawkers and daily wage workers who make their living on cash and carry no ID or bank accounts with them. The money saved by them to bribe people, from police to gangs to let them carry on their livelihood.

There can be a many more additions to the above list.

To add to it, the following can be major fallout on economic and political level:

  • Any political party can now accept the old denomination at a good rates of discount and then deposit the same with the RBI from January to March with smaller fake receipts generated from voters all over India as “donation money”. So ideally, the tax money that should have come to exchequer shall instead go in the hands of powerful political lobbies.
  • Government shall have to amend the amount a political party can accept as anonymous donation or ask political parties to deposit their cash-in-hand with the RBI immediately; otherwise, political parties will be biggest beneficiary.
  • Any large deposit accepted with the bank should be backed by sufficient book entries (easily available in market). If the IT department raises any objection, it can be easily managed. Because in most of cases, the new currency would be easily available by then. So, the generation of black money will start again.
  • The Government should have to keep a strict vigilance on revenue department. All Assessing Officers handling assessment cases should deal online without any Chartered Accountant to negotiate and keep all communication transparent.
  • Gold, which is being transacted currently in grey market, at double the price is being exchanged for old currency notes as those gold dealers already have stock-in-hand and purchase in their books of accounts. So, gold dealers are minting money out of the deal and not the exchequer.
  • The government must conduct surprise raids on the grey market Gold and Forex dealers and keep a strong check on the sale of gold post few months.
  • There are other loopholes also being generated where the basic beneficiary is not the government, but the brokers in the market.

Chartered Accountants are having the last laugh. However, the above reform could have been much more game-changing had the government kept few things in mind.


Respected Prime Minister,

  1. The move could have been timed along with the Voluntary Disclosure of Income Scheme (VDIS). Had people used it, the VDIS scheme collections would have been manifold compared to the 65,000 crore it eventually netted. Had the two been clubbed, people would have been incentivised to declare more on the VDIS; simply because there would be no other alternative or the money basically becomes useless. I think that this is something that the government, given its wisdom, did not do.
  2. Also, what if they had issued 0% coupon bonds for infrastructure or health sector for a period of five years with acceptance of cash with no questions asked? Every citizen would forego five year returns if they would have been assured of all the money in their books. For exchequer, they would have accumulated huge free money for infrastructure which has broken the backbone of our country’s economy.
  3. Another option could have been financing of start-ups who are sitting on brilliant ideas but have financed facility from banks. What if the government issued a notification that start-ups vetted by government or reputed CAs can be funded in cash, with no questions asked; provided they report to the government for every penny with proofs quarterly. This would have made Narendra Modi’s dream of Digital India successful at a much faster pace.

There can be a long list to this too. So, by scrapping high currency notes, the Government may not benefit as much as others in the financial sector. However, this was a brilliant opportunity for the government to convert this to compulsory VDIS. Everyone would have been forced to disclose or invest their black money in infrastructure, hospitals, start-ups and many more.

My opinion is that a strong relationship of the Finance Minister with Bank lobbies might have prompted this move. Banks are sitting on huge NPAs and this move shall increase the banks’ liquidity. He had proved the same by taxing Mutual fund debt schemes redeemed before three years, that too retrospectively!

I urge PM Modi to re-look the above options for people to divert their money for the development of country rather than throwing it into GARBAGE.

Renuka Jain

The Author is a successful Chartered Accountant, Company Secretary, Financial & Tax Advisor. She is an expert in Portfolio Management. She does not entertain DMs/PMs on Twitter.