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India's Cash Crackdown... and More

Nov 24, 2016


Imagine you're stood outside your bank one day when a series of army helicopters land nearby. There's no security risk. The country isn't under attack. The army has just been enlisted to restock the bank with cash in an emergency.

It sounds utterly bizarre. But that's exactly what's been happening in India over the past week or so. The country is in uproar over a new government plan to abolish five sixths of the cash in circulation.

It's a story longtime readers will be familiar with. Maybe you remember my petition to the government last year following Andy Haldane's suggestion the state should consider abolishing cash altogether.

Well, if you were in any doubt that this is a truly global story, look to India. Although I must admit, there are some strange elements to the story I didn't think we'd see anywhere. Helicopters and fighter planes full of cash, for instance.

I've received a fair bit of correspondence about this, as you'd expect. One particular note caught my eye. It claimed our analysis of the move (and Jim Rickards' analysis too) was misleading:

  • What happened in India was that the notes were recalled and new ones were substituted .

    Indians will still have their cash in newly minted notes -but the difference being the state will now know who owns what, and presumably tax it. That's why there was no limit on what Indians could declare to the banks.

    There is no sinister motive other than what states' always subject their citizens to!

    It appears to clearly be a dramatic measure to stamp out tax evasion, not abolition of cash.

    Please correct me if I have missed something vital here that you know and I do not.

I wouldn't say it's misleading at all. Here's why:

The state argues that abolishing cash reduces chances for black market exchange and tax evasion. Which is true. It does. And you'd expect the government to highlight these particular aspects of the plan. So on that front, you're right.

But here's the problem. We know the preferred way of dealing with a banking crisis now is to follow the Cypriot model. That is, not to bail the bank out... but to bail it in. That means to use depositor's cash to recapitalise the bank.

Whether that's morally right or wrong is a story for another day.

But think it through. In a world where there's no cash and the government can "control" the flow of money from one part of the economy to another... what happens when a bank looks shaky? They lock the system down. There's no cash, so you can't get your money out and shove it down the back of the sofa, if that's what you want.

In fact, there's pretty much nothing you can do, because the state can electronically "lock" your capital in the bank. No need to worry about a bank run. Just lock the system down from a computer.

As we've said before, it leaves the state free to impose a kind of Financial Martial Law on the populace.

There's a deeper and more important level to this, too. It comes down to the relationship between economic freedom and state control. I'm not necessarily saying having a mattress full of cash is a good thing. But it's a choice people are free to make in a cash economy. Eliminating the majority of the cash in the system just makes it easier for the state to control how and where you spend your money. If you believe people deserve the freedom to manage their own financial affairs, that's wrong.

So no, I don't think we're being misleading. I think we're highlighting a huge risk of a cashless economy - one that the state makes no effort to educate people about. When you consider it like that, who's really being misleading?

  The Fight Against BLACK MONEY
Here's What It Means For YOU And YOUR Money...
  The Fight Against BLACK MONEY Modi's move to scrap the Rs 500 and Rs 1,000 note could impact YOU more significantly than you think.

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Real estate: only way is up?

So it turns out that property stocks have been the worst performers on the MSCI UK index since the referendum.

That's not to say there's been a collapse, or even a particularly sharp selloff. There hasn't. But the market is down. No one really knows what Brexit means yet. In London, where huge parts of the property market are driven by the finance industry, you'd expect particular uncertainty.

If Brexit hits the City's role as a key financial sector - and there threat is more from a more business friendly US than Europe - that could take a key source of demand out of the market. That's led to prices drifting lower and projects coming under review.

But what if that just means all the bad news is now priced in to the market? If that's the case the contrarian move would be to say the fall is over and the market is going to rise. Which is what you'd expect if Akhil Patel is correct and property is at the start of a decade long boom. See why that is here.

Making America great again... using robots?

Donald Trump has already started making noises about bringing US manufacturing jobs back to America.

You'd expect that. It was one of the core pledges he made in his campaign. Yesterday Bloomberg reported that he's planning to start putting pressure on key manufacturers - like the firms that assemble the iPhone - to move from China to America:

  • "Apple asked both Foxconn and Pegatron, the two iPhone assemblers, in June to look into making iPhones in the U.S.," a source said. "Foxconn complied, while Pegatron declined to formulate such a plan due to cost concerns."

You can see the appeal for the President-elect. Bringing the manufacture of iPhones back onshore would be a major political win. It might also send a signal to other manufacturers to do the same.

But there's another part to the story that wasn't reported. Foxconn is the firm that laid off 60,000 Chinese workers in a single day over the summer - and replaced them with robots.

I'm sure when Trump talks about work coming back to America, he meant work for workers, not for robots. If you feel like a Chinese worker takes your job, you complain about China. If an American robot does... who do you blame?

The underlying point is this: globalization reorganized the world as new, cheap sources of labour became a part of the global supply chain. But we've arguably reached the peak of that trend.

We've barely started when it comes to technology and automation on a large scale. That's the next force that will reorganize how and where the world works. There will be winners and losers, just like globalization. Want to be a winner? Read this now.

Please note: This article was first published in Capital & Conflict on 18 November, 2016.

Nick O'Connor is a writer and editor at Moneyweek. He is also the publisher of Exponential Investor.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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4 Responses to "India's Cash Crackdown... and More"

Surendra Kumar Sarda

Nov 25, 2016

The Union Cabinet late on Thursday cleared a proposal to amend the Income Tax (I-T) Act to levy close to 60% deduction on unaccounted deposits in banks above a threshold, as per news reports..
It means that the estimated Rs.4 lac crores of black money will get a route to become white by paying 60% Tax.

This will have two benefits:

First, The Government treasury will be rich by 2.40 lacs crores
( 60% of Rs.4 lac crores)

Second, The balance white money amounting to say Rs.1.60 crores will join the mainstream which then can be invested in entrepreurship, reality and such fruitful ventures creating therein more employment and more future taxes on its earnings.

It can be termed as another Income Declaration Scheme. The earlier collected 65000 crores and this will collect 2.40 crores.

The process has also become simple. Deposit cash in bank above threshold limit and bank will deduct 60% and credit Government account and shall credit 40% to the depositers account.



Nov 25, 2016

With this the financial control of individual is curtailed and at risk where the state is manipulating the cash of individual without his voluntary action. This is against individual's freedom and it is done in the name curtailing tax evasion. There are ways to control tax evasion like reduction of tax percentage. The common man is made to suffer and forced to think banking system as the saviour where it is not foolproof and risky. It is not that common man will be benefitted when the banks get benefits along with government . The government control is not minimalistic and common man forced to take steps which is not necessary in his day to day operations . The common man can be educated regarding non cash transaction and ultimately it is up to the common man to decide which way to go. Now the govt action is authoritative and autocratic.



Nov 24, 2016

The issue in India are the corrupt politicians, businessmen & govt officials.
This move by the Govt of India is a long overdue welcome step & will instill fear in the class which completely disregards ethical practices.

Like (1)


Nov 24, 2016

The NPAs of the banks was very high. Therefore, they came with this clever idea.

Like (5)
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