The war on cash

12 Sep, 2016
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The central bank tool of negative interest rates (charging somebody to take their money) being used for $13 trillion in rich country government debt seems like it belongs to a different universe from India; the government issued 10-year bonds last week at seven per cent. But, anecdotal evidence suggests that the government's war on black and paper money via five tools is having a wonderful side effect: Negative interest rates offered by traditional channels for holding large amounts of physical cash. I'd like to make the case that, over the next decade, these negative interest rates will be wonderful for formal job creation.

A wonderful new book The Curse of Cash by Harvard Professor Kenneth Rogoff suggests that paper currency lies at the heart of many of today's intractable problems. He believes that moving to a society where cash is used less frequently and mainly for small transactions will have a positive impact on the corruption of public officials, terrorism financing, the drug trade, tax evasion, human trafficking, informal employment, money laundering, and extortion. He acknowledges cash substitutes - cryptocurrencies, uncut diamonds, gold coins, prepaid cards-but believes that physical cash is still king amongst criminals because of its absolute anonymity, portability, liquidity, and near-universal acceptance. Since 80 per cent of physical cash is in $100 notes in the US -and a million dollars only weighs 10 kg and can fit into a shopping bag - he suggests that getting rid of the $100 note will make it harder to count, verify, handle and store large amounts. Mr Rogoff believes that physical cash is used far more for illegal activi-ties than for legal ones and advocates a "less-cash" society, not a cashless one.

The government has approached its war on black money with five tools; fear, financial inclusion, pol-icy creep, tax reform, and tax organisation reform. Fear created via the law (Black Money Bill, Mauritius Revamp, Benami Bill etc.) is finally changing the advice of chartered account-ants. Financial inclusion through Jan-Dhan, Aadhaar, direct benefit transfer, mobile banking, universal payment interface, Bharat bill payment, new bank licences, and much else are blunting the traditional, defense of cash as access. Sahara was possible because identity verification is not mandatory for deposits less than Rs.120,000. Ninety percent of our workers are employed informally because salaries can be paid in cash. As finance becomes synonymous with smartphones, both these must end. But the biggest change has been clever use of tax deducted at source (TDS), permanent account number (PAN), and caps on cash acceptance for jewellery and real estate. The government imposed a one per cent MS on land purchases beyond 150 lakh (the TDS rate becomes 20 per cent if PAN is not given) and jewellery purchases beyond 15 lakh need a PAN number.

Unfortunately the Rs.1-lakh cap on cash acceptance for jewellery was rolled back, but thankfully the Supreme Court-constituted special investigation team on black money has recommended caps on cash transactions (13 lakh) and cash holdings MB lakh), which the government must accept. Chartered Accountant Shailesh Haribhakti estimates that about 20 per cent of last year's gross domestic product (GDP) growth came from cash conversion running away from real estate and gold and advocates a phased de-monetisation of the Rs.1,000 note. The fourth tool of tax reform has made huge progress with the goods and services tax (GST), but the rate should be no higher than 18 per cent. It's also time to end deductions, move to lower TDS and tax rates. The fifth tool is furthest behind; ending corruption, randomness and terrorism in the tax organisation is urgent and overdue, however difficult.

This war on black and physical money has hugely positive implications for India's formal jobs. Hundred per cent of net job creation in the last two decades has happened in small, low-productivity enterprises. Of India's 63 million enterprises, 24 million do not have an office or address, only 8.5 million have any form of tax registration, only 1.1 million pay the mandatory Provident Fund, and only 18,000 companies have a paid-up capital of more than Rs.10 crore. Decent wages can only be paid by enterprises that have the productivity that comes from the access to talent and credit that comes with formalisation. Over the next decade I anticipate the number of India's enterprises to decline by over 50 per cent, ending the self-employment that is self-exploitation and low-productivity informal firms that operate in cash. Black money often goes to goofy investments; it's the only reason India's banking system does not have a sub-prime real estate crisis and the new joke about 24 per cent return schemes for cash deployment is that you get 24 per cent of your money back. Now, much of this money will become available to fuel growth in formal jobs, productivity and wages.

The war on cash also forces political parties to think creatively about financing and finally create the grassroots and retail funding machinery that political scientists suggest, at the margin, create more accountability and political participation than wholesale financing by interest groups. Negative interest rates have often been thought of as irrelevant for a capital starved India. But anecdotal evidence of their emergence for holding in large amounts of physical cash in parts of Uttar Pradesh, Andhra Pradesh, Karnataka, Maharashtra and Tamil Nadu are surely a sign that the government is winning its war on cash. This is wonderful for India.

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Manish Sabharwal, Chairman, TeamLease Services Limited

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