Posts Tagged ‘cashless economy’

Oh! to be in Estonia

I wonder how many people in India would even be aware that there is a country on planet Earth called Estonia. Tucked away in the Baltic corner of Europe, Estonia was one of the republics constituting the former USSR. The dissolution of the Soviet Republic in 1991 saw Estonia, along with a clutch of other erstwhile republics, achieve her separate identity. But what is truly remarkable about this small country of barely 1. 3 million people with a geographical area straddling not even 50,000 square kilometres is the rapid strides she has made in the digital revolution sweeping the globe. Estonia has an e-police, e-schools and an e-cabinet: you can now even apply for e-residency in that country. Estonia is virtually the digital hub for Eastern Europe and hosts the NATO Centre for Cyber Excellence. Not that digital progress does not come without a price; Estonia was literally brought to her knees by a major cyber-attack by Russian hackers some eight years ago and, has since, tightened cyber security measures. Her logic for offering e-residence facilities to non-citizens is, among other reasons, aimed at facilitating access to the European market to foreign investors at minimal cost and with a minimum of tiresome legal formalities.

No, I am not planning a shift to Estonia. The weather there is too cold, one has to keep worrying about a possible Russian re-takeover of the country and I am too tied to the earth of Bharat Mata. But I do think wistfully of Estonia’s e-topia whenever I run into India’s bureaucratic conundrums. The latest one is something called the FATCA declaration. For the uninitiated, this acronym stands for “Foreign Account Tax Compliance Act”. India and United States of America have an agreement under which the governments of the two countries will exchange information on taxable transactions by residents in the respective countries. So far, so good…but what gets my goat is the declaration to be signed by every Bharatiya whenever she opens a demat account or commences mutual fund trading, specifying her country of citizenship and place of residence. I am all for unearthing stashing of black money in safe tax havens, but getting over 99% of Bharatiyas, many of whom have not even crossed the Palk Straits or the Wagah check post, to sign one more silly document is surely the height of bureaucratic stupidity. More so, because these Bharatiyas generally transact through banking channels, where details about their citizenship, place of residence, etc. are already available with the banks.

But even the meaninglessness of FATCA pales before that other abomination, inflicted on us by the mandarins of the Finance Ministry, infamously known as KYC. Used by banks, gas agencies, mobile companies and sundry others to harry the unsuspecting customer, KYC officially stands for Know Your Customer. To my mind, it stands for Keep You Confused. I suspect that each time there is a change of Finance Minister or Finance Secretary in the Government of India, 600 million bank customers are once again asked to confirm their place of residence. Why else has one had to go through this exercise three times in the past six years? It is not as though seeking address details leads to lesser tax evasion or concealment of ill-gotten gains. We read daily about the number of fake accounts being uncovered in reputed private and government-owned banks: the mind boggles at what may be going on in cooperative banks.

As a matter of fact, asking for residential details of a customer wanting to open a bank account is itself a source of harassment to a citizen who moves for employment to different parts of the country every couple of years. I have read horror stories of young professionals who had to run from pillar to post to open a bank account when they moved in to stay with their parents and had no independent proof of residence. If the customer retains her bank account at the branch near her earlier residence and largely transacts through internet banking, she still needs to update her address to receive new debit and credit cards or for other transactions like securing loans. The agency that provides a service will invariably insist on a document like the Aadhaar card, passport and driving license or ration card for proof of residence, although a recently relocated customer is unlikely to have the new address on any of these documents. Nor do banks follow a uniform procedure for accepting address changes. One private bank allows for change of address through phone banking, while others ask for scanned copies of address proof. What defies comprehension is why the individual who can transfer/withdraw lakhs of rupees through net banking transactions cannot be trusted to change her address through the same net banking channel, without further verification. This underlines government’s basic lack of trust of the citizen and its permanent suspicion about her motives.

I have also not understood why the Aadhaar card needs to have the address on it at all. As a pan-India identity symbol, it is enough if it testifies to the fact of Indian residency. Updating the address every few years is an avoidable irritant for the geographically and socially mobile Indian: the fate of her economically worse-off migrant sisters and brothers is much more difficult to envision. Equally meaningless is the police verification at the time of issue or renewal of a passport, when any police station would have the list of persons whose record does not entitle them to issue of a passport. The police constable visits the house of a passport-seeker just to verify if she does stay there, never mind if the person moves house a few days after that. All this exercise does is to give a few more rent-seeking opportunities to the official machinery. It has not prevented gangsters and underworld henchmen from acquiring multiple passports at the drop of a hat.

Actually, the concept of a permanent residential address is so antiquated and irrelevant for members of the post-independence Indian domestic diaspora, who (and whose parents) have travelled wherever their employment took them. Most of us today have virtual email addresses that have survived longer than our present residential addresses. So when will our beloved Bharat be rid of this medieval fetish for permanent addresses? Probably when we move in the course of the next few months and years to a cashless economy. Once every transaction of ours leaves an electronic trail, there will be no need for any officious Finance Ministry bureaucrat to insist on an address. Till then, may I request the powers that be to content themselves with a correspondence address and trust the individual citizen when she furnishes that address?

Demonetization – Phase 2 – from cash to cashless

The first month of demonetization has been a trying one: long queues, frayed nerves, some panic and the usual meaningless political drama. Now that the genie has been let out of the bottle, it makes more sense to work out the future steps than to flog the dead horse. I chanced on a news item where a Pune-based not-for-profit outfit, Arthakranti, has claimed credit for planting the idea in the Prime Minister’s brain. Unfortunately, they have also pointed out that, of their recommendations, the government of India implemented only one. Since not many would have gone through their suggestions, I am detailing them below, along with my views on the way ahead, as well as two critical issues that will need a push from the government if the cashless economy is to become a reality in the not so distant future.

Withdrawal of high denomination notes (₹ 1000, 500 and 100) from circulation was the one recommendation that has largely been implemented. Arthakranti had, however, proposed a phased withdrawal programme starting with the ₹ 1000 note, then the ₹ 500 note and finally the ₹ 100 note, spread over three six-month periods, with an adequate supply of newly printed notes of the next lower denomination to substitute for the withdrawn currency note. Finally, the highest denomination note in circulation was to be the ₹ 50 note. Without trying to guess the compulsions of the government in rushing through such a monumental process in fifty days without ensuring adequate supply of currency of legal denominations, there is no denying that much pain has been caused to the general public, apart from the man-days lost in queues and the depression in economic activity just when the kharif crop has been harvested and the rabi sowing is due. Having done what it did, the government should now move towards a gradual phase out of the ₹ 2000 and ₹ 500 notes, probably over the next 12 to 18 months, with adequate provision of ₹ 100 notes to avoid the situation we went through in November. I would advocate continuing with the ₹ 100 note for at least another three to five years till cashless payment systems are firmly established as the preferred transactional mode.

A cap on legal cash transactions of ₹ 2000 has tentatively been proposed by Arthakranti. Given the large number of unbanked Indians and the gestation period that will be needed for cashless payment systems to be put in place, I would be more comfortable with a cap set at ₹ 10000 for the period when the ₹ 100 note continues to be legal tender, with the cap being reduced to ₹ 5000 once ₹ 50 is the highest currency note in circulation. Any transaction in cash above this cap should be made illegal and liable for punitive action.

The truly revolutionary recommendation of Arthakranti is the replacement of all domestic direct and indirect taxes (central, state and local) by a banking transaction tax (BTT), with only import and export duties continuing in respect of internationally traded goods and services. This is tantamount to killing many birds with one stone. Coupled with the cap on legal cash transactions, this brings every transacting citizen into the tax net. Any transaction through a bank account (with automatically attached Aadhar and PAN card details) attracts a BTT of 2 percent, as suggested by Arthakranti. The BTT is added to the transaction value and deducted from the amount realised by the payee. The BTT realised is shared between central, state and local governments and the banking intermediary. With the tax net covering all transactions over ₹ 10000 (ultimately ₹ 5000), the system can be revenue-neutral even at a rate which is barely 7% of the currently highest marginal income tax rate or 10% of the anticipated GST rate. The ordinary citizen will be spared the ordeal of filing direct and indirect tax returns, an exercise that today taxes even the most nimble-minded chartered accountant. Governments at all three levels can save money on the huge army of tax inspectors, assessors and enforcers in departments ranging from income tax and central excise to state excise, land revenue, stamp duty, registration fees, commercial taxes, road tax, entry tax and property tax. User charges paid online will not only accrue immediately to the concerned department/agency but revenue receipts to the concerned governments and banks will also be instantaneous. The BTT would also cover agriculturists, who are out of the income tax net for political reasons, despite the recommendations of the K. N. Raj Committee over four decades ago. Most importantly, black money generation through corruption and tax evasion, and its conversion from cash to other asset forms like real estate and jewelry, can be checked.

Reaching out to the huge unbanked portion of the Indian economy requires, as a prerequisite, a digital revolution: the cashless economy can be built only on the foundations of a digital economy. Efforts to promote cashless payments and cash transfers in MGNREGA and the PDS have foundered on the absence of virtual connectivity in large swathes of the country. With banking services not covering even the last ten miles, let alone the last mile, banking correspondents, armed with point-of-sale machines, and mobile wallets are probably the major means by which money can be accessed. This, however, requires microwave towers, with reliable electric supply. Where the terrain does not suit microwave tower connectivity and where electric supply is yet to reach (which are the areas where the most disadvantaged sections of Indian society live), there is need to rely on satellite connectivity coupled with towers powered by solar energy. A second concern is that of cyber security. With increasing criminal infiltration of cyberspace, development of secure, encrypted systems is the need of the hour to avoid economy-wide disruption of financial systems.

Demonetization was initially promoted as the solution to check tax evasion and corruption and deal with counterfeiters and terrorists. With growing public irritation and the downturn in business, the government has started trumpeting the virtues of a cashless economy. This requires a paradigm shift in technology and in individual mindsets. But above all, it requires certain crucial reforms in other sectors of our democracy and polity. I will deal with these in a future blog.

Money…the root of all evil

“For the love of money is the root of all evil”
(Timothy 6:10, The Bible, King James Version)

The Bible makes it clear that it is not the medium which is evil but the inordinate attraction to it. Before we castigate that poor banknote or coin, let us also reflect that greed is only one of the human failings, on par with envy, fear, lust and anger. And yet, the action of the government of the day to render worthless ₹ 500 and ₹ 1000 denomination notes at the drop of a Prime Minister’s speech has left the common citizen speechless and in the grip of a welter of emotions. The intentions may be good and the purpose may be noble : there is a groundswell of support today for the government’s actions among the chattering classes, even though the silent masses are going through difficult times. But is “black money” so easily tamed? Since there seems to be popular misconceptions about “black money”, its origins and nature, some clarifications are in order.
Black money can refer to a flow or to a stock. It is the activity through which the money is generated which determines whether it is black or white, while the subsequent use of the money determines its colour at that time. For example, a private engineering college accepts a donation in cash from a student and declares only 25% of the amount as received. The remaining 75%, which is held in cash, or converted to other assets (and not declared as income), constitutes black money. If this money is used to pay cash salaries to the college employees, the money gets converted from black to white, since the employees use it for their legitimate monthly expenses. Similarly, undisclosed “black money” income parked abroad (as stock) is converted to a “white money” flow when it legally reenters India as foreign institutional investment from foreign tax havens. The roots of black money can lie where activities are wholly illegal (smuggling, drug dealing, arms transactions), or where the activity is legal, but part or whole of the amount realised is not disclosed, either because there has been some violation of permissible limits (illegal mining, capitation fees) or simply to avoid tax payments of any kind. The mythical metaphor could be Ravana’s ten heads in the Ramayana or the Lernaean Hydra in Greek mythology: chopping off one head would see more heads grow back again. A modern day analogy would be the Jackal, the terrorist tasked with the assassination of President Charles De Gaulle of France. With his multiple stolen passports and the ability to change his appearance to suit the passport photograph, the Jackal evaded stringent police surveillance and was finally stopped in his tracks by a patient, persevering French policeman only after he had managed to take a crack at his target. Black money is similar: just when the enforcement agencies think they have got the beast, it will reappear in a new form elsewhere.

In these days of highly fungible economies, the very processes of economic and government functioning give immense scope for the generation of black money. Since I started this article with a quote from the Bible, it would be appropriate to list the Ten Commandments that the Government of India must follow if the current demonetization drive is to come anywhere near yielding the desired results:
I. Thou shalt make bank accounts mandatory and easily accessible
The innovative idea of the Pradhan Mantri Jan Dhan Yojana (PMJDY) to provide every Indian citizen with a bank account has seen as many as 254 million accounts being opened till November 2016. By the government’s own figures (gathered from banks), nearly 25% of these accounts have zero balance; there is an average of about ₹ 2500 in the remaining accounts. The geographical spread of these accounts would be highly skewed: remote tribal and rural areas are likely to be underserved. It is the poor with no access to bank accounts who have been hardest hit by the demonetization exercise. The significant percentage of zero balance bank accounts is testimony to the fact that bank accounts are still not perceived as useful by the poor, especially where they have little bankable surplus and where bank locations and timings are such that they cannot easily be accessed. Making the opening of a bank account by every citizen above the age of 18 mandatory would popularise the use of banking services and compel hitherto reluctant bankers to actively seek customers. There will still be areas where access to bank branches is difficult, either because of geographical location or, more often, because of timings which do not suit the customer. It is here that the Second Commandment comes into play.
II. Thou shalt actively promote the cashless economy through the use of technology
Mobile wallets and payments through mobile phones and computers using internet and wireless technology can obviate the need to visit banks. Use of point of sale (POS) terminals at all transaction outlets would promote cashless transactions. Money transfers (salaries, etc.) can be done online or using mobile phones. Banking correspondents can ensure needed cash payments from and deposits to customers’ bank accounts. This will need some knowledge of how to use these systems. Having seen how quickly nearly 900 million Indians have mastered the use of mobile phone software, including the use of WhatsApp and the downloading of videos, I do not foresee any problems of adapting to modern technology. There is, of course, still the need to ensure that the temptation to escape the electronic trail is checked…enter the Third Commandment.
III. Thou shalt declare illegal and void any cash transaction exceeding ₹ 10000
Given the Indian propensity for jugaad, all efforts will still be made to evade scrutiny of economic intelligence agencies by going in for over and under the counter cash payments, to avoid payment of direct and indirect taxes. Black money will be converted into holdings in real estate and gold/jewelry. To ensure a clear electronic trail of all transactions, any cash transaction over ₹ 10000 should be made illegal and liable for punitive action, including confiscation. This will also, hopefully, check the widespread and pernicious practice in India of large-scale cash transfers in real estate dealings to evade payment of capital gains tax, stamp duty, registration fees and other related levies.
IV. Thou shalt demonetize ₹ 2000 and ₹ 500 notes
The rationale for introducing ₹ 2000 notes when the lesser denomination of ₹ 1000 has been scrapped has raised many eyebrows: suitcase payments become easier when the number of currency notes required to be packed into the suitcase are reduced by 50%. A strong case can be made for scrapping all currency notes of a denomination greater than ₹ 100. In fact, there is growing support from American economists for withdrawing from circulation the 100 dollar bill which, they feel, helps only drug dealers, terrorists and illicit activities while rarely being used for transactions. India may not be quite in the same cashless economy boat as the USA, but moving the economy in the cashless direction requires demonetization of ₹ 500 and ₹ 2000 currency notes. The presence of currency in only small denominations from ₹ 1 to ₹ 100 would force reluctant merchants to go in for cashless technology. It would also render more difficult the task of using low denomination currency notes in large numbers for high value transactions.
V. Thou shalt make Aadhaar and PAN card details mandatory for all transactions above ₹ 10000
Despite the objections of neo-Luddites opposed to the universal deployment of the Aadhaar card for all, it is heartening that, for schemes like the LPG subsidy transfer, Aadhaar cards are being linked to bank accounts. Since opening a bank account does not require either Aadhaar card registration or PAN card details, there is every scope for diversion of unaccounted for income to benami accounts. What is urgently required is to link Aadhaar and PAN card details and to make PAN details mandatory for any transaction exceeding ₹ 10000. This would check possible misuse of bank accounts which are not on the income tax radar (due to non-availability of PAN details) and would also ensure that non-income taxpayers (like agriculturists) are not used as conduits for undisclosed payments.
VI. Thou shalt discontinue top-level political decisions in all discretionary matters
A major scope for corruption lies in the centralization of decision making powers at the political apex, especially in state governments and local bodies. Whether it is the posting of officers, the permission to start primary schools or the award of contracts for anything from chalk pieces to supplementary nutrition for children to major constructions, the ministerial seal of approval is a must. This has spawned a major corruption industry which enmeshes a significant portion of the bureaucracy as well. We are also often regaled with stories of the MLA or local body corporator who becomes a multimillionaire within a year or two of getting elected. The standard defence is that elections are a costly business, although how that justifies corruption is beyond one’s comprehension. Be that as it may, there is no denying that, apart from lowering administrative efficiency and providing substandard services to the aam aurat/aadmi, high-level political corruption is a significant source of black money, often ploughed back into real estate and conspicuous consumption. Since this is a disease that cuts across political boundaries and is particularly common at state and local government levels, the Government of India must, through a combination of incentives and shaming, compel governments to restructure their governance processes and decentralize decision making powers.
VII. Thou shalt implement a sound public procurement policy
The Government of India had introduced a Public Procurement Bill in 2012 to regulate and ensure transparency in procurement by the central government and its entities. The bill was allowed to lapse and there have been no efforts subsequently to resuscitate it. Most state governments have no public procurement policy or legislation in place. Even in the few states where such legislation has been passed, its effectiveness has never been assessed. Since, apart from administrative postings and patronage in resource allocation, public procurement is the greatest source of political and bureaucratic corruption, some urgent action on this front is essential to check amassing of illegal wealth by the politician-bureaucrat-businessman trinity.
VIII. Thou shalt eliminate the inspector raj through online processes
The permit-license raj was curtailed in 1991; unfortunately, the then government lost steam before the death blow could be delivered to the inspector raj. There are still too many ‘inspectors’ in local bodies, police, road transport, liquor licensing, education, industry and labour welfare, whose major function appears to be the collection of economic rent, for themselves and those above them in the government hierarchy. Some streamlining of licensing processes has taken place but the overall picture is still one where the inspector-tout system flourishes: just visit any Regional Transport Office and see for yourself. This corruption has two “black money” aspects: firstly, the unlawful gains to the organs of the state and, secondly and more dangerously, the operation of a parallel economy that can threaten national security and financial stability. Technology is, again, the only answer. As more processes go online, self-certification by licensees and only minimal, essential contact with the human element can help reduce corruption and harassment.
IX. Thou shalt streamline the justice system to deliver just deserts promptly to all bribe-takers, bribe-givers, tax evaders and hawala traders
As an American jurist put it “The millstones of justice turn exceedingly slow, but grind exceedingly fine”. Justice in India often seems inordinately long in coming. It is rather ironic that, in recent times, a public prosecutor of Indian origin investigated and secured the conviction of two well-known individuals of Indian origin on charges of insider trading in a matter of four years in the USA. While we may not all support his approach, it is a fact that high profile cases involving top political and bureaucratic functionaries in the previous central government are still far from closure even in the trial court. Lengthy, tortuous legal processes not only breed cynicism in the populace at large (not a healthy sign for a democracy) but also embolden lawbreakers with political and economic clout. Sincere and speedy implementation of the provisions of the Benami Transactions (Prohibition) Act, Prevention of Money Laundering Act, Prevention of Corruption Act and related legislation will show that the government means business. Along with the government, the judiciary also needs to tighten its processes and dispense justice fairly and speedily.
X. Thou shalt ensure that all elections are funded only through legal contributions and that all transactions relating to elections are closely monitored
The final Commandment covers a subject which is at the foundation of the efforts to tackle the genesis of black money: electoral corruption. Election funding is itself a small portion of the black money generated. But the politician-businessman nexus that unaccounted election funding sustains has deleterious long-term implications for the economy as well as for the credibility of democracy in the eyes of the people. There are politicians who proudly claim that they have never enriched themselves personally but have taken money only for their political party. Political parties have never been required to account for the sources of their funds and have stubbornly resisted efforts to bring them within the ambit of the Right To Information Act. Demonetization should bring about a situation where all receipts and all expenditures, small or big, by parties and their candidates can be electronically tracked. This will give the Election Expenditure Observers far more teeth than they have at present. With rigorous monitoring of electoral expenses, the last fig leaf for justifying corruption before, during and after elections will be gone.

I write this piece at a time when the nation is probably going through one of its greatest phases of turmoil since independence, rivalled only by the churning of the polity in the closing months of the Emergency in 1977. As one who lived for over a decade in the vicinity of Muhammad Bin Tughlaq’s aborted capital of Daulatabad, his other aborted experiment with currency comes to my mind. Of course, 2016 is not 1333 and we are not minting brass and copper coins, though the flimsy quality of the Rs. 2000 currency note makes me slightly apprehensive. There will always be insinuations that raw political calculations dictated the demonetization decision. The current pains that large sections of the population are going through could have been mitigated somewhat if some of the Ten Commandments had been implemented prior to the “surgical strike” on the currency. As matters now stand, systemic changes on the lines suggested above would give the government some victories on the black money front in the months and years to come. Human greed will remain, the craze for conspicuous consumption and the Big Fat Indian Wedding will continue unabated and the Cayman Islands and other tax havens will always beckon those with an insatiable appetite for moolah. But the government would at least have the satisfaction that it made earning a fast buck that much tougher for those who are never going to respect the rule of law, while also ensuring that it does not make the wretched life of the common (wo)man even more wretched.