The real reason behind demonetization

The Indian government cities various reasons for demonetization, namely to reduce

• black money
• terrorism financing
• duplicate currency

These may be side benefits of demonetization, but the real reason of demonetization is totally different. The real reason is that BJP should win upcoming elections.

In India, crores are spent during elections. If a politician does not spend this amount, he/she will likely neither get a party backing nor win. A major part of this amount is spent in cash. BJP has eliminated ₹500 and ₹1000 notes a few weeks before election and allowed only a paltry sum to be withdrawn as cash from bank accounts. It is likely that BJP has made cash arrangements before making the public announcement of the ban.
So now BJP has the cash, but all opposition parties have no cash. How will the opposition parties conduct rallies, gatherings, etc. The opposition's life blood has been sucked out by making their cash unusable and accounts frozen.
So BJP has a major advantage in upcoming elections.

However, BJP leaders probably did not foresee a side-effect of demonetization. Lot of poor and middle-class people are impacted by this decision. They are facing hardships. So these voters may be driven to cash-starved opposition.

Demonetization is BJP's gamble. No single opposition party can now face BJP. All opposition parties have to get together and then fight BJP in coming elections. Only time will tell whether this gamble of Demonetization benefits BJP or not.

Withdraw maximum cash possible every week

In India, people can withdraw cash maximum ₹24,000. This limit will likely not be removed. The limit may change over time, but Indians will never be allowed unlimited cash withdrawals from their a/c.

If Indians are allowed unlimited cash withdrawals, then black money will return in a few years. The government's demonitization effort will go waste. So the limits will never be removed.

Indians should

• Withdraw maximum cash permitted every week.
• Open bank a/cs for every family member e.g. children because the limit is for each bank a/c.
• Pay by check/card/mobile wallet where ever possible.
• Use cash where electronic payment is not possible or inconvenient.
• Learn crypto-currency like Bitcoin because these cannot be tracked or restricted by governments.

A move towards cashless society is preferred by governments because

• It leads to more taxes. Cash transactions are easier to hide.
• It reduces imports of gold/silver. (Gold/Silver are usually purchased in cash). This makes the local currency stronger.
• Small crimes are reduced because less cash is being circulated.
• If more currency in in bank deposits the government can steal more from citizens via inflation.
• The government can confiscate the wealth of its citizens anytime easily.

How should city transport be?

No matter how many roads are buit in a crowded city, the roads have a traffic jam. So here I will mention one possible solution to solve traffic needs of a city.

1. The city will have buses and shared taxis.
2. When a passenger is about to start a journey, a mobile app will tell him the nearest pick up point. The passenger may need a short walk to this pick-up point.
3. The passenger will board the bus / shared taxi.
4. If there is no direct route to destination, the passenger may have to change bus/shared taxi.
5. The passenger will be dropped off near his destination. The passenger may need a short walk to his actual destination.

The above method

• May involve the use of trains/metros
• Each vehicle will be tracked by GPS
• The passenger will be charged for his rides electronically, since the mobile app tracked the ride.
• Will save fuel because it will increase the occupancy rate in buses/cars.

For more details see video

Indian mobile wallets will not get popular

If I am using Paytm (one mobile wallet in India) and you are using FreeCharge (another mobile wallet in India), then I cannot pay you using my mobile wallet i.e. mobile wallets are not inter-operable.
Imagine if a Vodafone (one telecom operator) customer could not call Airtel (another telecom opeator) customer in India. Then mobile calls would never be popular.

If Indian government wants to go cashless, then it must ask every Indian mobile wallet company to make their app inter-operable with others. So a Paytm user can pay a FreeCharge user.

Without having proper infra-structure / rules in place, cashless will remain a dream.

How rich Indians are converting currency from black to white?

A rich person has say ₹10 crores in demonetized notes of ₹500 and ₹1000. He will ask his servant (say driver) to deposit the currency in his savings account. After the deposit is made, the driver will buy, on paper only, say an expensive painting for nearly ₹10 crores. Thus almost the entire amount will be transferred to an account controlled by rich person.
The driver will asked to leave the city. The income tax people will not be able to find the driver easily.

The black ₹10 crores has been converted into nearly ₹9.5 crores white. The driver and bank officials have been paid nearly ₹50 lakhs bribe. The rich person has not done anything illegal i.e. he has only sold something for ₹9.5 crores. So the rich person, with black money, cannot be prosecuted easily.

How to do demonetization or demonetization 101

Here is a dummies guide for demonetization. A few weeks before demonetization:

• Issue rule that all tolls booths, petrol pumps, buses, railways, city restaurants, post offices, etc have to accept payment by credit/debit cards, mobile wallets, etc; in addition to cash.
• Raise the limits on mobile wallets.
• Issue rule that while purchasing any item, the buyer has a choice to pay by card, mobile wallet, etc.
• Allow road side shops to load mobile wallets with cash and vice versa.
• Upgrade ATMs so that they can dispense new notes.
• Print enough new notes and disburse them at the start of demonetization
• Allow foreigners coming and people going abroad unlimited exchange at international airports, as long as they show their passport and ticket.

As soon as demonetization begins

• Customers can go their banks any time for deposit/withdrawal/exchange
• Foreigners and senior citizens only allowed in other banks for first 2 days.
• Women also allowed in other banks for next 2 days
• After 4 days, men can also exchange in other banks.

The Indian government did not plan the demonetization well. It is causing problems for citizens. By planning well, the demonetization would have been a lot smoother for the poor.

Modi will fail to clean black money

Modi has made ₹500 and ₹1000 notes illegal. He says that this will reduce black money. I think not. Black money will come back with a vengeance within few years.
The conditions that cause black money remain as before. If black money was generated before, it will be generated after the notes are banned.

If Modi really wanted to eliminate black money, he would

• Eliminate income tax and wealth tax.
• Put a charge of say 10% on cash withdrawal from banks.
• Put a charge of say 0.1% on all electronic transactions.

This will immediately permanently eliminate all black money. Since there is no income/wealth tax, all money is white. There will never be a black money problem, ever in India.

But a dishonest person will never take these steps, because

• A dishonest politician wants to steal from poor / middle class; not his rich friends.
• If there is a flat tax then the politician's friends will also have to pay taxes. That is not acceptable to corrupt government.
• Using the sword of income tax, a corrupt government wants power to harass his opponents.