Currency Demonetisation and Future course of Indian Economy

[RajeshG]

thats hobson's choice Suraj. I think govt should offer another disclosure scheme and get this done and over with instead of continued bleeding.

[Suraj]

Hobsons choice: take what's available, or nothing at all.

That's literally not true here. They have two choices with almost equal costs:
a) formally deposit money, pay penalty and tax
b) try to use 'money changers' with no guarantee they're not getting fakes or that they won't be fingered in future.

It is not their money to keep entirely. It never was. There will never be a choice c) keep everything, offered. And despite choice a) being better, people still try choice b) . The stupidity involved here is irredeemable.

Another disclosure scheme ? There was one running for four long months between June and September. Anybody who didn't use it, deserves their fate. Modi repeatedly said he will take action. What were these people doing then, sitting on their behinds sucking thumbs ?

[Singha]

are chit funds legal ? a lot of "weaker economic sections" eg maids have a lot of faith in "chitti" and put all their savings there.

this despite periodic scandals of founders making off with all deposits.

this too deserves to be deeply probed.

[RajeshG]

I don't think a Doctor can even think if practicing wihout a PAN card. My students themselves all have PAN cards and have to file and pay income tax as their stipend has a TDS deduction

from what i have seen a considerable part of commercial real estate is owned by labs, doctors, hostpitals, pharmacies and so on.. a lot of payments in these lines are made by cash ( as with any other profession ).. the investments both black and white have to be recovered by doctors and their non-medical professional partners who sometimes might just bring RE to the partnership. a lot of these guys will "set" their cash for now and going forward if the cash avenues are closed the consulting/hospital/medicine fees might go up to compensate for that.

it might also result in a situation where a relatively new doctor will have trouble opening his new clinic and there would be a wave of consolidation where private hospitals would be part of huge franchises. meaning large economies of scale will kick in and same arguments as mom-and-pop stores vs large departmental stores would then begin to apply.

[RajeshG]

a) formally deposit money, pay penalty and tax

the penalty and tax amounts to a large %age making it not worth it. The 45%-50% being quoted in that article currently will again go to dubious sources as opposed to another scheme where the govt gets it and the whole thing gets over way sooner.

[Suraj]

a) formally deposit money, pay penalty and tax

the penalty and tax amounts to a large %age making it not worth it. The 45%-50% being quoted in that article currently will again go to dubious sources as opposed to another scheme where the govt gets it and the whole thing gets over way sooner.

So what's the problem ? One doesn't pay tax at all, then when in a position where the only legal option is to pay tax and penalty, that's 'too much' ? No, that's what such a person deserves. Pay the cash, continue with business fully white. Stop complaining. Until Sept 30, everyone could have 'cleared their conscience' for 40% tax during the IDS. The fools who didn't take that chance should have to suffer more now.

The tout who's taking 45-50% cut will screw you over the moment IT people go after him. Then you'll be out 45-50% plus the tax and penalty on what's left over.

Everyone uses the roads, uses the electricity grid, discards garbage, uses water etc. All this maintained using our taxes. Pay the tax and stop complaining.

[RajeshG]

Everyone uses the roads, uses the electricity grid, discards garbage, uses water etc. All this maintained using our taxes. Pay the tax and stop complaining.

Sure but that is making a stand purely based on principles and thats great. But thats not practical. There are elections to be won. Weddings to be performed. More such measures to be announced.

I truly believe this action is revolutionary - a black swan moment if there ever was one. Upon its success depends what will be politically palatable for decades to come.

Nobody wants an "India Shining" moment to happen again.

[symontk]

It is funny how every naysayer Economist says that cash component of black money is minuscule.

Have any of these worthies ever been close to large wads of cash in life? Tell them to take a stroll in Delhi Sadar Bazaar or Chandni Chowk or meet a few 'investors' in RE sector.

Not everything can be converted in asset and is NOT converted into assets for various reasons. Even a middle level shopkeeper in a any of the markets in Delhi was sitting on Rs 2-3 crore worth of cash after Diwali shopping. And this is just 5-6 weeks of spending activity.

If you are a shopkeeper, declare the amount for this year, you can pay the advance tax for this year and be happy. Only problem is that IT will ask the penalty for the previous years. and thats a problem

[shiv]

are chit funds legal ? a lot of "weaker economic sections" eg maids have a lot of faith in "chitti" and put all their savings there.

this despite periodic scandals of founders making off with all deposits.

this too deserves to be deeply probed.

They could be legal if they are registered and are tax compliant. Many are not

[prahaar]

a) formally deposit money, pay penalty and tax

the penalty and tax amounts to a large %age making it not worth it. The 45%-50% being quoted in that article currently will again go to dubious sources as opposed to another scheme where the govt gets it and the whole thing gets over way sooner.

One VDS got over just a few weeks back. We cannot expect GOI to give tax penalty breaks every few months, it is equivalent to torturing honest taxpayers.

[Suraj]

Everyone uses the roads, uses the electricity grid, discards garbage, uses water etc. All this maintained using our taxes. Pay the tax and stop complaining.

Sure but that is making a stand purely based on principles and thats great. But thats not practical. There are elections to be won. Weddings to be performed. More such measures to be announced.

I truly believe this action is revolutionary - a black swan moment if there ever was one. Upon its success depends what will be politically palatable for decades to come.

Nobody wants an "India Shining" moment to happen again.

Oh it's VERY practical. You seem to think this is something negotiable. The last date for negotiations was September 30 2016.

All these people with black money have an inflated sense of their own importance. "Without us, the economy will crash".

Here is the reality: less than 2 weeks into this, more than 1/3rd of all outstanding cash has already re-entered the banking system. In other words, 1/3rd of the people have already chosen to make use of this and make their money white. They can continue with their business, while the rest are scrambling to deposit their cash.

Those who didn't hurry, are going to see their business eaten up by those who have white money, access to loans and lines of credit that the guy sitting on a pile of waste paper (formerly black money) does not. Say you and your neighbor run mithai production stores. He declared all his money. He can get a Mudra loan, bank loan or line or credit. You are stuck sitting on useless paper. While he's using the money to make mithai and sell it to make more money, you make Rs.0 because you can't buy ingredients, can't pay the cook, nothing.

Get rid of the Inflated sense of importance. It is fatal to business at this juncture. There are far more nimble people who have already found a way to get ahead of your business. Only foolish people sit around waiting for the competition to chew them up.

[RajeshG]

Here is the reality: less than 2 weeks into this, more than 1/3rd of all outstanding cash has already re-entered the banking system. In other words, 1/3rd of the people have already chosen to make use of this and make their money white. They can continue with their business, while the rest are scrambling to deposit their cash.

Another point, from debroy's interview ( his estimates )..

Rs 2.5 lakh crore is single black and Rs 1.5 lakh crore is double black.

your eg of mithaiwala is very appropriate. if you know of a mithaiwala, any mithaiwala - what do you think the distribution of his income is ? white ? black ? double-black ?

[Bart S]

Everyone uses the roads, uses the electricity grid, discards garbage, uses water etc. All this maintained using our taxes. Pay the tax and stop complaining.

Sure but that is making a stand purely based on principles and thats great. But thats not practical. There are elections to be won. Weddings to be performed. More such measures to be announced.

I truly believe this action is revolutionary - a black swan moment if there ever was one. Upon its success depends what will be politically palatable for decades to come.

Nobody wants an "India Shining" moment to happen again.

Sorry, this just doesn't add up. The few people with crores of black money don't count at the polling booths. Its the masses of people who are enjoying them squirm right now who make up most of the voting public.

[Suraj]

Did you understand what Debroy said ?

Single black : You broke the law by not reporting income. Your business is legitimate business.
Double black : You broke the law by not reporting income. Your business also broke the law - e.g. drugs, prostitution.

See the common thing here ? You broke the law either way. You pay the same penalty and tax either way. The law does not care if your business is productive work. You didn't pay tax. So now you pay tax + penalty. Be thankful you're in a legal line of business, because after you're done paying tax and penalty, you'll have an IPS case registered for criminal business if you were in double black money.

[Prasad]

It is funny how every naysayer Economist says that cash component of black money is minuscule.

Have any of these worthies ever been close to large wads of cash in life? Tell them to take a stroll in Delhi Sadar Bazaar or Chandni Chowk or meet a few 'investors' in RE sector.

Not everything can be converted in asset and is NOT converted into assets for various reasons. Even a middle level shopkeeper in a any of the markets in Delhi was sitting on Rs 2-3 crore worth of cash after Diwali shopping. And this is just 5-6 weeks of spending activity.

The elections in TN that just happened?
Xmk fellows - four people in your family? Here take 2000.
Axmk fellows - here take 2000.
Public -but xmk have 500/head
Axmk - ok take 500/head more.(hands over another bunch of notes)

[RajeshG]

Suraj

i was trying to tell you something else. consider..

- you said 1/3 of cash has been deposited which is prob 4-5 lac cr. which means there is still 10 lac cr to go. maybe it is the 8 lac cr or 2 lac cr idle money ? or maybe its the black or double-black money that people have "set" - a lot of it with 20-30% commission per all reports.
- i posted this in response to the interesting analogy you posted (mithaiwala). i asked you to realistically tell me how many mithaiwalas have 100% white ? i can guarantee that none of them would have double-black. i am guessing some amount would be single-black. and that is part of that 2.5 lac cr.
- about 65k cr was deposited as part of vds scheme. thats about 20-25% ? i am guessing none of them were double black. otherwise its more like 10%.
- if we were to assume that all single-black money comes into the system with say 50% ending up with govt that would end up being 1.25 lac cr.
- if the same ended up getting "set" thru the agents then equal amount of money would end up with the kind of people that you dont like as you have made so abundantly clear

if we just go by ideology and principles then NM would never have teamed up with PDP. but politics is art of possible. you just try to make the best of the situation with best-interests in mind - best interest in terms of principles, ideology, support-base etc.

------

Bart

your argument is sound. my only argument against it would be that NM came to power with just 30% ( inspite of 80% popular rating ). we dont have a presidential system. if the political bet is that all these poor people who are having a good time will translate to votes that would be a high-stakes gamble. after every election we end up analysing how certain sections of population have no choice but to vote in certain way.

regardless if that is the arithmetic that NM is going by its valid. we would hopefully know when UP elections come.

to me UP elections are very important because of RS seats on which depend a lot of big-bang reforms. without that NM wont be able to push them thru during this term. thereby when 2019 comes there would be that much less to show.

[Primus]

With all the advances in digitization of land records and computers., such a change can be brought in India.

Disha Ji, Title Insurance is mandatory if you take out a mortgage to buy but not if you pay 'all cash' and of course as you know it adds several thousand dollars to the price.

Oh, and the other thing of course is the 'survey'. Every time you make any changes to your property (applies to land not apartments), you need an updated survey. So when we put a generator on our property (after Sandy it made good sense), we had to pay a guy over $1000 to come and draw up a survey showing our boundaries and everything on our land. This is then matched with what is already registered with the town to make sure that we have not done any illegal construction. Here, the surveyor is assumed to be honest and non-corruptible. That too is an area where I can see problems in India.

A lot of land records simply don't exist.

It is technically possible for someone's family to have been on a plot of land for generations and have no record whatsoever of how much land was originally theirs and how it was acquired. This has been very very useful for land mafia backed by builders and local government officials to falsify records, or create fake "records" and then used to sell to someone else - who divides it into two and sells to two parties.

The problem is how to one of chor being kotwal also. If you own a plot and you need to register it and have it digitized - you have to approach the local government who are 100% crooked. They can say anything the they like. They can say "Your records are fake" or "There are no records" etc depending on whether they want to create trouble for you and kick you out of your land. That is how bad things are at a local level. At the best possible scenario they will ask for cash to do your work. And for cash they will gladly falsify records. Making a land measurement 2 feet this side or 4 feet that side can earn them money now but will be a huge problem in future - and this has happened time and again.

Yes something must be done. A start must be made, but just like demonetization the poorest and the most honest with the least land will support the GoI. The most powerful will hate it.

The biggest hurdle to this will be the baboons in the municipal department. It makes kings out of small-time pencil pushers. After my father passed, my brother and I had to transfer ownership of his home to our name, something that is called 'mutation'. We were told it would take weeks and cost us lakhs in bribes. Fortunately a close relative is an ex-director in the Municipal Corporation of Delhi. He came with us to get this done. It took less than an hour (which is what it should take) since we had all the relevant paperwork. The resident asst-director still tried to create trouble by citing nonsense objections which he could not sustain in the presence of our learned relative. In the end as he handed the papers over to us he could not resist saying 'congratulations, you are now the owners of property worth crores'. As if we were not earlier. I could sense that he felt the loss of his share of the potential bribe acutely. It was in that moment that I realized how much power such a man holds in India. THAT is what needs to change.

[durairaaj]

A Request guys: Please keep the discussion about land and Benami issues off this thread.

Demonetization is getting serious and dangerous.
It looks like the economy is totally unhinged. Quick steps are a must. But the RBI looks paralysed and are hiding behind the retail banks. Except for the first few days we dont get to see Urjit Patel and Shanktikanda Das.

[manjgu]

oxigen ( e wallet) have opened counter in south delhi to accept deposit upto Rs 10000 of any adhar linked bank a/c

[rahulm]

SBI ATM at Shaniwarwada Pune at 8 PM last night was open and there was no Q. People were coming and going casually.

SBI ATM ain Kothrud today at 5 PM had 6 people in the Q

Reforming, simplifying and automating processes that deliver government services at and from the lowest level eg Village panchayats is necessary to tackle corruption. Eg. All/most approvals and NOC's should also be available to submit online and deemed to have been granted if no written instructions are received from the relevant authority to the contrary.shift he power equation in favour of the public with a time bound window to the authority to object.

[TKiran]

Businesses need not pay taxes, if properly exploit the provisions of the tax laws.

The whole problem I see here is that many of posters have no idea of businesses, most of them are salaried or professionals such as doctors or lawyers.

I check my profit and loss account before I go to the CA for tax filing, if my revenues are high and my expenses are low, immediately I increase my salary, my office expenses, and buy a car, or two wheeler ( even if I don't require), buy some additional equipment etc to show only nominal profit, and then only I call the CA. If I am already incurring loss, I would be more happy, I don't have to show any profit, so no tax.

But I crossed the bridge, (crossing the bridge takes heavy toll on health, wealth, happiness, and it takes anywhere not less than half a decade of extreme torture),

I said here first, the unintended consequence of this step is that more than 70% of Mom and pop businesses are going to wind down in another 6 months.

We can expect Western concepts of businesses such as, heavy investment, employing only a handful of people, all are law abiding, with no 1 black, 2 shades of black etc.

I hate the tax guys, I have not come across a single honest tax guy ( income tax or sales tax or service tax guys) in my life. We have to give biscuits to shut the mouth of the dogs, even if you are honest.

This situation will not change, and I hope NM would desist from sending any tax guys behind business people, the objective of this drive is to make FICN invalid and out of circulation, and catch the politicians who have amassed 2nd shade of black money, and make the corrupt babus loose all the wealth.

But if you touched the 1st shade of black money, you have the responsibility of creating jobs for 70% of the mom and pop businesses which have already collapsed. Heck, even in Shanghai, I see the whole businesses run in cash. A cashless society, I would certainly don't want.

Sorry for the rant.

[Manish_Sharma]

Demonetization is getting serious and dangerous.
It looks like the economy is totally unhinged. Quick steps are a must. But the RBI looks paralysed and are hiding behind the retail banks. Except for the first few days we dont get to see Urjit Patel and Shanktikanda Das.

why you say this? Money is flowing faster now, queues are much shorter now, 500s have started arriving. BJP has won back its seats...

[srin]

But if you touched the 1st shade of black money, you have the responsibility of creating jobs for 70% of the mom and pop businesses which have already collapsed. Heck, even in Shanghai, I see the whole businesses run in cash. A cashless society, I would certainly don't want.

Sorry for the rant.

Doesn't compute. Sure - have a very cashfull society but pay taxes. If you don't pay taxes - which is your share due to the country - and others are forced to, they won't be sympathetic.

I'm not sure if there is a rule that businesses can't claim expenses paid out of cash, but if there isn't one, high time there is.

[TKiran]

But if you touched the 1st shade of black money, you have the responsibility of creating jobs for 70% of the mom and pop businesses which have already collapsed. Heck, even in Shanghai, I see the whole businesses run in cash. A cashless society, I would certainly don't want.

Sorry for the rant.

Doesn't compute. Sure - have a very cashfull society but pay taxes. If you don't pay taxes - which is your share due to the country - and others are forced to, they won't be sympathetic.

I'm not sure if there is a rule that businesses can't claim expenses paid out of cash, but if there isn't one, high time there is.

Srin sir, you didn't read my post or you don't understand businesses, how can you get raw material from a village guy, with VAT registration, for example, you are running a restaurant and you need vegetables as your raw material? Totally ridiculous no??

[vnms]

Businesses need not pay taxes, if properly exploit the provisions of the tax laws.

The whole problem I see here is that many of posters have no idea of businesses, most of them are salaried or professionals such as doctors or lawyers.

I check my profit and loss account before I go to the CA for tax filing, if my revenues are high and my expenses are low, immediately I increase my salary, my office expenses, and buy a car, or two wheeler ( even if I don't require), buy some additional equipment etc to show only nominal profit, and then only I call the CA. If I am already incurring loss, I would be more happy, I don't have to show any profit, so no tax.

But I crossed the bridge, (crossing the bridge takes heavy toll on health, wealth, happiness, and it takes anywhere not less than half a decade of extreme torture),

I said here first, the unintended consequence of this step is that more than 70% of Mom and pop businesses are going to wind down in another 6 months.

We can expect Western concepts of businesses such as, heavy investment, employing only a handful of people, all are law abiding, with no 1 black, 2 shades of black etc.

I hate the tax guys, I have not come across a single honest tax guy ( income tax or sales tax or service tax guys) in my life. We have to give biscuits to shut the mouth of the dogs, even if you are honest.

This situation will not change, and I hope NM would desist from sending any tax guys behind business people, the objective of this drive is to make FICN invalid and out of circulation, and catch the politicians who have amassed 2nd shade of black money, and make the corrupt babus loose all the wealth.

But if you touched the 1st shade of black money, you have the responsibility of creating jobs for 70% of the mom and pop businesses which have already collapsed. Heck, even in Shanghai, I see the whole businesses run in cash. A cashless society, I would certainly don't want.

Sorry for the rant.

So, you are telling us that you are not paying your share of taxes. And you are still complaining. Unbelievable!!!!

[TKiran]

When Infosys was $100 million company, with 5000 employees, they didn't have to pay service tax, they got land for free, they didn't have to pay Fringe benefit tax, thokka, tholu etc,

But if I have to start a business, I have to pay all the thokka, tholu, rent, etc, it's unfair no. Though I have acquired the wisdom to run such a business after failing a multiple times, and somehow in a relatively good position now, the taxes and rents only will kill my business. Every Politician would be interested to collect the taxes from the organized sector only, when there are any number of people in the unorganized sector who make more. The Chinese economy is also having huge unorganized sector, and the authorities wink and nod, as the Govt can't create enough opportunity for the masses for employment. Talk about sweatshops, you still are correct, so much for wisdom... Now I am becoming incoherent.. I should stop... Sorry for the rant again...

[Manish_Sharma]

I check my profit and loss account before I go to the CA for tax filing, if my revenues are high and my expenses are low, immediately I increase my salary, my office expenses, and buy a car, or two wheeler ( even if I don't require), buy some additional equipment etc to show only nominal profit, and then only I call the CA.

But why such aversion to pay tax? I mean buying two wheelers and cars you don't need......

And with these taxes Tejas, Arihant, Agni and Dhanush will be purchased, railway tracks, ports, highways & bridges but you say :

If I am already incurring loss, I would be more happy, I don't have to show any profit, so no tax.

Very very sad... hopefully NaMo govt. goes after such people with vengeance.

[TKiran]

Vnms sir, with respect, you don't understand businesses.

[Sachin]

How is this demonetisation going to affect Bhaiwood er.. Bollywood? I am not really bothered about the *.Khans or the various directors. But about say the camera boys, low level acting apprentices, and the general technical staff.

[Picklu]

Once a large number of them gets on the cashless bandwagon, bollywood would also continue as usual. Only Terror finance will go away to a large extent.

Overseas would become the new play area for black money and tackling that would be the new challenge.

However I think NaMo has already created a lot of treaty agreement to traditional tax heavens and with the terror situation being what it is there is low tolerance for the same world over.

So, I would ask all naysayers to stop scare mongering with "business will crash" and "economy will tank" and "there would be another India Shining moment".

In WB by elections, BJP came second in all of them next to TMC which were unthinkable a few years back. *

This is even after demonitization hardship were in full swing and also bidi factory owners in TMC camp (one of them is a state level minister even) shutting down shop to rile and incite poor people to start riot.

Edit: BJP is 2nd in one seat & 3rd in others but the only party other than TMCn with an increased vote share.

[yensoy]

The Chinese economy is also having huge unorganized sector, and the authorities wink and nod, as the Govt can't create enough opportunity for the masses for employment. Talk about sweatshops, you still are correct, so much for wisdom... Now I am becoming incoherent.. I should stop... Sorry for the rant again...

Chinese are lucky in so many ways:
1. Thanks to all the property they confiscated after the revolution, the (local) government is the de facto land bank and can fund itself by selling small parcels periodically. Also eminent domain rights to kick out poor people and make room for "development".
2. No democracy, so no elections, no political parties with black money.
3. While corruption is there (and often big fish are caught & fried) draconian laws and enforcement has ruled out low level corruption.

Yeah so theirs is a huge cash economy with even full payments for apartments being made in cash not uncommon. Interestingly they don't have personal cheques, which has helped e-wallet providers quite a bit.

[Sachin]

are chit funds legal ? a lot of "weaker economic sections" eg maids have a lot of faith in "chitti" and put all their savings there.

Chit funds are legal. In KL there is a specific law which governs them; Kerala Chit Fund Act 1975 (and its amendments). But the problem is that the maids etc. may not know whether the people who they deal with are legal or illegal. In KL, at least many of the old timer Chit Funds have managed to get some good reputation and people have more faith in them. The "fly by night" Chit Fund operators may not have got registered etc, and may also give some extra benefits. This is what make people still go to them.

[RajeshG]

http://www.business-standard.com/articl ... 836_1.html

Out of 2.2 lakh ATMs, 82,500 were recalibrated till yesterday evening.

http://www.livemint.com/Opinion/MC65319 ... -from.html

The salaried middle classes have been vocal supporters of the move, as they have been the least affected. All of them are securely plugged into the digital economy. Similarly, the very rich are also complacent, as only a small proportion of their assets are kept in cash, mainly to make political contributions. The rich also have the know-how to convert their cash holdings into assets rapidly.

The informal sector and petty businesses, all part of the cash economy, are facing enormous disruption. The poor too have been hard hit, but then they are used to facing much worse challenges. The Indian state is hardly a compassionate one and the lives of the poor are cheap in this country.

Schadenfreude seems to be popular, although it is a moot question how long it will remain so.

There are, of course, obvious questions here—one, whether he has the bandwidth to succeed in his objective; two, whether his cultural nationalist baggage will clash with his development goals; three, whether he can face the challenge of assertive caste formations; four, whether he will succeed in creating enough jobs rapidly enough to retain his popularity; and five, the crucial one of whether the east Asian model is past its sell-by date.

The title of a book by Raghuram Rajan and Luigi Zingales was Saving Capitalism from the Capitalists, in which the authors wrote about the need to discipline powerful private interests to protect capitalism as a whole. In his own dramatic fashion, Modi is trying to drain the swamp of Indian capitalism. Perhaps he is trying to save Indian capitalism from its capitalists.

[shiv]

I check my profit and loss account before I go to the CA for tax filing, if my revenues are high and my expenses are low, immediately I increase my salary, my office expenses, and buy a car, or two wheeler ( even if I don't require), buy some additional equipment etc to show only nominal profit, and then only I call the CA. If I am already incurring loss, I would be more happy, I don't have to show any profit, so no tax.
.

A decade ago my CA changed. the earlier guy used to tell me "Buy a car" or "show some expenses". The new guy simply looks at my accounts and does what he can for maximum possible tax benefits. I am much more comfortable with him. Your post, to me, looks like you don't trust your CA/Auditor to help you. I don;t know you or your business but it looks like you need a better CA. Auditors/CAs are meant can help you get bang for your buck - but if you are hiding stuff from them and then cursing the taxman it really is your call.

My auditor tells me that as long as you are in the tax net and be shown as paying some taxes - you will not be harassed. Depending on your annaul turnover your auditor need not even cost as much as scooter and his fees are tax deductible. In any case I think an annual income above Rs 10 lakhs needs to be audited - but I am not sure is this information is current

[yensoy]

I have been reading articles (often forwards from my well meaning family & friends) from eminent economists. The common thread in a lot of critical articles goes like this:

1. Folks doing black money are smarter than that, they have invested the illicit proceeds in land, gold or foreign currency. The amount of black money in the form of cash is miniscule.

2. Common folks and folks in white business are going to be hit because the wheels of the economy will come off because there is no liquidity to go around.

Here's my peeve: If removal of liquidity from (1) will have no effect on their illicit holdings, why will removal of with gradual replacement of liquidity in (2) kill the legitimate economy?

As far as I can see, the demonetization exercise should completely jam up the liquidity situation of (1) while only slowing the part (2) down due to the fact that low-denomination notes are still valid, and legitimate or low-value exchanges are permitted. I am not an economist, so what am I missing?

[yensoy]

Also there is a notion circulating - e.g. one article in Rediff http://www.rediff.com/business/report/t ... 161117.htm, and a photo from a public sector bank I got on whatsapp - implying that PM asked for the nation to exercise austerity and not spend on inessentials.

Is that even true? As far as I can tell, there has been and should be no exhortation for austerity. In fact people should be encouraged to spend and spin up the economy. Otherwise the cash they pull out will be sitting idly without lubricating the system. Maybe some tax rates (e.g. central excise) should be lowered by 10% across the board for the next 3 months to get people to spend. Otherwise the cure will be worse than the disease (which of course is what some self-fulfilling prophets want).

[shiv]

Srin sir, you didn't read my post or you don't understand businesses, how can you get raw material from a village guy, with VAT registration, for example, you are running a restaurant and you need vegetables as your raw material? Totally ridiculous no??

Serious question. Deposit 1 lakh (or 10,000) profit in the bank. Withdraw 5000 or whatever amount from the bank and pay the vegetable man. Claim that 5000 cash withdrawn as cash paid to the vegetable vendor. As long as you do it regularly from the bank - you can claim it as a business expense. If you do it from cash in hand you are losing tax benefits

[shiv]

OK a question for Suraj - probably requires only speculation as an answer - I don't know because I am speculating. It's like this

Day 0 - demonetization occurs

Day 1 to day 60 - there is a contraction in the economy because no one has cash

By day 61 people with cash have started rejuvenating those parts of the economy that they used to inhabit. The plastic money spenders have not been inconvenienced much and are spending as usual.Banks are back to normal. ATMs have no queues. Money is freely available for withdrawal

Now suppose we find that by day 90 there are certain segments of the economy are still suppressed. There are still some people who are complaining bitterly that they business has not picked up at all. Could it them be surmised that there were special "channels of flow" of black money that kept certain businesses thriving which have now been shut down. That is to say that black money was being turned into white by giving business to certain businesses and that those businesses are feeling the pain. For example - prostitutes and high end dance bars could be one such business segment. Another could be out-of-town resorts for "leisure activities",

[vnms]

Vnms sir, with respect, you don't understand businesses.

Yes, I may not understand business. But by your own admission, you have stated that you pay no tax. Then why are you cribbing? Is it because it might hinder your accumulation of wealth that you don't pay tax on?

You are using all available loop holes to avoid tax. The loopholes that salaried people do not have.

Would you be ok with the government doing away with all the hurdles(taxes etc.) to starting a business and also removing the loopholes?

[TKiran]

Shiv sir, you are absolutely correct, I don't trust my CA, it's all experience. When I was in Bombay for my first ever business, a CA adviced me to provide ESI and PF for my employees, even though I didn't have the requisite no of employees, I added some more benami employees and obtained PF and ESI, And after 2 months I removed them, all these things I did only because I wanted to do something good for my employees.

At some point, when I was in bad shape and a lot of competition came, all my employees joined my rival company and I lost my business. I informed the PF and ESI guys with proper acknowledgement, and wound up my business.

ESI guys never troubled me, but PF guys harassed me for 10 years, I had to pay a fortune to get out of their books permanently.

Once bitten twice shy, now I don't employ anybody, take any number of employees through consultancy, and remove any body more than 3years experience in my company. They can get jobs anywhere now that they acquired experience.

All this happened because the CA told me that the employees would be loyal to me if I provide them with benefits of ESI and PF.

In fact I provide my contractors with accommodation and food, and they are very loyal to me. I don't trust my employees too. It's becoming a headache for me to remove my employees, as they plead with me, but then I only arrange for some other job for them, by searching in job portals, and remove them only when they get some other job. Usually they get double the salary that I pay.