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Saturday, February 18, 2017

100 days after demonetization in India - points to note

After 100 days of demonetization, the chaos surrounding the shortage of currency has subsided. Banks and ATMs are honoring customer's currency requests better.

Indeed the demonetization is publicized as a war on black money, but it is not the only aim. Because the government is well aware that this step alone will not help in finding the assets stashed as property and other means.
Also, as anyone might expect, new fake currency notes are already in circulation. So, what could be the motive for demonetization?
  1. To force citizens to use digital currency to make them accountable to Tax.
  2. To force citizens to keep their money in the bank so that the Central Bank can "Overcome the Zero Lower Bound" on the negative interest rates.
  3. Reduce cost of printing and circulating money.

This may not be a welcome move regarding Indian Citizens who are already fed up due to multitude of tax and bribing by officials and politicians.
By promoting digital currency, the government will be able to reduce the cost of creation of currency notes. Usage of digital currency requires the users to pay the service charge to some party, either the provider or the bank. So, effectively, the cost of currency creation is directly transferred to the citizens.

The majority will consider this move a positive one only if:

  1. Income Tax and VAT rates are reduced.
  2. Service charge is completely avoided for digital payments.
  3. Easy, secure and widespread use of POS machines.
The government have modified the Tax slab recently, but there is no decision yet on waving off the service charges especially at petrol pumps. These needs to be addressed quickly otherwise the whole exercise will be a black mark for the government.

Dangers Ahead
When using currency one needs to be scared of the robbers who can physically access your money. The theives now have sophisticated tools that can be used to skim the ATM card and withdraw money.
But when things goes digital and we are forced to store the money in the bank accounts it will provide bigger opportunity to them. Added to the fact that even most of the literate and working class are lacking security skills on the smart phones, the risk is multiplying. The Android phone users can easily be tricked to install fake applications and the hackers can gather all information from the phone to get money out of their bank accounts. There haven't been many instances of losing money using hacked smart phones, but widespread using of low cost internet and digital payments will soon be a point of risk.

There are several important steps that needed to be taken by the government regarding security and various taxes before implementing such a bold move. Now that the demonetization is already done, the steps to address the security concerns and get the confidence of the consumers should not be delayed.