The war on cash

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 percent. 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 percent 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, policy 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 accountants. 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 percent MS on land purchases beyond 150 lakh (the TDS rate becomes 20 percent if PAN is not given) and jewellery purchases beyond 15 lakh need a PAN number.