India Borrows Less After Cash Ban

Last year, in a move that shocked many economics experts, India declared a ”war” on cash. Since then all transactions must have a digital record. The move was an attempt to curb the country’s thriving black market, which makes up an estimated 45 percent of its economy. High taxes and a punishing level of bureaucracy have led Indian citizens to circumvent traditional commerce, and until the country’s latest directive, some 95 percent of transactions were conducted using untraceable cash payments. However, this week the Indian government announced that it was able to collect enough additional funds from tax revenue to reduce projected borrowing by more than 4 percent. Does this mean that India was right to ban cash?

India's war on cash pays off in tax collections.

India Invalidates Large Bills and Demands Digital Transactions

The Indian attack on undeclared income and transactions began in November, when Prime Minister Narendra Modi announced that 500 and 1000 rupee notes were no longer valid tender and needed to be returned to the banks in exchange for new notes, which ironically had not yet been printed. The resulting cash shortage meant that suppliers went unpaid, and the Indian economy has suffered two straight months of contraction. Without a major reset of the cash system, economists are warning that India’s growth could fall below 6 percent. This could put the country at risk for a recession.

Corruption and Privacy Fears Follow Cash Ban

Critics of the government’s plan point to corruption as a leading cause for why Indian nationals do so much business in cash. They also question how giving the government even more power will address this issue. Aside from economic implications, universal digital transactions raise huge privacy concerns. The government could use purchases to track dissidents.  Hackers could also access records and possibly even engage in blackmail without sufficient security precautions.

Tax Revenues Increase After Ban

Indian Finance Minister Arun Jaitley spoke out against those criticizing the government’s plan. He noted that income tax revenues had increased by 14.4 percent. The minister then added that other fees, such as customs duties and excise taxes had gone up by 26.2 percent. Jaitley suggested that this was because of the new methods of linking income directly to wage earners.

According to Jaitley, “What comes into the banking system gets identified with the person and therefore its impact on taxation and revenue collection is already being seen.”

Some Americans Back a Cashless Economy

India is not the only country working to reduce cash transactions. In the United States, former Treasury Secretary Larry Summers has recommended banning $50 and $100 bills. American proponents also point to a desire to hamper terrorism, drug trafficking, and tax evasion. But some advocates also point out that digital transactions make it easier for the government to directly control the economy. The Obama administration had blamed the slow recovery on a lack of consumer spending. If all liquid assets needed to be stored in a bank, then the government could encourage spending almost immediately by lowering interest rates. Given Donald Trump‘s pick of Goldman Sachs executive Steven Mnuchin as Treasury Secretary, the new administration might also try to implement this type of pro-bank strategy.

In fact, Larry Summers spoke about introducing negative interest rates. He declared “introducing negative interest rates would create a powerful incentive to hold deposits in cash, most likely in higher denominations. Eliminating high-denomination notes, so that saving in cash was more inconvenient, would mitigate this problem.”

Singapore Pushes to Reduce Cash Transactions

Singapore has also reduced access to cash, and withdrew its largest denomination, the 10,000  Singapore dollar, from circulation. This was a move to inconvenience money launderers, as carrying large sums of paper money eventually becomes cumbersome. Ong Chon Tee, of the Monetary Authority of Singapore, notes this is unlikely to hurt criminal enterprises. He said “The development of more advanced and secured electronic payment systems has reduced the need for large value cash-based transactions.”

How India’s Cashless Economy Hurts the Poor

The true victims of India’s war on cash are the poor. As recently as 2014, more than 65 percent of Indian citizens had never used a bank account. These individuals gave up wage earning opportunities to stand in line exchanging currency, lost pay due to the instant demonetization, and are charged fees to access their own money.

How India’s War on Cash Affects Trading

India is having trouble coming up with a way to pay suppliers. Many manufacturing companies will have to severely reduce production, or might even close. The country exports the majority of its goods to China, the Middle East, and the United States. China imports cotton and copper, which will increase prices on those commodities. Middle Eastern Countries tend to import jewelry, gold, and somewhat surprisingly, refined oil. Gold prices can be expected to go up in the short to midterm, though over the long term gold prices will likely trend down. Oil prices are already on an upswing. Medication and jewelry costs will rise. Watch the Dow Index to reflect these price increases. Take advantage of these trading opportunities today.