THOUGHTS ON PRESENT CURRENCY CRISES MANAGEMENT

[Dr. Sanjiv Agarwal]

Demonetization of high value currency (Rs. 500 and ₹ 1000 notes) w.e.f. midnight of 8-9 November, 2016 is now a fortnight old decision, aftereffect of which is still worrisome and concerning.

While we all agree that this surgical treatment is a welcome step but like in any surgery, post operative care is crucial, so is with this one. The ground reality appears to be full of gaps and unpreparedness on the part of Government - be it political handling, administrative decision making or effective operational management by our banking system. On one hand, every day we are changing the rules but on the other hand there is acute liquidity crunch for livelihood itself. RBI claims that there is no currency shortage but banks are dry. There are no funds. If supply of currency is an issue, it could be very well managed. After all, two weeks have passed by.

The liquidity crunch would lead to overall economic slowdown, first in sales and then in manufacture which will directly hit production, consumption, exports and everything related to economy – savings, wages, unemployment, investment and so on. The economic growth itself will take a major hit in this quarter and atleast next two quarters. GST may also have an adverse impact initially.

Here are some ideas of how the old currency be allowed to be used by citizens (not by people with disproportionate / unaccounted currency) for next one month so that their essential payments are taken care of, rush at banks is avoided and there is less burden on the system. The objective of Government which is laudable will  also not diluted –

• Come out with a zero interest bond issue whereby citizens are allowed to invest upto ₹ 2.50 lakh in cash till 30 December, 2016.
• Allow cash deposit for payment of Service Tax for November / December, 2016
• Allow Advance Income Tax payment (due till 15 December, 2016) in cash which will yield huge collections and ensure higher tax returns for FY 2016-17.
• Allow cash deposits in PPF accounts till 30 December, 2016
• Allow school / college / education fees paid by parents for their wards in cash till 30 December, 2016  irrespective of public or private schools / colleges / universities  
• Allow payment of premium in cash for on-going LIC policies on self and NPS scheme till 30 December, 2016
• Allow cash payment upto a limit of ₹ 2.50 lakh for purchase of solar equipments
• Allow local taxes (e.g. house tax, property tax etc) to be paid in advance for FY 2017-18 till 30 December, 2016.
• Cash purchase of text books / equipments / research books / subscriptions upto ₹ 25000 may be allowed for engineering / medical / scientific research students etc till 30 December, 2016
• Bank loan & repayments or prepayments be allowed in cash till 30 December, 2016.

These measures may ease out liquidity to an extent and bring some immediate relief to the citizens without losing the objective.

If the banking outlets are not enough to dispense cash or exchange demonetized notes, Government may also use roadways buses throughout the country as mobile units for rural areas and villages with 1-2 security personnel for small sums (say, upto ₹ 2000 per person). This may also be done by using school buses on Saturday – Sunday. However for this, supply and distribution of currency will have to ensured which does not seem to be an issue with RBI clamming that there is no shortage of legal tender in the country. Government school teachers and premises can also come to rescue  if the situation so demands.

Government will have to handle and manage the ground reality on an emergency basis failing which situation may go out of control and all good done by demonetization would turn bad, besides having a huge cost in terms of chaos, hardship and unrest on streets. Economy too will suffer, which is otherwise also inevitable.

The key to revival and damage control as well as to enjoy real fruits of demonetization lies with the Government itself by bringing normally as fast as possible. Various agencies have already expressed their view on the economic growth with one brokerage even scaling it down to 3.5%.

Discussions to this article

[RAJESH SANGHVI]

I think in this entire exercise of Black Money ( sadly only Indian and NOT foreign .. and why I dont know ?? ) the root cause of generation is not touched upon in a "surgical manner' and only the after effects have been attended to by way of demonetisation. Paracetamol will just control or reduce fever but anti-biotics to kill the virus is needed. Sadly I find nothing bold on that front is found. On the contrary the Prevention of Corruption Act is diluted ( permission to prosecute needed ) further aggravated by the SC judgement in the case of Madan Mohanlal verma ( 2013 (8) TMI 460 - SUPREME COURT). Why does an average Indian businessman or person evade any kind of tax , be it Income-tax, VAT, Service tax or Municipal taxes or simply any tax. This WHY is not attended to ??. This requires a comprehensive study and complete overhaul. If Demonetisation is surgical & drastic for the common person , who are facing wealth erosion of almost about 30% today ( in some form or the other ) , Can there be something as drastic as declaring corruption as War on the nation equivalent to Sec 121 of the IPC having death or life imprisonment. This may sound dramatic or surgical but these are just ignored. Does the average man indulge in corruption ( tax evasion and not only Income-tax ) or is he forced to be a victim. This fundamental issue not being addressed, the current move is merely cosmetic and may rather lead to an upsurge in corruption which when accompanied by fall in Bank FD interest rates ( as a benchmark ) ( SBI is already down to 4.75 % pa ) can lead to further violations. Respectable estimates of black money in India was about 30% of the GDP namely about 30 lakh Crores in INR. Assuming this quantum is out of business , many industries/trades will collapse in the times to come. I see the problem in 3 parts. ONE - current chaos and mischief happening across India. I would say with a pinch of salt that this is still manageable. SECOND : In the times to come , be it 2 to 5 years or may be more, many trades/industries, who have been typically cash centric for centuries will either die off or find extremely difficult to function. Many people may loose their liveilhood/jobs and this can fuel further chaos and crime. Even otherwise the plastic money or banking penetration or usage is not great and what about hacking etc. Are we fool proof. !! So the more we use plastic money the more we are opening to hackers and cyber crimes. Time will see the surge in these crimes. THIRD : The basic faith in Govt systems and in currency as a store of value has taken a hit. What if successive Govt demonetize the new 2000 or 500 or may be even 100 ( little dramatic forgive me ) as a political backlash or sheer vendetta. Who gets caught in the cross fire. Gold & dollar are expensive today ( unofficial markets ) and the concept of store of value is taking a beating. Hence the whole faith edifice in Govt, has taken a major seismic shock. The Ambition and surge to earn more is , to some extent, taken away from the average small time businessmen. This will have it cascading effect for years to come.

The Govt spending is still not clean. With PSU Bank net worth being eroded due to NPA ( first of all why NPA's ) and Govt pumping money is unworthy companies like Air india or Not-required projects like Mumbai-Ahmedabad Bullet train ( spoken of 96,000 cr project ) , and so many scam in the past and not a single word or white paper on actual recoveries , I find this so called surgical strike is akin to treating the symptoms and not the cause. Poor Economics accompanied by further poor preparation, can be disastrous for the nation. Wealth cannot be multiplied by dividing it.

These are strictly my personal views and I may be wrong and am always open to correction & criticism.

CA Rajesh Sanghvi

Mumbai