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A good idea. It can turn sour if disruption continues to linger on...
Dr. C Rangarajan (CR), former Governor of the Reserve Bank of India (RBI), welcomed demonetization but wished that there could have been better preparations that would have helped mitigate the inconvenience caused.

Dr. C Rangarajan (CR), Chairman of the economic Advisory Council of the prime minister in the UPA government and former Governor of RBI, welcomed demonetization but wished that there had been better preparations that would have saved the hardship caused to vast sections of the population.  The disruption will also damage small businesses, retail trade and agriculture.  

“Basically it is a good idea but it is in the danger of turning sour as disruption continues to linger on,” said CR.  Demonetisation to immobilise black money has been attempted earlier but this time it is much deeper, he said. 

CR described the objective as three fold: to target those who hold black money generated through illegal means; those who fund terrorism with illegal currency and those who create fake currency.

He pointed to three issues: 1) businesses and firms that generate black money do not keep much of it in cash. They employ it in business and thus a chain of black transactions is set in motion. They may hold some part in assets like gold and land. The source of generation must be plugged. 2) Corrupt officials may hoard a large part of unaccounted income in cash. 3) Corrupt politicians may also keep such illegal wealth in cash and use it for elections. 

CR said nearly 85 per cent of the currency in circulation accounted by Rs. 500 and Rs. 1000 notes had been withdrawn. This is bound to cause considerable disruption to economic activity. To tackle this, the government security printing presses should work overtime to get as many new notes as possible in quick time. Attempt should be made to push urban areas to e-commerce and rush the new notes to rural areas where cash transactions dominate. CR suggested banks and NBFCs should work to popularise digital modes of transfer and help mitigate the disruption. 

CR said that simultaneously government should focus on reforms designed to prevent the generation of illegal money. He suggested three areas:

1) Tax system should be structured with low rates and this would reduce the incentive to avoid taxes and promote greater degree of tax compliance.  

2) To tone up the administrative machinery, reduce the discretionary element and make the systems and procedures transparent. 

3) Election Commission should focus on the massive use of cash by politicians for contesting elections. 

CR pointed to the currency to GDP ratio as high in India. Demonetisation can push society towards a greater of degree of digital transactions which should be welcome. The Jan Dhan Yojana has helped several crores to open bank accounts with ease. Efforts should be taken to activate these accounts and help the account holders to take to transfers through modes other than cash. Banks, especially new payment banks and other institutions dealing with electronic payments, should endeavour to expand transactions in the digital mode, he said.

Many believe that the currency notes extinguished by not presented to banks would result in higher profits to RBI. The Rs. 500 note and Rs. 1000 note together are estimated to account for around Rs. 14.5 crore. So far (up to 23 November 2016) around Rs. 6 lakh crore are estimated to have been deposited with banks and Rs. 1.35 lakh crore withdrawn. An estimate puts an additional Rs. 4 lakh crore may be deposited before end December leaving a little over Rs. 4 lakh crore of notes not converted into new notes. Can this result in increasing the profitability of RBI and in turn a higher dividend to the government? 

The former Governor of RBI doesn’t think so: “profits of RBI come from the interest income on securities. CR said that at present it is not clear how the non-deposited currency should be treated. He also pointed out that the accrual of deposits in banks is only temporary.  As and when new notes become available, depositors will begin to withdraw cash from deposits. 

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