Economic Highlights
New Delhi, 21 November 2016
Officials-Made Chaos
I-T NEEDS TO BE REFORMED
By Shivaji Sarkar
India economy has been the pride of world.
It has been showcased as the only growing economy - a proud moment for Indians
particularly under Prime Minister Narendra Modi. That was until a week back.
International media quietly observed the scenario for eight days. On Nov 16,
2016, CNN, BBC and other international channels came out with long stories. The
CNN headline screams, “Indian economy is in turmoil”. The BBC and others also
echo the same sentiment in different words. A week has changed the worldview!
The Opposition in the country are debating, demonstrating
and protesting. The queues at banks and post offices are surging. But despite
all this one surprising aspect is that those standing in the queues or
suffering the sudden withdrawal of cash are with Modi and even the Opposition
does not doubt his intentions. A week later after many brawls at such counters,
they have started blaming the officials.
Many in the crowd now say that the officials have misled the
Government and had given inappropriate information of smooth transition leading
to the chaos. Even insiders do not mind admitting that the dependence on
officials was “possibly a bit too much”.
There are ramifications for people living abroad and
questions are being asked how they can exchange the demonetised notes. Those in
Nepal also have their
concern and Nepal
government has officially taken it up.
The Government also needs to understand that its move to
channelise the trading and transactions through banks is also not appropriate.
The banks have become unethical, levy undue charges and are expensive. The
private banks are less dependable. Credit card transactions at 2 per cent cut
(annualised would be over 30 per cent) are expensive for sellers. Debit cards
expose the holders to risk of being swindled as their data can be compromised.
Bank transactions are slow and instruments like cheques are
not trusted. India’s
wholesale business works on 1 to 1.5 per cent cuts. It moves on trusts. It is
fast. The defaults are rare. If it moves to banks it would cost over 3 per cent.
Outside urban India,
it is largely hard cash transactions. Banks are 15 or more kilometers away from
the villages and this has really hit the villagers hard.
This apart, 1.25 lakh bank branches and two lakh ATMs (of
which on only 1.25 lakh remain operational any time) are too inadequate if 1.25
crore people are moved to the banking system. It is bound to collapse. Additionally,
no society is fully banked and possibly it should not be so.
The move has hit the market, except a small section that
accepts cards. Some traders say that the servers have become difficult to
access. The saving grace is shopkeepers and traders are allowing free credit to
their customers.
Demonetisation has affected sowing as well in large parts of
the country. Again the local credit system is keeping alive farm functions and
supply of fertilizers and seed. The latest announcement of increasing credit and
withdrawals to farmers, larger withdrawals to farm traders should help. So also
the decision for Rs 2.5 lakh withdrawals for weddings would.
There is a cost on economy. The old notes had cost about Rs
15,000 crore in printing. The new notes also have a similar cost. There is cost
for recalibrating the ATMs, which may take over three weeks to complete.
How much is the counterfeit currency? According to a study
done by the Indian Statistical Institute, Kolkata, in 2015, Rs 400 crore worth
of fake notes were in circulation in the economy. This is merely 0.025% of the
total budget outlay of Rs 19.7 lakh crore as announced this fiscal.
The cash comprises only a tiny part of black assets. This is
borne out by facts. Cash recovery has been only 6 per cent of the undisclosed
income seized from income tax evaders, according to data from tax raids from
2012-13 onwards. In April, the SBI said that people were withdrawing cash in Rs
100 and 50 denomination notes in large amounts. Some newspapers in some parts
of the country had reported that demonetization and introduction of Rs
2000-notes were in the offing in April itself.
Data from different banks shows during the last three months
most of the banks reversed the trend of declining deposits and witnessed
healthy growth. The sudden rise in deposits, many of it in high-value notes,
has raised some eyebrows. While it is necessary to take people with untaxed
money to task, the present move has made the detractors vocal as large section
of the people are hit and unable to access their own money.
While partial demonetisation always takes place, the problem
this time was the sudden withdrawal of 86 per cent or Rs 16 lakh crore worth
cash from the system. The 500-Euro-notes were demonetised but it remains a legal
tender till it is in circulation. The Indian case is aimed at the supposed
super rich but it hit the marginalised and the vocal middle class the most.
Such moves have taken place in some other countries too. In
2002, all European currencies were replaced by Euro. The transition was smooth.
But in many other countries such as Soviet Union by Mikhail Gorbachev in
January 1991, Zaire in 1993,
Myanmar in 1987, Ghana in 1982, Nigeria
in 1984 and North Korea
in 2010 the moves failed. Most of these led to massive protests, civil wars,
ouster of the governments and economic collapse.
In case of India,
despite problems, people have shown faith in Modi’s move and are showing
solidarity for cleansing the system. It has caused some disruption but the
trade chambers say the corporate transactions are on. The chambers complain
that if the officials had briefed properly things could have moved without this
massive jerk.
India needs to solve the cash problem and
that too soon. There need not be insistence on cashless economy. Personal
income tax needs to be reformed to pep up the economy. The Government is reportedly
mulling over such ideas, as junior Finance Minister AS Meghwal says. The Economy
may have taken a small hit due to sudden demand slump but it is not in turmoil
as envious western media say. In the course of next few weeks it is expected to
be back on rails. ---INFA
(Copyright,
India News and Feature Alliance)
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