Source: News Bharati English09 Nov 2016 14:08:09

The enthusiasm with which common people have welcomed demonetisation tells us that this nation is now on the path to being truly great. Skepticism of sour Congress and perennially anti-Modi media camp is understandable. This divergence between self-appointed sentinels of democracy and liberalism and native wisdom of people is clearly visible now across the globe.

These developments tell us how a great leader can fire people’s imagination and swing negative mood of a nation and supposed sloth into a positive mood with energetic society,  ready to contribute their mite for the national good.

Experts have been talking about the move towards plastic and non-cash economy with squeezing out of cash from market and control on the parallel economy. Some overzealous non-experts have tried to mislead people into believing that their currency notes of 500 and 1000 are now a piece of paper. This has led to uncalled of scare among unsuspecting masses making them run to retail outlets, petrol pumps, and ATMs. For people carrying legal cash, it is a just exchange of old notes and new notes.  Only hoarders of massive cash need to worry and worry really hard.

Some well-meaning idiots have given strange logic that once cash is handed over to low-income people it becomes unaccountable cash and goes out of legitimate circulation. It is not true at all. Retail payment in cash doesn’t convert good money into bad money. Non-payment of tax and purchases by sellers in cash takes money out of circulation in legitimate channels and creates a parallel economy. 

This cash cycle will slowly shrink after implementation of GST. Demonetization is linked to this same cycle of activities to bring all money in the country into mainstream economy as were earlier steps taken by this government. With this blow, sources of the parallel economy of purchase in cash and sales in cash without paying tax will dry up as cash will dry up, breaking this parallel cycle.

However, we need to appreciate that this demonetization will not kill black money. It will damage it hard, no doubt. And, halt its play in the market in the short term and reduce it in the medium run. This act itself will not bring such money out into legitimate cycle In the long run. 1978 demonetization did not kill a parallel economy. In fact, it grew massively in later years. The parallel economy today may be bigger the total size of the economy of 1978.

Why did earlier demonetization not give desired results?

Because demonetization needed to be followed up by simultaneous improvement in other areas that force people to opt for cash transactions. Cash transactions at a normal consumer level are not bad, per say. Is it possible to use plastic money or cards in remote villages of this nation? Obviously, not.

The truth is we have not created that kind of infrastructure so far. With the coming of electronic banking, there is still a vast part of the economy that pays through cheques. Then, there is oppressive tax regime that oppresses because of high rates and complex rules. This tax regime itself results in the creation of parallel financial channels.

To cash onto this bold step, the Prime Minister needs to take some immediate steps in next budget. Sooner the better.

  1. Electronic payment options fleece customers with ‘convenience charges’. If more people use these facilities, cost of running such operations will come down. For this to happen such fee must be reduced.
  2. Cheque transactions – Bounced cheques legislation was brought in long back, treating this as a criminal act. This was diluted through courts of law and government. This is now a civil matter. This mode is still most common in business. This goes into a loop of years of litigation. Thus, parties are stuck with bad debt and dead money for no fault of theirs. This law needs to be made stricter with resolution within a given time frame. If the intent is criminal, then a strict penalty should be imposed on the defaulter. Such laws also need to be kept out of the purview of judicial appeals that helps the defaulter than the suffering party.
  3. Convert Post Offices into proper banking channel. Right now it is only part banking. This is an unparalleled network that cries for better utilization.
  4. Spread ATMs to far off places. Post Offices could be ready places for ATMs.
  5. Barefoot bankers can move around in rural areas with good incentives to educate people and get them to open more accounts under Jan Dhan Yojana, its easy use etc.
  6. Reduce cost of transacting in plastic money or cash-less transactions. I believe India may be one of the costliest places to use plastic money. Excessive transaction charges, penal interest charges dissuade people from using it.
  7. The high cost of pre-paid cards – For example Indian Suburban Railways and Metros have shocking charges for buying a pre-paid charge card. For example, Mumbai Metro charges INR 150 for making a card! Indian Railways cards have an expiry date, after which your balance is lost and you have to create a new card at cost. This exploitative malpractice must stop.
  8. Simplify taxation procedure and returns filing - Complex cess, duties over taxes etc should be shunned. GST may resolve this problem partially. But, other areas of TDS and Income tax are still there. If we wish citizens and industry to be compliant, tax rates must be reduced so people feel encouraged to pay taxes. All over the world, lower taxes have increased revenue and helped expand the economy.        

We can enjoy fruits of this highly complex operation launched by the Prime Minister if Finance Minister takes up action on points noted above. Otherwise, we may end up with a new cycle of Black Money creation, even if the cycle is smaller, but not kill it.