Three weeks after Prime Minister Narendra Modi’s announcement about withdrawal of Rs 1,000 and Rs 500 currency notes from circulation, the impact continues to be felt by the man on the street. (Whether the step is demonetisation is a question of technicality.) There are still queues before some banks; even in a well-banked city like Mumbai banks are running out of cash; there are problems in day-to-day purchases of necessities; and the impact on the stock of unaccounted money will be known only after a few months, when the holders of unaccounted money will have to treat the withdrawn notes as waste paper.
The other side is that the step was a bold economic/administrative decision. If it leads to significant losses for holders of unaccounted money and the situation in the marketplace becomes normal in a week or two, the prime minister may well get an electoral bonus.
Could the implementation have been better, more efficient, causing less hardship and uncertainty to the average citizen? In retrospect, yes, but given the unprecedented nature and scale of the enterprise, surely some weaknesses were bound to occur. The fact that the decision was successfully kept secret, despite the number of individuals involved, is itself an achievement. It is now evident that the whole approach was step by step: First came the directive to report all cash purchases above Rs 2 lakh (early 2016); then the amnesty scheme, which was extensively publicised and which ended on September 30; then the “demonetisation”; now the 50 per cent route. At this stage, the only implementation criticism one can make is whether instead of Rs 2,000 notes, continuation of Rs 1,000 denomination would not have been better; whether sufficient notes could have been printed abroad and imported (perhaps secrecy was an issue?); and whether the practically daily changes in exchange/withdrawal restrictions could have been avoided. But such issues should not diminish the overall credit due to the team involved, except marginally.
To come back to the success or otherwise of the basic decision, some points occur to me:
There would probably be a short-term impact on economic growth, difficult to estimate;
Mobile/electronic payment systems have suddenly attracted millions of new users (even paan sellers!), which is all to the good;
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The accounting for the number of Rs 1,000 and Rs 500 notes not exchanged or deposited in banks is an issue up for debate. One thought that occurs to me: If unrecoverable assets (bad debts, for example) are debited to the profit and loss account by banks (and corporate companies), should not non-payable liabilities be credited to it?
Over the weekend, the Reserve Bank of India has directed banks to maintain a 100 per cent cash reserve ratio on the increase in deposits since demonetisation. Was this necessary at this stage when the situation is still evolving?
Coming back to the psychology of tax evasion, one story is worth narrating. David Handing, one of the most successful hedge fund managers in the UK, is also one of the highest individual taxpayers — and gives large donations to charities. He was recently quoted as saying, “I can really afford to pay taxes without it affecting my lifestyle” (Financial Times, November 26). Do the rich evade taxes to pay for their needs — or even luxuries? Obviously, for them, the “utility” of money never diminishes!
The exchange rate
On November 25, The Economic Times headlined a report on the exchange market describing the rupee as “the 5th best (currency) in Asia”. In other words, other Asian currencies had fallen more against the dollar. One thought: “Best” for whom, the domestic economy in comparison with other Asian economies, or for portfolio investors? In any case, I for one would be happier with the rupee being the “worst performing currency” in Asia.
This apart, I am surprised that the ostensible reason for the dollar’s rise globally is the anticipation of the new administration’s fiscal stimulus to the economy. Surely, on first principles, this should imply higher inflation and that should lead to dollar depreciation on the good old purchasing power parity theory? But even Martin Wolf, the respected Financial Times columnist, believes “the combination of fiscal loosening with monetary tightening would mean a stronger dollar and a rising current account deficit in the medium term”. Though the last part, namely stronger currency leading to higher current account deficit, is correct, does Donald Trump’s promise to curb the independence of the central bank imply no rise in interest rates? USD is at a 13-year peak — “rational expectations” about “Trumponomics”?
The author is chairman, A V Rajwade & Co Pvt Ltd; avrajwade@gmail.com