Note Ban: Rs 200, NOT Rs 2,000 Notes Would’ve Ensured Cash Flow

Cash crunch could’ve been avoided if government had gone for Rs 200 note instead of Rs 2,000 note, writes S Narayan

The bold initiative of demonetisation is suffering at the hands of poor implementation, and it is now clear that the people responsible for the implementation clearly did not do their homework properly. As of end November, approximately Rs 9 lakh crore 500 and 1,000 rupee notes in circulation have been received by the banks, and around Rs 2.5 lakh crore new notes given out. There is a liquidity crunch in all the cash markets, and hence the frustration, especially for those in small businesses.

Also Read: ‘Extinguished Cash’ Now Meaningless to Judge Modi’s Demonetisation

Ambiguous Objectives

In spite of protests and long queues, it has been generally welcomed as a bold and much needed measure, though very poorly carried out.

The dilemma is that if liquidity is restored at the earlier levels, around Rs 13 lakh crore, then the entire exercise would become pointless. If Rs 13 lakh crore comes back into the banks, then the question is where was the black money?

Can the government then argue that all its efforts in the last two years have eradicated black money, and see, all the money is in banks in the accounts?

Or would it argue that the people have found innovative ways to undermine the demonetisation drives, and therefore more harsh measures are required? The recent Income Tax Act amendments that have been proposed reflect this dilemma of converting the flushing out of black money exercise into a voluntary declaration option with penalties.

It is not clear what was intended. To recall Seneca, the Greek philosopher -“ if you do not know which port you are sailing to, any wind will take you there.”

Also Read: Modi’s Current Challenge: Dealing with the DEMON in Demonetisation

Better Ways of Handling the Situation

Could it have been done differently? Perhaps yes. Let us think through an alternative path. 86 percent of the cash was in 500 and 1,000 rupee notes, so unless they had replacement notes for at least 40 to 50 percent of this, in the first week, and with all the ATMs recalibrated, the move should not have been made. Further, 50 days’ time is far too long, and all the clever brains have come up with ingenious ways of remitting the cash into accounts.

Of the notes, 1,000 rupee notes represent less than 15 percent of the liquidity. The first phase could have simply sucked out these notes, giving people just one week’s time to deposit it into their accounts- without any immediate redemption. Those who do not have bank accounts could go to another queue where they would use their Aadhar cards for deposit, and would be given a receipt. Those who have neither would go to the third queue, and life would be made a little difficult for them, for they would have to prove their details with documents.

Also Read: Fundamental Rights Violated in Note Ban, but Will SC Take on Modi?

Alternative Measures

With only 15 percent sucked out in the first week, the effect on liquidity would be far less. Simultaneously, IT department could have conducted raids on all jewellers to declare their total cash and impose a total ban on accepting cash for jewellery until further notice.

In a week, introduce new 200 rupee notes (not 2,000), and allow people who have deposited to withdraw what they have deposited- whatever they want, in 200 rupee notes. This increases bulk, works against storage, and keeps liquidity going (getting change has been the biggest problem with the 2,000 rupee notes).

Step two, after a month, remove all 500 rupee notes. Now they could not have used these notes to change into 200s, or to buy jewellery, in this interregnum. Deposit into banks, draw new 500 rupee notes. It is possible to think this through without leakages- perhaps in another blog, if there is interest.

More important is saving face. More money has been put into banks than was anticipated, people have been smarter than the government gave them credit for, and now it is important that the intent of collecting taxes be pushed through, as envisaged in the IT amendment, and any smart accountancy moves be anticipated and plugged. If this is not done, there will be general criticism of the move, and the culprits would have got away. For the huge deposits in the Jan Dhan accounts, anything over six months average could be automatically converted to term deposits of two years or more bearing interest, so that they do not add to liquidity.

Once again the action is in the hands of the implementers, who have let down the government so far.

(The writer is Former Economic Adviser to the Prime Minister during 2003-04 and former Union Finance and Economic Affairs Secretary. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)

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