It is time to Demonitise
“Not all the perfumes of Arabia will sweeten this little hand” (Shakespeare from ‘Meckbeth’)
The rate cuts of 2010 from the RBI did not influence the prices of food articles in particular and others in general, with the food inflation at the alarming level of more than 18%. Rampant corruption surfaced in nooks and corners of the economy. Recently the stories of forged notes coming into circulation via Pakistan, Bangladesh, West Bengal have also come to light.
Rs 1000, Rs 500 notes have become the minimum denominations in circulation. All bank counters can stand evidence to this phenomenon. Several ACB raids revealed that the cash stored and seized in raids were mostly in Rs.1000denomination currency or Rs.500 currency. It is not certainly the 8.5% growth of economy that is responsible for this.
This will certainly bring down the inflationary pressure as it will flush out excess money in circulation. For a moment, this may foment the bear hug that has already started, for a few more days and market correction may in fact be facilitated.
This measure would not certainly affect the small and marginal as also tenant farmers, wage earners, salaried class and the aam admi in general. The rich might regret for the stack. Extraordinary situations require extraordinary solutions.
Measures Announced on the 9th November 2016
After the one-day halt of all banking transactions and ATMs for two days, the counters will enormous rush from the 10th instant and this rush may continue till December 30, 2016. Success of the scheme would very much depend upon the efficiency of the Currency Department of RBI as it has to withdraw all the demonetized currency from the currency chests and strong rooms of all the Banks on one hand and replenish with the currency in smaller denominations of Rs.10 up to Rs.100/. By no means is this a small effort for the regulator.
Each individual can deposit into his account up to December 30 all the Rs.500 and Rs.1000 currency he has but beyond Rs.3lakhs remittance the account holder may be subject to scrutiny by the tax hawk. In so far as MSMEs are concerned, those enterprises whose bills are held up with a view to gain some advantage through delay in payment by the buyer-corporate or mid-corporate entities, payments may come forth faster. The buyer may not stack currency with a view to use it for other purpose than industry like the impending elections or other purposes. NPAs in MSMEs have thus a chance to come down if the Banks take pains to understand their clients’ requirements. A sagacious banker knows where the entrepreneur’s shoe is pinching and with what intensity.
*The author is an economist and Adviser, MSE Facilitation Council, Government of Telangana. The views are personal.