Early lifting of withdrawal limits to fuel optimism GAZING INTO THE CRYSTAL BALL
Omati taka,"
IDEMONETISATION pening with spiritual leader Ramakrishna Paramhansa's
Bengali for money is mud, the Economic Survey 201617's demonetisation chapter skipped difficult questions on note-ban implementation, while trying to figure out how best to milk the note ban, described as money-vacuuming chopper or "helicopter hoovering” or the opposite of helicopter money, which involves distribution of printed money to the public.
Advising against any impulse to penalise cash withdrawals in the short term, chief economic advisor Arvind Subramanian in the Survey said, "The early elimination of withdrawal limits will help build confidence. By the same token, there should be no penalties on cash withdrawals, which would only encourage cash hoarding."
Supply of currency should follow actual demand and not be dictated by official estimates of "desirable demand". In other words, "the Reserve Bank of India should re-establish internal convertibility, guaranteeing to give the public the amount of currency that the latter wants," he added.
Hailing the move as unconventional and unprecedented in "Taka mati, DIFFICULT QUESTIONS ON NOTE BAN SKIPPED Impact of demonetisation peacetime, the Survey argued that the liquidity squeeze was less severe than suggested by the headlines. "India has given a whole new expression to unconventional monetary policy, with the difference that whereas advanced economies have focused on expanding the money supply, India's demonetisation has reduced it. This policy could be considered a ‘reverse helicopter drop', or perhaps more accurately a 'helicopter hoover'."
The Survey suggested a number of steps to minimise costs and maximise benefits of demonetisation. These include fast, demanddriven, remonetisation; further tax reforms, including bringing land and real estate under goods and services tax, reducing tax rates and stamp duties; and acting to ease anxieties on over-zealous tax administration. "These actions would allow growth to return to trend in 2017-18, following a temporary decline in 2016-17," the Survey concluded.
Long-term benefits may not necessarily manifest in the next six months but evidence should start trickling in over one-year horizon and beyond. It identified three future markers of success.
First, changes in use of digital payment methods across three categories of digital access: Smartphone users, regular phone users, and phoneless. The early signs are encouraging.
Second, cash to gross domestic product (GDP) should decline as more savings get channelled through the formal financial system and black (unaccounted) money declines. Based on one estimate of black money, the cash-GDP ratio could decline permanently by about two percentage points.
The most important marker of success would be taxes. The number of new income taxpayers as well as reported and taxable income should go up. As of FY14, there were 36.5 million taxpayers who filed returns and 17.3 million taxpayers who didn't. Over time, these numbers should rise. That will be the surest sign of success, the Survey said. Money Cash declined sharply Cash will recover but settle at a lower level Deposits Bank deposits increased Will decline, but settle at a slightly higher level Interest rates Fell Loan rates could fall further, if deposit rates are durable Corruption NA Could decline, if sops for compliance improve (underlying illicit activities) Unaccounted income Real estate Broader economy Stock of black or unaccounted money fell Reduction in flow of unaccounted income Prices declined Prices could fall further Job losses, decline in farm incomes, social disruption Should gradually stabilise