Friday, March 26, 2021

Demonetisation moves the Nation

Demonetisation moves the Nation

Interestingly it emerges from the Parliamentary Committee examination that RBI was told about demonetisation on 7 November 2016. The Committee has already examined the Finance Ministry officials. Next month the Committee will examine RBI Governor. The only press observation was about RBI being brought into the picture on 7 November. It would be interesting to follow this Committee 's findings.

The government has implemented demonetisation but the question of its power to demonetise existing all series of ₹500 and ₹1000 notes currency is yet to be confirmed by the Standing Committee of the Parliament and by the Supreme Court.

Section 26 in The Reserve Bank of India Act, 1934

26. Legal tender character of notes.—
(1) Subject to the provi­sions of sub-section (2), every bank note shall be legal tender at any place in India in payment, or on account for the amount expressed therein, and shall be guaranteed by the Central Government.

(2) On recommendation of the Central Board the Central Govern­ment may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notifica­tion, any series of bank notes of any denomination shall cease to be legal tender save at such office or agency of the Bank and to such extent as may be specified in the notification.
This may be read as:

1. Powers of demonetisation of any series of bank notes of any denomination are vested with the Central Government.

2. But it says, the Central Government may act after the recommendation of the Central Board of the RBI. If RBI has acted after the govt directives on 7th, the recommendation (after due diligence) may come under the scrutiny of the court and the committee. But this may not be right, because the banks started disbursement of ₹2000 notes immediately after the declaration. It means, the preparation of demonetisation was started earlier but was put down on paper (recommendation, approval and notification) on the last day of the announcement. Whether they can print the currency in advance before the demonetisation decision, may be another question to defend.

3. Whether the term "any series" is valid to be interpreted as "existing series" is a matter of judicial interpretation. Any series is a restrictive phrase. In the denominations of 1, 10, 20, 50, 100, 500, 1000; 500, 1000 can be interpreted as restrictive phrase, as demonetisation was not applied for all the currency notes in India?

As per today's news report (Guj Samachar, source not confirmed), ₹ 15 trillion (97%) of total ₹15.4 trillion have been deposited in the banks and post offices. There is possibility of remaining ₹440 billion (3%) to return to the banks in remaining 6 working days. Experts estimate that black money in cash is only about 1/20th of the black economy. If all notes return, it will be the duty of the IRS cadre to find out "black notes" of ₹770 billion from the deposited lot of ₹15.4 trillion from the 54000 bank branches, cooperative banks and post offices. If the remaining ₹440 billion don't return, then the job will be reduced to ₹330 billion. At the end of the exercise, ₹14.63 trillion will get the certificate of "White money".

As people have deposited ₹15 trillion into the bank accounts, and presuming that all the currency issued so far approximately ₹6 trillion withdrawn, the banks are carrying extra liabilities of 4% interest burden of ₹9 trillion. Unless they come out with an attractive scheme of different types of loans, and enhance their credit net, their balance sheets will be disturbed for quite some time. It is for the IRS cadre to reduce their load by search of black money and charging penalties.

Now the next question comes, where has beenthe remaining 95% black money parked? In Gold? In diamonds? In lands? In buildings? In stocks and shares? In goods? Only 3% of Indian population pay the income tax. How will you identify the blacks amongst the billion? Some more steps to take to fight out black money from the economy. And if all blacks are caught, what will happen to the competitiveness of the entrepreneurs. They are competing with the world because of some space of adjustment. Will that affect the growth of trade, industries and commerce of the country; only the experts can analyse and reply.

To make the demonetisation successful to curb black money, thousands of Indian stayed in bank lines peacefully (Venezuela had to withdraw the demonetisation after the riots); informal sector lost its income and the manufacturing sector lost its production. Demonetisation will surely improve the liquidity and capacity for financing of the banks, people at large will have additional interest income of ₹360 billion per annum. Their purchase power will rise up to that extent. If digital payment system succeeds, people at large will be free from the burden of currency security. All cash will be in wire! India will move to a new life style of Cyber and Viber!

Jai Hind.

24 December 2016

NB: This is purely an academic discussion with the seniors and colleagues with an intention to learn more on the subject.


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