Article by Dr. Rajesh Chakrabarti on "Remonetisation key to limit note ban blow: Economic Survey 2017" - Live Mint

February 02, 2017 | Dr. Rajesh Chakrabarti

Policymakers and regulators should speed up remonetisation, or the replacement of money, to limit the impact of cash shortages on the economy after the 8 November outlawing of high-value banknotes, the Economic Survey said.

The survey, released on Tuesday, also seemed to nix the idea of any curbs on cash withdrawals, arguing that such measure will encourage cash hoarding. A banking transaction tax on cash withdrawals of more than Rs50,000 has been recommended by a chief ministers’ panel tasked with suggesting ways to move India to a less-cash economy, fuelling speculation that the government may introduce such a tax in the 2017-18 budget to be presented on Wednesday.
 
Prime Minister Narendra Modi on 8 November invalidated Rs1,000 and Rs500 banknotes, removing 86% of the currency in circulation by value and triggering a severe cash shortage that has now begun to ease. So far, around Rs10 trillion of new currency is estimated to have been injected by the Reserve Bank of India (RBI) into the banking system, still short of the Rs15.4 trillion that was demonetised.
 
The survey said RBI should offer a guarantee that people would be able to withdraw the amount they want. “The early elimination of withdrawal limits will help build confidence. By the same token, there should be no penalties on withdrawals, which would only encourage cash hoarding,” it said.
 
“Unless people have confidence that money deposited in bank accounts is freely convertible into cash, and vice versa, they will be reluctant to deposit their cash in the first place. Instead, they will hoard it, starving the formal financial system of resources and the informal economy of the currency it needs for transactions,” the survey said.
 
Besides remonetisation, especially in lower denomination notes, the survey urged further tax reforms, including bringing land and real estate under the ambit of goods and services tax, reducing tax rates and stamp duties, and acting to allay anxieties about an overzealous tax administration, to allow the economy to recover in 2017-18 after the temporary decline in 2016-17.
 
The survey acknowledged demonetisation had impacted the economy in the short term and caused inconvenience and hardship, especially to those in the informal and cash-intensive sectors. It also admitted these ‘transitory costs’ may not be adequately reflected in gross domestic product numbers. But highlighting the long-term benefits of reduced corruption, greater digitisation, increased flows of financial savings, and greater formalization of the economy, the survey said this could eventually lead to higher GDP growth, better tax compliance and greater tax revenues.
 
One economist doesn’t buy the argument. “The pain is obvious. The gain is speculative. The pain caused by demonetisation is not necessarily transient,” said Rajesh Chakrabarti, an economics professor at O.P. Jindal Global University in Sonepat, Haryana. “Demonetisation hurt the country where it is most vulnerable, and that is job growth. People who lost jobs may not necessarily get them back as many small businesses have completely folded because of demonetisation,” he added.