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December 2016
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Demonetisation (The Total Investment & Insurance
Solutions)
Most discussions and debates on
demonetisation have a few things in common: the move is right; it is the worst
planned event in India’s economic history; calculations on black money went
wrong; and rural masses are in distress unable to meet their daily needs. I am
a strong votary of demonetisation. I am, however, not a supporter of complete
digitisation or cashless economy. Less cash economy can be a target of
gradualism and not maximalism. The
Total Investment & Insurance Solutions
Former Governors of RBI, C. Rangarajan, Y.V.
Reddy, and Subbarao also lent support to the move in their articulations in the
Press and media. Kenneth Rogoff, renowned economist also supported the move,
but the mechanism suggested was gradualism and not a sudden action like the
currently engineered measure. However, would all these articulations, mine not
excluded, alleviate the distress of the vast rural masses? The Total Investment & Insurance
Solutions
Both houses of Parliament demanded a
discussion, but were unwilling to discuss demonetisation for reasons that the
common man was unable to understand. The distress of those who had to bury
their dead or had imminent marriages in the family, not to mention the plight
labour on daily wages has been immense. The Total Investment & Insurance Solutions
A few important macro-economic and
demographic aspects deserve a recap to understand the implications of a
cashless economy. Cash to GDP ratio of Indian commerce is 10%. Only 4.3% of
people pay tax and all they have deposited all their cash savings into their
bank accounts during the first 15 days of demonetisation. 30% of the population
is illiterate; only 17% of the population has smart phones that can use mobile
apps for money operations. In the past credit cards, debit cards and net
transactions have all been victims of cyber-attacks putting the customers and
banks to huge losses and causing fear among users. The Total Investment & Insurance Solutions
From priests to prostitutes, informal and
small businesses and many others will continue to deal in cash for ages to
come. The cash economy has not been extinguished even in developed nations that
have the highest density of mobiles. The Total Investment & Insurance Solutions
Wealth inequalities are very high in India.
The richest 1% owns 58.4% of India’s wealth and the richest 10% of Indians owns
80.7% of wealth. The bottom half of the population owns a mere 2.1% of the
country’s wealth (according to the latest data on Global Wealth by ‘Credit
Suisse Group, EG, a financial company based in Zurich, Switzerland’. Hence
introduction of ‘wealth tax’ and ‘estate duty (inheritance tax)’ is essential. The Total Investment & Insurance
Solutions
Pertinently, 25% of the population is poor
and does not come under the tax net. Another 20% of the earning population is
below the tax threshold. This leaves approximately 51% who evade or avoid
paying taxes and these should be the target of the government. Where are these
persons? Movie producers who declare often that they spent hundreds of crores
of rupees in producing movies; actors who receive lakhs and crores of rupees;
real estate; professionals like high flying advocates; chartered accountants,
politicians, doctors and several businesses in hardware, waste and scrap, wood
and wood products, hawala merchants, politicians of all hues etc., all come in
the evasion bracket of 51%.
Are the Prime Minister and the Finance
Minister ignorant of these facts? I imagine not. Can the digital economy be
accelerated in just 50 days by strangulating cash economy? Any increase in
digital payments, can, at best be just icing on the cake. Digitisation should
be a long term goal. The immediate objectives of demonetisation, like
containing inflation, preventing access to terrorist havens and bringing to
book tax evaders are all laudable and the entire country supports the move. The Total Investment & Insurance
Solutions
The Planning Department, Government of
Telangana, carried out a quick survey on the eve of the visit of a Secretaries’
Committee of the Union Government on the impact of demonetisation. The survey
done in Warangal, Siddipet and Rangareddy (urban) districts throws not merely
the difficulties of the affected persons but also provides solutions worthy to
note for immediate implementation.
The quick survey with 15 questions covered 26
staff members at secretariat representing all cadres in planning department;
480 persons representing domestic households, farm households, retail traders
in vegetables, kirana etc, and self-help groups and women in Siddipet, a
similar number in Warangal that also covered education sector and R.R.
Districts. The sample is spread at random in the mandal headquarters. Options
include: Option 1: Good policy and good implementation, Option 2 Good policy
but bad implementation, Option 3 Bad policy and bad implementation.
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Opinion By
Income Level (The
Total Investment & Insurance Solutions)
38% of Farmers, 42% of Agriculture Labour,
27% of Self-employed, 88% of Business people and 23% of Employees said that
they are facing a “severe problem in their day to day life” after
demonetisation. The Integrated Household Survey by the State Government in 2014
revealed that 46% did not have a bank account. After Jan Dhan Yojana the
percentage declined to 25%. It is well-nigh impossible for this 25% of the
population to open bank accounts before December 30, 2016 as the coverage of
bank branches, Banking Correspondents, BFs, Post offices and even much-maligned
cooperative societies have no access to this population. The Total Investment & Insurance
Solutions
The survey revealed that about 73% of
respondents welcomed the demonetisation initiative but felt it is badly
implemented. About 19% thought it faulty both in policy and implementation;
this constituency is mainly educated persons with post graduate degrees. Income
stratification reveals that 40% of persons earning less than Rs5 lakh per annum
find that the policy is poorly conceived and badly implemented. About 79% of
the staff having income levels between Rs5 lakh to Rs10 lakh and 83% of the
staff having income levels between Rs10 lakh to Rs15 lakh said that the policy
is good but poorly executed. (see the chart). The Total Investment & Insurance Solutions
The government has an archaic Treasury Code
that is incompatible with digital operations of State Governments. This
Treasury Code should be revised on a mission mode if the reform agenda has to
be placed on a firm footing. All budget sanctions and releases of both the
central and State governments should shift to digital banking. The Total Investment & Insurance
Solutions
Some suggestions made by respondents to the
survey cited are of great value and the PM and FM may like to pay heed to them:
·
Reduce income tax rates
and introduce wealth tax for the super-rich.
·
Withdraw all
incentives provided to the high-end housing schemes
·
Remove service
charges, surcharges and all other taxes on credit / debit card transactions.
·
Government should
provide POS machines to each vendor to encourage online / cashless
transactions. Digitize the transactions of the value of Rs.500 and above.
·
Mobile ATM services
may be extended to rural and hard to reach areas and frequency may be
increased. The Total Investment &
Insurance Solutions
What surprised many was that Banks like HDFC
Bank, ICICI Bank, Axis Bank, Yes Bank, which boasted high volume of online
transactions were doled out higher volumes of currencies of lower denominations
compared to PSU and private banks that predominantly cater to cash-using
segments of society. Undue favours from the RBI were patently seen in some
places. The Total Investment &
Insurance Solutions
It is not too late to take effective steps to
mitigate the pain and suffering that is expected to continue for another 28
days by taking note of what people have to say. The Total Investment & Insurance Solutions
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