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Political Play
Ratan Sharda
Beyond demonetisation hype 09 November, 2016
There is huge excitement about demonetization of old 500 and 1000 rupee currency notes. It is good to see that common citizen is ready to bear with temporary inconvenience if it means better economy and end of black money menace.

This enthusiasm vis-a-vis sour mouthed comments of a few political parties and so called liberal intellectuals; and their virtual isolation tells us how a great leader can swing negative mood of a nation and supposed sloth into a positive mood with energetic citizenry ready to contribute their mite for national good.

Experts have talked about control on parallel economy, move towards plastic and non-cash economy etc. Some have tried to mislead people into believing that their currency notes of Rs 500 and 1000 are now piece of paper, making unsuspecting people run to ATMs and retail outlets etc. It is sad that a fear psychosis is sought to be created among people who hardly have a chance of having massive unaccounted money.

A few commentators have given strange logic that once cash is handed over to low income people it becomes unaccountable cash and goes out of legitimate circulation. It is foolish. Retail payment in cash doesn't convert good money into bad money. Non-payment of tax and purchases by sellers in cash takes money out of circulation in legitimate channels and creates a parallel economy.

This channel will slowly dry up with implementation of GST. Demonetisation is linked to this same cycle of activities to bring all money in the country into mainstream economy. With this blow, sources of parallel economy of purchase in cash and sales in cash without paying tax will dry up as cash will dry up and this cycle will break.

Having understood this much, we need to appreciate that this demonetisation will not kill black money. It will wound it badly and halt its play in the market in the short term and reduce it in the medium run. In the long run this act itself will not bring such money out into legitimate cycle. If this action itself were so powerful, 1978 demonetization would have killed the parallel economy. But, it subsequently grew massively. Today this parallel economy may be bigger than the total size of the economy of 1978.

Why did earlier demonisation lose steam?

Because, this needed to be followed up by simultaneous improvement in other areas which force people to opt for cash transactions. Cash transactions at normal consumer level is not bad per say. Is it possible to use plastic money or cards in remote villages of this nation? Obviously not.

Have we created that kind of infrastructure so far? At business and industry level, with coming of electronic banking, there is still a vast part of economy that pays through cheques. Then, there is complex oppressive tax regime. This tax regime itself results in unintended creation of parallel financial channels.

To cash onto this bold step, the Prime Minister needs to take some immediate steps in next budget, if not earlier –

  1. Convert post offices into proper banking channels. Right now it is only part banking. This is unparalleled network that cries for better utilization.

  2. Spread ATMs to far off places. Post offices could be ready places for ATMs.

  3. Barefoot bankers can move around in rural areas with good incentives to educate people and get them to open more accounts under Jan Dhan Yojana, its easy use etc.

  4. Reduce cost of transacting in plastic money or cash-less transactions. I believe India may be one of the costliest places to use plastic money. Excessive transaction charges, penal interest charges dissuade people from using it.

  5. Electronic payment options fleece customers with 'convenience charges'. If more people use these facilities, cost of running such operations will come down. For this to happen such fee must be reduced.

  6. Cheque transactions – Bounced cheques legislation was brought in long back, treating this as criminal act. This was diluted through courts of law and government. This is now a civil matter. This mode is still most common in business. This goes into loop of years of litigation. Thus, parties are stuck with bad debt and dead money for no fault of theirs. This law needs to be made stricter with resolution within a given time frame. If intent is criminal, then strict penalty should be imposed on the defaulter. Such laws also need to be kept out of purview of judicial appeals that helps the defaulter than the suffering party.

  7. High cost of pre-paid cards – For example Indian Suburban Railways and Metros have shocking charges for buying a pre-paid charge card. For example Mumbai Metro charges INR 150 for making a card! Indian Railways cards have expiry date, after which your balance is lost and you have to create new card at cost. This exploitative malpractice must stop.

  8. Simplify taxation procedure and returns filing - Complex cess, duties over taxes etc should be shunned. GST may resolve this problem partially. But, other areas of TDS and Income tax are still there. If we wish citizens and industry to be compliant, tax rates must be reduced so people feel encouraged to pay taxes. All over the world, lower taxes have increased revenue and helped expand economy.

I hope policy makers will think on these lines and take this decisive action of the prime minister to its logical conclusion. Only with such simple acts supplementing demonisation can we see end of such a massive parallel economy.

Editorial NOTE: This article is categorized under Opinion Section. The views expressed in this article are solely those of the author and do not necessarily represent the views of In case you have a opposing view, please click here to share the same in the comments section.
About The Author
Ratan Sharda is a citizen journalist. He has authored books like 'Secrets of RSS'. A marketing consultant by profession, Mr. Sharda is a keen observer of the country's political scenario.
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