TIOL-DDT 2975
22 11 2016
Tuesday

THERE was a time when many people in the country did not know who the Prime Minister was. It is said Morarji Desai visited a village and asked one of the villagers if he knew who was ruling the country. "yes", replied the villager. Morarji Bhai was happy that he was known even in the remote villages. On being asked as to who the ruler was, the villager replied, "Lord Ram"!

Last week, I was in Mawsynram, a tiny village in remote Meghalaya, which reportedly receives the highest rainfall in the country. And everyone I met in this village knew Narendra Modi as the Prime Minister who performed the vanishing trick on the 500 and 1000 rupee notes right across the country.

I spoke to several people - a taxi driver in Kolkata, tea sellers outside the Kali temple in Kolkata, a mahout & an elephant owner in Kaziranga National Park, priests & pretty girls in Guwahati. People were facing a lot of difficulties and business has come down to less than half, but life seems to be going on normally with the irrepressible Indian as cheerful as ever. I went to an EXPO in Guwahati and found a large number of people queuing up to buy entry tickets. I went to an expensive hotel in Guwahati and found the place full with people drinking merrily to the sound of live music. I ate in a cheap wayside motel and was told that business was difficult but life was okay. But I found the 'legal tender' had no takers and the demonetised currency was in full circulation. Nobody was prepared to accept the new 2000 rupee note, not even a Star Hotel, but everyone was more than willing to take the old 500 and 1000 rupee notes. I had to pay a thousand rupees for a boat to ferry me to the Umananda temple on an island in the Brahmaputra. My taxi driver who bargained the deal with the boatman asked me what currency notes. I was going to pay the boatman. I was told that he would not take the 2000 rupee note; then I agreed to pay 100 rupee notes. The driver took my ten 100 rupee notes and gave a thousand rupee note to the boatman.

ALL SMILES FOR FUTURE This beautiful girl Ambu gave me roti in a ramshackle hut in Mawsynram. What do we have in store for Ambu and her son? Ambu means beauty

The ingenuity of the Indian knows no bounds. A small time trader outside the temple told me that some rich people threw away currency notes into the Brahmaputra. How nice it would have been if they had given it away to poor people like her. She said 30,000 rupees would solve all her problems and one of her fantasies is that like the newspaper thrown at the door, one day God will ensure that a bundle of 30,000 rupees lands up on her doorstep and till then she is happy to bear with Modi's money mantra. "after all he means good for the country", she adds smilingly.

A tea vendor told me, "we had no money on 9th November and we have no money now, I sleep happily."

"Old or new or no notes, I will not let my elephant go hungry", said a mahout to me in the Kaziranga National Park

Yesterday, the RBI announced that from November 10, 2016 upto November 18, 2016:

1. Banks have exchanged Rs. 33,006 crores.

2. Bank deposits amounted to Rs. 5,11,565 crore

3. Cash withdrawals amounted to Rs. 1,03,316 crore

Against an inflow of 5.44 lakh crores, there was an outflow of only 1.03 crore. RBI had earlier reported that as on 28th October 2016, the currency with the public was to the tune of 17 lakh crores. Of this, it is reported that about 86%, that is 14.2 lakh crores were 500 and 1000 rupee notes. So, now there is only about 4 lakh crores in circulation against the 17 lakh crore earlier. People have to manage with less than one-fourth the amount of currency they had earlier. A difficult situation?

Will GST also go the demonetisation way?

GST has to be in place latest by the 15th of September 2017, that is less than ten months away. We are still to have a consensus on who will administer the GST and the laws are to be passed by the Parliament and thirty one States/UTs with Rules instructions etc. What will happen if the GST cannot be implemented by 15th September 2017? Perhaps, the States will not be able to collect the tax while the Centre can. And the Centre can collect other unmentioned taxes also.

Can we have a one tax collected by the banks instead of the CBEC and/or the State Commercial Tax departments. Maybe there should be a 1% tax on all banking transactions, automatically deducted by the banks for every transaction - receipt or payment. There will be no need of registration, accounts, returns, complicated compliance procedures and above all no need of officers. All taxes except Customs duties can be abolished and the Central Government can distribute the banking tax collected among the States and Municipalities & Panchayats. Cash transactions above Rs. 10,000 will be banned and there will be no tax on cash transactions below Rs.10,000. Cash withdrawal above Rs. 10,000 will not be allowed. Once we run a less cash regime for a year or so, there can be another demonetization of the entire currency.

We cannot prevent corruption, we cannot eliminate black money, but we can certainly reduce these. And maybe it will take another fifty years before we catch up with these evils.

IRS Association Fears Rampant Evasion if low level GST is given to States

THE IRS (Customs and Central Excise) Association yesterday tweeted,

GST faces deadlock over administrative control on assessees Thanks @arunjaitley Sir. Strong centre is the way..

We profoundly thank Hon'ble FM @arunjaitley for his firm stand on the issue of strong centre & for protecting interests of the Service.

It is reported that in a letter to the Finance Minister, the Association says,

The move towards GST is aimed at simplifying the tax structure, widening the tax base, reducing tax-evasion and incentivising the honest tax payers. It is supposed to be a win-win situation for all the stakeholders viz the taxpayers, Central and state government.

The proposal for having divided control over the assessees with all assessees having revenue less than Rs 1.5 crore being monitored only by state government is in conflict with the very root and premise of having GST. It will lead to rampant tax evasion, confusion and chaos amongst assesses due to different interpretations of issues by different states from J&K to Kerala.

The Kerala Finance Minister wonders why two controls for one tax. The officers are likely to take a decision today and it is likely to be proposed that there is a vertical split with the Centre having one third control and the States two-thirds. Even this may not be agreeable to the States.

More the reason why the tax should be collected by the banks and not the revenue officers. Many of us will go unemployed, but if the chai-wali in Mawsynram can make sacrifices, so can we.

Currency conundrum

ADVOCATE KSK Prasad a former banker mailed me this:

Amid the unending queues before the Banks and ATMS even after 13 days of demonetisation of Rs.500 and Rs. 1000 denomination, RBI vide their press release dt 21st Nov 2016 has released the figures of Cash deposits and withdrawals at the banks since Nov 10th to Nov 18th 2016. An amount of Rs. 5,11,565 Crores is deposited by the public, 33,006 Crores is surrendered to the bank for exchange with new notes. The amount of cash withdrawn in new currency amounted to Rs.1,03,316 Crores. Coupled with the amount of Rs. 33,006 Crores exchanged with new currency notes, an amount of Rs. 1,36,322 Crores is now in circulation perhaps mostly in 2000 note denomination, which has found few takers in the market on account of absence of smaller denomination notes of Rs.1000 and below in the circulation.

As per RBI statistics, the money in circulation is Rs. 17,97,460 Lakh Crores as on 4th Nov 2016. Out of the above it was estimated that 86% of it is held in the form of Rs.500 and Rs.1,000 denomination which on a rough estimate amounts to Rs. 15,45,000 Lakh Crores, which was withdrawn on Nov 8th 2016.

On Nov 17th 2016, RBI issued a press release clarifying that sufficient supply of notes is available consequent upon increased production (which started nearly two months ago) and requested the public not to get panic and hoard the cash. Curiously, the press release is silent on the quantum and value of currency released to banks from Nov 10th 2016 onwards in the form of new denomination of Rs.2000 and Rs.500 notes. It is gathered from market sources that Rs.500 denomination is not released uniformly across the country as on today, as many banks have reported that they are yet to receive the 500 denomination into their currency chests as on 21 st Nov 2016.

Now coming to statistics released today, if public withdrawals amounted to Rs. 1,36,322 (Rs. 1,03,316 Crores withdrawn plus Rs.33,006 Crores exchanged) as on Nov 18th 2016 most of which is in the form of new currency released into the market. Coupled with the amount held as balances held in bank branches (2,00,000 branches with an average cash balance of Rs.7.00 Lakhs per branch) the money in circulation amounts to Rs 1.50 Lakh Crores of withdrawn money plus smaller denomination amounting to Rs.2.52 Lakh Crores (Rs.17.97 -15.45 Lakh Crores) totaling approximately to Rs.4.00 Lakh Crores in circulation.(as against Rs.15.45 Lakh crores which was withdrawn, post demonetisation announcement.)

This explains the reasons why such a severe cash crunch came about, leading to severe illiquidity in the market with long queues before banks and ATMS, the retail market coming to a stand still and daily wage workers both in agricultural and non agricultural sectors losing their daily earnings. With Rs.500 denomination yet to reach many cash territories across the country, the currency woes can only be expected to last much, much longer than forecasted.

Therefore, the question arises as to what exactly is the policy position on the quantum and value of money to be released into the money market in place of high denomination notes with drawn from the market. Whether RBI will replace the entire quantity of Rs.15.45 Lakhs Crores or so withdrawn from the market or the government has chosen to release only a portion of the money withdrawn into money markets, to move to a less cashless economy, if not to a total cashless economy?. If the Government has veered to the latter position, which it seems so as is consistent with the lesser supplies of cash being made available at the banks, the currency scenario may turn grim and difficult to bear with for the public in the next couple of months, because of the delay and lag in printing new currency and bringing it into the markets.

The Government would do well to publicise its policy on the quantum and value of the replacement of the currency proposed to be infused as against the amount withdrawn, so that the public will be better prepared to get used to alternative channels of settlement to tide over the present situation rather than wasting their time standing in front of banks and hoping against hope waiting for the proverbial manna from heaven that is not going to come in a jiffy. It is time to tell the people, the policy in place rather than playing the Secrecy Clause, which is no longer relevant.

Corruption will continue

FORMER US Treasury secretary Larry Summers in a blog yesterday said,

Like everyone else, we were surprised by the dramatic action taken by Indian Prime Minister Narendra Modi to demonetize the existing 500 and 1000 rupee notes.  This is by far the most sweeping change in currency policy that has occurred anywhere in the world in decades.

We recognize that many of those who hold large quantities of cash in India have come by their wealth in corrupt or illegal ways.  So, the temptation to expropriate is understandable.  After all, as the argument goes, anyone who came by their wealth legally has nothing to fear from coming forward and exchanging old notes for new ones.

Most free societies would rather let several criminals go free than convict an innocent man.  In the same way, for the government to expropriate from even a few innocent victims who, for one reason or another, do not manage to convert their money is highly problematic.  Moreover, the definition of what is illegal or corrupt is open to debate given commercial practices that have prevailed in India for a long time.

There are also questions of equity and efficacy.  We strongly suspect that those with the largest amount of ill-gotten gain do not hold their wealth in cash but instead have long since converted it into foreign exchange, gold, bitcoin or some other store of value.  So it is petty fortunes, not the hugest and most problematic ones, that are being targeted.

Without new measures to combat corruption, we doubt that this currency reform will have lasting benefits.  Corruption will continue albeit with slightly different arrangements.

Until tomorrow with more DDT

Have a nice day.

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