Without disincentives for cash, we are going to lose all the gains of DeMo in six months. So, here’s what the government must do once the cash situation eases completely.
The easing of the cash crunch this month, which has allowed the Reserve Bank of India (RBI) to raise daily ATM withdrawal limits to Rs 10,000, is both good news and bad news. It is good news, for it confirms the increasing availability of cash in the economy after the 8 November demonetisation (DeMo). It would be bad news if this easing enables people to return to their bad old days of using too much cash for transactions.
RBI Governor Urjit Patel indicated to the parliament committee on finance yesterday (18 January) that Rs 9.2 lakh crore of new notes had been put into circulation, thus replacing nearly 60 per cent of the withdrawn demonetised money amounting to Rs 15.44 lakh crore. Since the idea is to replace possibly 80 per cent of the delegitimised notes and shift the balance requirements to non-cash modes of payment by mid-February, the cash crunch will cease to be an issue.
The challenge before the RBI and the government is thus different now: they must resist demands for more cash to be put into circulation for the simple reason that this will damage the positive outcomes of demonetisation, including the steady shift away from cash to digital and other modes of payment, including e-wallets, cheques and internet banking. It is not worth jeopardising this gain by trying to restore cash normality, for it would mean erasing two related gains: a dent in the stock of black money and greater tax compliance. To preserve the second and third gains of demonetisation – an expansion of the formal economy and a wider tax base – it is important to continue disincentivising cash and privileging payment modes that leave an audit trail.
An Economic Times report on Tuesday (17 January) suggested that with the cash situation easing, the growth in card and other payments is slowing. The last thing we need is to make people believe that they can go back to their old cash transaction habits. Cash, in fact, should be penalised for all but the smallest value transactions.
Soon after demonetisation, the English chatterati – which never had any love lost for the Narendra Modi government – made a big issue of the government’s nudge towards less cash by claiming two things: that cash is some kind of birth-right; and that restrictions on cash withdrawals are an infringement of their fundamental rights. “It is my cash, and government has no business telling me I can draw only so much,” was the general refrain.
There is no doubt that cash is needed for many transactions, but it does not follow that the right to hold lots of cash or transact in it is some kind of unfettered right. In fact, governments do have laws to say some kinds of payments, or payments above a certain level, must be made by cheque or digital mode.
The right to withdraw all your cash if you feel like it is also not a untrammelled right: the RBI, and even commercial banks, have the right to restrict drawals if they believe there could be a run on banks. In modern banking systems, where credit and deposits are created endlessly, any attempt by all depositors to withdraw cash at the same time can have disastrous consequences. In the post-demonetisation scheme, this was the exact scenario the RBI was trying to avoid, in view of the limited new notes that could be printed in advance due to fears of news leaks.
In any case, the boot is really on the other foot. The reality is that before 8 November, it was those who wanted to pay by cheque or cards who were discriminated against, with charges and costs being billed to them, and merchants often discouraging card payments by levying charges or encouraging cash by not issuing bills.
So the claim that cash became the pariah after DeMo needs to be balanced with the reality that it was non-cash modes that were frowned upon earlier. If cash is someone’s right, so is non-cash someone else’s.
Also, the craze for cash has less to do with ease of transactions and more with the need to stay under the taxman’s radar – a motive that cannot be tolerated if we want a reasonable tax structure. In India, honest taxpayers are gouged because millions of Indians won’t pay tax. We have placed a premium on dishonesty.
So, this is what the government needs to do, now that the cash situation is easing.
One, large ATMs and branch cash drawals need to be taxed, with ATM fees rising after certain limits are reached, and withdrawals from cash counters being taxed directly by the exchequer.
Two, digital payments need not be given a free ride either, for the cost of maintaining servers and point-of-sale machines and servicing merchants cannot forever be absorbed by banks and merchants. So a limited fee structure should be in place after March, when the current incentive structure for cards and e-payments can be discontinued. We cannot have a system that permanently needs sops to succeed. But a reasonable fee structure for digital and other forms of cash movement can be viable if volumes can be drummed up. For this, it is government payments – to and from – that need to go cashless, not to speak of organised sector companies and banks.
Three, by early 2018, the existing Rs 2,000 and Rs 500 notes need to be steadily withdrawn and replaced with notes upto Rs 100 in value. Whenever these notes return to banks, they need not be replaced. A Rs 200 note can probably be introduced, but the Rs 500 note is too much of a temptation to hoarders. Gradual withdrawal of Rs 500 notes will be a bigger goad to non-cash transactions than demonetisation and card incentivisation itself. The idea should be to make cash inconvenient to use beyond a certain limit.
Without disincentives for cash, we are going to lose all the gains of DeMo in six months.