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Friday, January 24, 2014

Withdrawing pre-2005 notes: RBI move impacts public, creates panic

By SHILPY SINHA & ANITA BHOIR, ET Bureau

The central bank did specifically say there was no reason to get into a panic about bank notes printed before 2005 getting phased out. So naturally, a lot of people have done exactly that. That's an exaggeration of course, but it has to be said that there is consternation among large sections of the people.

The Bharatiya Janata Party fumed that the poor and the illiterate will be badly hit by the move. Meanwhile, some shopkeepers and cab drivers are looking askance at currency notes without the year of printing on the back.

Experts said gold and real estate prices may increase while individuals could face difficulty making transactions, leading to the mushrooming of agents to facilitate note swaps.

All these and more could be among the unintended consequences of the Reserve Bank of India's decision to swap currency notes that went into circulation before 2005 with new ones.

RBI governor Raghuram Rajan seems resigned to facing a barrage of questions over the move. Even Central Bureau of Investigation director Ranjit Sinha wanted to know whether the timing of the announcement on Wednesday had anything to do with the general election that's coming up. "I feared that this question will be asked," Rajan said in Delhi on Thursday. "The decision to withdraw pre-2005 currency notes after March 31 is not guided by politics and elections. It was a long-standing demand of the finance ministry. There are security factors attached with the decision."

Rajan was delivering the RN Kao memorial lecture. Incidentally, the governor's father had worked closely with Kao, founder of India's external intelligence agency, the Research & Analysis Wing.

"This is not an attempt to demonetise," Rajan insisted. "It is an attempt to replace less effective notes with more effective notes. I understand people are making different interpretations. Unfortunately that should not be the interpretation." Some RBI officials said that with many security features having been introduced since 2005, it made sense to withdraw currency without these to weed out counterfeits, which was possibly what the governor meant by "more effective notes".

Still, Sinha's question was legitimate. Black money with businessmen, politicians and elements beyond the pale of the law may chase real assets ahead of the polls on fears that come April they'll face uncomfortable questions from the income tax department even though in theory, unlimited amounts of currency could be exchanged without disclosing the source of income.

While that may act as boost to an economy in a prolonged slump amid a cut in government spending, a price rise would run counter to what policymakers are trying to achieve.

Veteran bankers remember what happened in 1977 when the Janata Party government of Morarji Desai demonetised notes of higher value to curb black money. But the intended effect was undone by a weakness in the system -- it moved to Nepal instead where the currency had the same status as in India.

"In 1977, RBI had withdrawn currency and called it demonetisation with a focus to curb black money hoarding,'' said Sunil Pant, a banker who retired from the State Bank of India recently. "We used to wait for customers to walk in with the notes, but it hardly happened. Pressure on undeclared currency could result in black money moving into other near cash assets like commodities.''

Since currency notes began carrying the year of printing in 2005, all those without this will be withdrawn according to the plan. Those who have such notes can swap them for new ones from April 1. From July 1 though, anyone wanting to exchange more than 10 Rs 500 or Rs 1,000 notes will need to show identity proof unless they are customers of the bank.

Rajan got some support from yoga guru Ramdev. "This a very good move to curb black money,'' he told ET. Ramdev had held a protest in 2012 seeking to force the government to make greater efforts to unearth black money. "But, this is just a band-aid solution and what we need is complete surgery...

RBI should have recalled all 500 and 1,000 rupee notes issued until 2013." Experts such as R Vaidyanathan, a professor at the Indian Institute of Management in Bangalore, and Arun Kumar, a professor at the Jawaharlal Nehru University in New Delhi, believe the move won't help in combating black money.

"They have not said you have to establish the source of income,'' said Vaidyanathan. "You can walk in with any amount of cash and walk out with equal amount of new currency.''

Meanwhile, RBI officials admit that the move has led to problems on the ground. "This has created panic among the people and only publicity can bring awareness,'' said an RBI official who didn't want to be identified. "Shopkeepers and small shops have stopped accepting the notes already.'' Some question whether banks can handle the currency note swap of this magnitude.

"From the logistics point of view, it is going to be a nightmare," said Madan Sabnavis, economist at CARE Ratings. "Not many banks will have that kind of cash stock. A lot of agents will spring up and we could face a lot of irritants.''

With inputs from Deepshika Sikarwar

Source:-The Economic Times.

at 3:20 PM