There is no knowing if the government intends to withdraw the Rs5,000 note from the economy. But the debate is getting intense and voices are deafening.
The strongest proponent of demonetisation is Shabbar Zaidi, chartered accountant by profession who recently served as head of the Federal Board of Revenue (FBR). He recently suggested the Rs5,000 note should cease to be legal tender from July 1. He strongly believes that the move will “improve the economy, assist the banking sector and mainly make bribery difficult”.
Economists and industrialists who are opposed to the move suggest that lessons should be learnt from the neighbouring country as New Delhi decided to withdrew the Rs500 and Rs1,000 notes. The Indian prime minister conveyed through a televised address to his nation that from Nov 8, 2016, the Rs500 and Rs1,000 notes would “no longer be the legal tender” and asked people to exchange them with smaller denomination notes though banks. The boisterous premier announced that it would “break the grip of corruption and black money”. But did it?
‘Banning the currency bills of the largest denomination cannot dramatically alter the banking habits of the masses’
The Guardian wrote: “Figures suggest Prime Minister Narendra Modi’s demonetisation policy likely wiped at least one per cent from the country’s GDP and cost at least 1.5 million jobs, but failed to wipe significant hordes of unaccounted wealth from the Indian economy. New notes could not be printed fast enough, and the policy sparked a months-long currency crunch that left tens of millions of Indians cashless or standing in line for hours each day to retrieve small sums of cash.”
A local economist said: “Four to five years gone, the Indian economy is still reeling under the effects of a bad economic decision and is projected to grow at a miserable negative 8pc growth in the 2020-21.”
Syed Salim Raza, the 15th governor of the State Bank of Pakistan (SBP), told this writer he had not given thought to the matter, but he could say offhand that demonetisation might achieve its objective to “some extent”. However, the move would not suffice by itself and banking habits of the masses would not change dramatically. “Tax reforms need greater attention, which include the separation of taxation policymaking from tax collection,” he said.
Industrialist Arif Habib said, “Ours is a cash economy.” Cash activity contributes to the turning of wheels of the industry. He observed that 20pc of GDP was currency, which amounted to $60 billion or Rs10 trillion. “All of it is available to the government free of interest,” he said.
He said the government was already realising tax on imports and exports and sales tax/minimum turnover tax on the industrial output.
Mr Habib observed that the Rs5,000 note ensures the ease in business activity. There was no need to rush to ban the big bill, he said. To arrest corruption by withdrawing the high denomination note was over-simplifying the problem. People could always find ways around the laws, he said. He reckoned that one simple way was to convert rupees into dollars, which meant huge sums could still change hands with the benefit going to the home country of the dollar.
Industrialist Majyd Aziz concurred that trading, wholesale and retail business depended on “king cash” in a cash economy. He dismissed the subject as frivolous. “There are more important economic matters that should occupy our minds.” He contended that demonetisation was always negative, particularly for the lower middle class and the poor. “My factory worker is at ease in carrying a few (big) notes of his salary tucked away under the pyjama compared to holding a bundle of smaller notes in a paper bag,” he said.
Similarly, traders can save their income from being robbed if the notes are fewer in number. The promotion of mobile banking and documentation of the economy are matters of importance, he said.
Another major industrialist who insisted on anonymity reckoned that even if demonetisation was the right thing to do, its timing was woefully wrong. “As 50pc of the economy is undocumented, it actually supports and provides resilience to the economy in hard times,” he affirmed. He said such measures were effective and understandable during the period of 5-6pc economic growth.
The industry, he said, was overtaxed and had little faith in economic managers. He said traders usually operated on turnover and, as the currency keeps rolling, the size of the note would scarcely make a difference.
A man of finance said that pressed by the Financial Action Task Force (FATF), there was already a major improvement in the central bank’s monitoring and regulations that led to reduced tax evasions and money laundering. “Demonetisation at this time would be pushing forward too far, too quickly,” he said, adding that it could cause a drawdown on bank deposits and slow down the economy.
Professor Saqib Sharif, who teaches business and finance at IBA, Karachi, also said he needed time to provide his holistic view on the subject. But he commented offhand that demonetisation had both sides to it. Anecdotal evidence suggested that it could help stem corruption and money laundering, but real benefits would accrue if the economy had a wider user base of electronic wallets.
Published in Dawn, The Business and Finance Weekly, February 22nd, 2021