RBI's dilemma

Well articulated and presented. The demonetisation risk has not been properly assessed is a fact and therefore the risk management seen subsequent to the implementation of the scheme cannot also be said to be effective. This is what has been experienced by the economy and the people for the last few days.  There is absolutely no dispute on the faulty implementation . However, the task is huge and the RBI a well reputed organisation for its competence and professionalism in managing what ever tasks it undertakes has unfortunately let down this time for every one to criticize. The consequences of demonetisation  could have been assessed well and the risks could have been very well minimised if not eliminated altogether. The Introduction of Rs 2000 notes could have been very well  avoided or at best restricted to metropolitan centres and all other areas could have been flooded with small denomination notes. The outsourced works could have been well monitored and RBI could have relaxed some administrative measures for fast, smooth and equitable distribution of its available stocks of notes to reach as many people as possible without disturbing the banks normal functions of accepting deposits and lending. A little planning in the initial stages could have helped implementation of the demonetisation scheme a great success. A stitch in time saves nine is what is demonstrated. To what extent RBI's independence in handling such a huge exercise has been eroded is not made transparent as the Government's interference in RBI's functioning these days is too much and it has perhaps lost its strength and credibility to vent its views to the Government. The coordinated approach from the government and RBI without undermining RBI's own reputation and professionalism could have brought in better results. All said RBI will have its own reasoning for the lapses which need to be adequately captured and factored into while writing the History as and when attempted. It is an Institution which has faced criticism but has always been adjudged as one of the best Central bankers of the world.

Dr T V Gopalakrishnan

(This comment apperaed in Money Life against the article on Demon of demonetisation. on the 23rd of December)

Biased views from Dr Manmohan Singh and Dr Amartya Sen

Both Dr Amarya Sen and Dr Manmohan Singh seem to be biased on the issue of demonetisation  and their observations have not come out of their knowledge of economics.Being eminent professionals, having international experience and knowledge of evils of corruption, black and fake money faced by the emerging economies in particular,both should not have come out with such harsh statements on demonetisation. The economy needs lots of clean up and the PM with all resistance and opposition shows some conviction and guts to take some very bold steps risking his own party's prospects in the next election. The economy has been facing all sorts of problems because of corruption, heavy accumulation of illegal wealth in the form of cash, gold, real estate , assets abroad and  all types of attendant issues like terrorism, high inflation, erratic data on vital issues like GDP growth, employment, distribution of wealth , allocation of subsidies, exports, imports , lack of capital for the much needed physical and social infrastructure. Unless and until the economy is cleaned first and corruption, black money and fake money are removed and the  ill effects of the mismanagement of the economy for several decades have been eliminated completely, the chances of the economy registering growth and distribution of wealth in an equitable and fair manner to remove the poverty once for all are very remote and the PM has no way but to take drastic measures even at the cost of facing some disruptions . Demonetisation is the first step and many more such drastic steps are needed. This is the time for professionals to view things in the right perspective and appreciate some politicians without the knowledge of the economics have come forward to take some corrective measures to put the economy on the right track. It is unfortunate that Dr Manmohan Singh and Dr Amartya Sen have different views and have opposed the PM's move to demonetisation tooth and nail without any rhyme or reason. 

Dr T V Gopalakrishnan      

Ball in Government's Court

This refers to your editorial Playing too safe (Business Line Dated 8/12/16). The monetary policy announced by the Reserve bank in the background of the demonetization of RS 500 and Rs 1000 notes has been very prudent and contrary to the expectations of the market, the banks and the Government. The Reserve Bank stood its ground and decided to pursue a conservative approach by keeping the policy rates unchanged and withdrawing the 100% CRR introduced to mop up the sudden liquidity faced by the banks thanks to sharp increase in deposits consequent upon the withdrawal of high denomination notes. RBI is right on its approach as the full impact of demonetization cannot be factored into this policy as things are in a fluid state to assess as to how the informal economy may get merged with the formal economy and to what extent the setbacks caused by cash withdrawals of a very high magnitude can be minimized through replacement of new notes, digitization of transactions and making the economic activities back in action in full swing. There is a definite time lag between the demonetization and remonetisation and this can have some short term pains to be offset by long term gains which cannot be fully accounted for in the present policy. The macro economic factors continue to remain stable and the RBI need not be unduly concerned at this juncture to effect policy changes. The rupee is some what stable, inflation is under control, the current account and fiscal deficit are very much manageable and there are possibilities of interest rate cut by banks themselves in the changed composition of their assets and liabilities thanks to demonetization. No doubt, there is a paramount need to stimulate the economy through enhanced demand for consumption, production, investment and fast pick up of credit for which more than the monetary policy, the fiscal policy can work wonders. RBI perhaps wants the Government to take the initiative in that direction which will also facilitate easy implementation of demonetization.

T V Gopalakrishnan

Bengaluru 76  

( Shortened Version of this letter has appeared in Business Line dated 9/12/16)

Monetary Policy on Right track.

Monetary Policy on Right track.

RBI's monetary policy announced today in the background of the demonetisation  has surprsied many and it is  definitely not as per the expectatiomns of the market. On the contrary,  RBI has firmly stood its ground and  the policy is on sound lines to favour the economy. It has kept the policy rates unchanged  and withdrawn the incremental CRR of 100 % introduced to suck the excess liquidity caused in banks due to steep increase in deposits consequent on the withdrawal of old notes of Rs 500 and Rs 1000 which can be  well taken care of by the Market Stabilisation Fund.  RBI has also well clarified through its policy  that the withdrawal of old notes would not add to the dividend of the Government and the remonetisation can bring in  some potential benefits over a period of time in the transparency and enhanced digitisation of transactions. RBI expects to have a moderate fall in GDP growth by 0.5%  in the current fiscal year  and the inflation to be benign. It is clear from the polcy that the augment of GDP is dependent on the polcy initiatives of the Government to attract investment, credit pick up and esae of doing business.        

Dr T V Gopalakrishnan

(This letter appeared in ET dated 8/12/2016)

My Experience with ICICI Bank A feed back.

I read with interest all that services your bank has provided and how ICICI Bank has updated itself with the state of art technology. However, I would like to narrate my exprience as a feed back and definitely not as a complaint. I know this is not the time to find fault but to cooperate in national interest as the implementation of demonetisation policy is on and there are lot of hurdles both man made and otherwise.  

Since the demonetisation was announced, I have not seen any ATMs operating in my area and I have visited two of ICICI Bank branches and the service I got was pathetic. I have all apprecitaion for all the  intended services but I strongly feel if some are translated into action , it would have been praiseworthy. The otherday I called on ICICI Bank branch at Bannerghatta Branch to encash my Travel Card having some dollar balances and after verifying my identity and account and having satisfied that I am the right person, prompt came the service that unless passport is presented, this cannot be encashed or credited to the account. I know banking is a risky business, but banking is also a business run on common sense, judgement and discretion assessing the risk and minimising the risk. I feel encashing and crediting the travel card to my account has no risk as envisaged and he could have asked me to send the copy of my passport  through  email. I have no grouse on this as he wanted to adhere to the rules prescribed.He is well within his right.

Then I wanted some cash for my personal expenditures and presented him a cheque and prompt came the reply that I could withdraw only Rs 2000 and that too in the same denomination, although the RBI has prescribed a withdrawal of Rs 24000 per week. He also advised me to stand in the queue having about 30 persons at that point of time. NO CONSIDERATION FOR SENIOR CITIZEN. I would also add here that since the announcement of demonetisation I do not think I have withdrawn even once through ICICI bank ATMs. I have always seen ICICI bank's  ATMS with OUT OF CASH or OUT OF SERVICE Boards.  I have withdrawn ontly from AXIS bank ATMs and they provided 2000 Re note, new 500 Re note and 100 Re notes.But withdrawal is limited to Rs 2000 at any point of time. Thrice I had taken  Rs 2000 each from Axis Bank ATM to take care of small payments to milk vendors and other retailers. Even Once I could get cash from  Lakshmi Vilas Bank ATM  which is no comparison to ICICI Bank . This is only a feed back as once in a while top brasses also should know what is the ground reality. I have been banking with ICICI bank for more than two decades ie since the inception of the bank.Technolgy is very good,but human involvement would definitely add to the service. There should be difference between Man and Machine. If both are mechanical, Customers have no choice but to turn digital at the earliest. But Senior Citizens have their own limitations. 

Dr T V Gopalakrishnan

(This is in response to the Personal Message that ICICI Bank sent to all Its Customers through email )

Bold Move.

Very bold but not a perfect move to prevent generation of black money and corruption 

Apropos your editorial more disruption than Economic Benefit (ET dated 9/11/2106), the arguments put forward therein saying that there are better ways to fight black money do not make sense and only add to the woes of the economy in the long run. The measure of demonetisation to fight black money and all its ill effects like corruption, inflation, growth of informal economy etc needs an element of surprise and what Mr Modi has done is very bold, timely, commendable and most appropriate to put the economy on the right track to derive the full benefits of growth and achieve a welfare state in all its sense. Though the Modi Government has given lots of hinds on its intentions to erase black money and corruption and several measures including the recently concluded declaration of black money have been introduced in that direction but the results have unfortunately not been encouraging and the performance of the economy in general and the ease of doing business in India continue to be lagging behind.

The withdrawal of Rs 1000 and Rs 500 denomination notes is the best available solution to eliminate the ills of the economy in the present circumstances although such a measure may have some disruptions and inconveniences which are inevitable in the larger interests of the economy and long term gains of sustainable nature. However, Reserve Bank and the Government seem to have well coordinated to make the withdrawal of these notes very smooth and measures have been in place to minimise the disruptions. All said, the introduction of Rs 2000 denomination notes and Rs 500 new notes cannot be said to be a perfect move in the over all schemes to prevent generation of black money. It may have definitely a nullifying and negative impact.

Dr T V Gopalakrishnan

( Letter sent to ET on 9/11/2016 but not published).     

Make Demonetisation scheme a success story.

                                              Victory is always for Dharma.

The economy in general and the financial system in particular got a shock but a game changing treatment when the PM announced on the 8^th of November at 8PM  the demonetization of high denomination notes of Rs 500 and Rs 1000 to prevent corruption and unearth black money to save the economy from the evils of dirty money. The objectives to combat financing of terrorism with black and fake money, to prevent corruption from the society, and to eliminate the disruptive  practices pursued in the economy mixing black money with the accounted money intelligently and finding  ways and means  to fight election, to distort the economic activities with wrong data on  macro economic factors,  are noble and laudable and needs to be achieved early to take the economy forward and restore the  lost values of this great nation to ensure a welfare state with utmost peace, safety and comfortable life for the people. The need to maintain ethics in business and commerce is paramount and when the people irrespective of their political, economic, social and technological background have wholeheartedly welcomed the PM’s initiative and bold decision to eradicate the black money and are prepared to put up with the inconveniences that such a measure can cause, then where is the opposition and what is the obstacle?.

Having decided to demonetize, and knowing the possible obstacle from opposition parties and people with vested interests to protect their black money hoardings in cash the preparedness of the Government and the RBI seems to have fallen short of and many a people particularly among the poorer segment have been made to suffer giving an avoidable opportunity to fight the policy tooth and nail and demanding a roll back even. The Government could have kept the positive sentiments of the public at large by ensuring smooth implementation which could and should have been made possible keeping the secrecy clause of the demonetization intact, had it acted fast as soon as the announcement was made and all the checks and balances are kept in place with appropriate logistics to serve the rural poor in particular on a priority basis. A bad execution should not kill the long term and perpetual benefits to be derived from this great and very bold move.     .

The Reserve Bank has a key role in ensuring the successful implementation of the scheme and should have been made fully responsible for its fast and smooth implementation without any glitches. The ATMs, banks’ branches and Post offices spread in the nook and corner of the country should have been fully equipped with adequate infrastructure like man power, transport, security, insurance,  note counting and verifying machines and adequate supply of all small denomination notes (including soiled notes and coins if required) right from Rs 5 to Rs 100. Rural and semi urban centers should have been supplied first with these notes in adequate quantities and the normal banking operations with a special emphasis for exchange of old denomination notes with proper identity with restricted numbers of notes. Unfortunately the Touts and Commission agents crowded all the counters and honest and genuine people suffered in the process. This could have been anticipated and effectively prevented. The two way operations in banks Viz acceptance of deposits and lending got stopped and the panic situation to corner as much money as possible in all denominations of permissible legal tender currencies got a momentum with all shortages and chaos every where in the first two or three days of implementation of the scheme. Lack of planning and proper execution to minimize problems for the poor and hapless people was taken full advantage of by the politicians in waiting to attack the government. The cooperative banks and micro finance Institutions working in rural areas and banking correspondents could have been enabled to carry out their normal operations using small denomination notes to come out to the rescue of the poorer segments. The Government could have got mobilized peoples’ volunteers to make the scheme understandable and acceptable by the masses with all inputs. The enforcement agencies like Income tax, Sales tax and Police force could have played their respective roles in keeping a vigil on possible irregularities and mal practices and educating the masses and business establishments to switch over to digital forms of payments to avoid harassments and come clean on all transactions. The issue of Rs 2000 notes could have been restricted to major towns and cities for the initial days as the people are by and large literate and can appreciate the Government’s move and have the entire wherewithal to absorb the problems if any without much of hassles. The Reserve Bank could have issued more of Rs 500 new notes instead of Rs 2000 notes to avoid irritation to find change for this high value note for small value transactions. The Reserve Bank also could have sought the help of Temples, Mosques and Churches and all shops and establishments to stop acceptance of the demonetized notes and to surrender all small denomination notes to nearby banks on a day to day basis to ensure their recirculation. The sensitive areas like village markets, ration shops, small business firms and village industries should have been given priority treatment in the withdrawals and exchange of  old notes with due diligence to avoid irregularities and malpractices with the help of  banks, ATMs, Post offices, volunteers and enforcement agencies. The man power shortages in banks could have been addressed by resorting to appointment of retired hands and volunteers and there should been more counters for exchange and acceptance of deposits of all denomination both illegal and legal tender currencies.

The Government also could have come out with some fiscal incentives to calm the public and mobilize their total support. Reduction of service tax on items consumed by masses, increase in the procurement prices of agricultural commodities, reduction in the prices of fertilizers, small increases in kerosene subsidy,  income tax relief’s for lower income groups, reduction of excise duties and taxes on two wheelers, petrol, diesel and LPG prices would have worked wonders. The losses may not be substantial but the overall gains both monetary and otherwise would be handsome and those who oppose the demonetization would have been silenced.  What the Government needs at this critical juncture is time to make arrangements to replace the withdrawn notes with adequate liquidity and help the people to act with confidence in the scheme of things to overcome the   temporary difficulties caused by the sudden withdrawal of high denomination notes

All said the economic benefits of the Demonetisation scheme are enormous and there is a paramount need to make it a success at any cost. The disruptions are temporary and definitely manageable. Once the normalcy is established  with effective administration and the banking system is back to normal carrying out all its functions, the economic activities would resume in new avatars and all informal activities hitherto unaccounted for would turn formal and get properly accounted for, rectifying the incorrect data on  investment, production, distribution of  economic products, enhancing employment activities  formally helping in the reduction of undeserved subsidies,  bringing in transparency in the compilation of data, movement of  accounted funds paving way for correct assessment of taxes, framing accurate policies based on more reliable  data unlike in the past. With the proposed GST implementation and with the eradication of unaccounted money, the cleanliness of the financial system gets assured and the Government can very well concentrate on improved and enhanced infrastructure,  effective Governance,  housing for all and better  welfare of the people having control on corruption, inflation, safety from terrorism and fair and equitable distribution of wealth. Conversion of unaccounted wealth in the form of gold and real estate needs to be the next step followed by electoral reforms to make the economy more clean and transparent.  

A society with less cash for transactions and more cash for better living standards can be made a reality with enhanced and wide use of technology in the payment and settlement system. Strong administration is what is called for at this crucial time and as long as people are for the change, then what and where can be the opposition in bringing the change for a better living? 

Dr  T V Gopalakrishnan