Economic Survey: Don't penalise cash withdrawals, says Arvind Subramanian

Survey calls note ban a reverse helicopter drop, whose impact will be clear over a one-year horizon

Opening with spiritual leader Ramakrishna Paramahamsa’s “Taka maati, maati taka,” Bengali for money is mud, the Economic Survey 2016-17’s demonetisation chapter skipped difficult questions on note-ban implementation, while trying to figure out how best to wring “reverse helicopter drop” in the long term. 

Advising against any impulse to penalise cash withdrawals in the short term, chief economic advisor Arvind Subramanian in the Survey said, “The early elimination of withdrawal limits will help build confidence. By the same token, there should be no penalties on cash withdrawals, which would only encourage cash hoarding.”

Supply of currency should follow actual demand and not be dictated by official estimates of “desirable demand”. In other words, “the Reserve Bank of India should re-establish internal convertibility, guaranteeing to give the public the amount of currency that the latter wants,” he added.  

Hailing the move as unconventional and unprecedented in peacetime, the Survey argued that the liquidity squeeze was less severe than suggested by the headlines. “India has given a whole new expression to unconventional monetary policy, with the difference that whereas advanced economies have focused on expanding the money supply, India’s demonetisation has reduced it. This policy could be considered a ‘reverse helicopter drop’, or perhaps more accurately a ‘helicopter hoover’.”

The Survey suggested a number of steps to minimise costs and maximise benefits of demonetisation. These include fast, demand-driven, remonetisation; further tax reforms, including bringing land and real estate under goods and services tax, reducing tax rates and stamp duties; and acting to ease anxieties on over-zealous tax administration. “These actions would allow growth to return to trend in 2017-18, following a temporary decline in 2016-17,” the Survey concluded. 

Long-term benefits may not necessarily manifest in the next six months but evidence should start trickling in over one-year horizon and beyond. It identified three future markers of success. 

First, changes in use of digital payment methods across three categories of digital access: Smartphone users, regular phone users, and phoneless. The early signs are encouraging. 

Second, the ratio of cash to gross domestic product (GDP) should decline as more savings get channelled through the formal financial system and black (unaccounted) money declines. Based on one estimate of black money, the cash-GDP ratio could decline permanently by about two percentage points. 

The most important marker of success would be taxes. The number of new income taxpayers as well as the magnitude of reported and taxable income should go up over time. As of FY14, there were about 36.5 million taxpayers who filed returns and about 17.3 million taxpayers who didn’t. Over time, these numbers should rise significantly. That will be the surest sign of success, the Survey said. 

The Survey conceded that people could have found ways around demonetisation, by inventing new laundering mechanisms. “In all these cases, black money holders still suffered a substantial loss, in taxes or “conversion fees”. Moreover, bank accounts are still being screened for suspicious transactions, which means that those who engaged in laundering run the risk of punitive taxes and prosecution, in addition to the fees or taxes already paid.”

The Survey expected “Helicopter Hoover” to have a profound impact on the realty sector by putting pressure on prices. “An equilibrium reduction in real estate prices is desirable as it will lead to affordable housing for the middle class, and facilitate labour mobility across India, which is currently impeded by high and unaffordable rents,” it concluded.