RBI’s Decision to Withdraw Pre-2005 Notes: All You Need To Know!

(image source: moneycontrol.com)

A lot of decisions taken by the RBI (Reserve Bank of India, the central bank of the country) go unnoticed by the public at large not because they do not affect them but because they do not relate to the day – to – day affairs. This time, though, Raghuram Rajan (the RBI Governor) has touched a raw nerve. This week, we try and simplify this decision and its consequences for us and the economy at large.

The decision in brief:

The RBI has announced that all currency notes (including Rs. 500 and Rs. 1000 notes) which have been printed before 2005 will be withdrawn from the market from 1^st April, 2014.

Anyone who has these notes can go to a bank and exchange them for notes printed in or after 2005 from 1^st April, 2014 to 30^th June, 2014 without any questions asked or documents sought.

From 1^st July, 2014, however, anyone who wants to exchange more than 10 Rs. 500 and Rs. 1000 notes will have to show a proof of identity and address IF they DO NOT have an account in the bank where they want to exchange these notes.

How to identify whether your note is pre-2005 or not?

We have put up an image of the back of a 100 rupee note here. In the middle of the note, a year is mentioned in a very small font. This refers to the year in which the note was printed. If no year is mentioned in your note, then it means that it was printed before 2005 and you need to exchange it.  In other words, even if 2005 is mentioned, you don’t need to worry.

Why was this decision taken?

The central bank maintains that this is just an attempt to replace less secure notes with more secure ones. The notes printed in or after 2005 have greater security features and hence this decision can reduce the instances of fake currencies in the country. If we look internationally, it is a standard practice to withdraw old series notes.

Consequences of the decision:

Let’s first look at it from an individual’s point of view:

Potential Problem: From an individual point of view, this has the potential to cause certain issues in undertaking transactions. In fact, as soon as such a decision is announced, people start finding out the details and it won’t surprising if shops start checking the year on the notes before accepting them.

Fact: The RBI has not taken this decision all of a sudden. In fact, it has been withdrawing these old notes from banks in a routine manner. So a large number of pre-2005 notes have already been off the market. What remains are only those notes which have been neither banked nor used for a long time (9 years to be precise).

 Now, we look at what effect it will have on the economy:

From the point of view of the economy, this decision could actually act as a stimulus as all the cash that  was stashed in homes will now flow into the formal economy. This is because not everyone would want to disclose their funds to their banks and may rather prefer to indulge in spending the money by purchasing gold or real estate.

In order to ensure that the transition is smooth, the RBI needs to create more awareness among people (more so the traders and shopkeepers) so that there is no inconvenience to the general public.

The Binny-Kejriwal Controversy : All You Need To Know!

(image source: timesofindia.indiatimes.com)

A man who became Chief Minister riding on the back of an agitation is all set to face the first protest against him, that too from one of his own party men. Yes, this week we take up the Binny-Kejriwal controversy and try and simplify it.

Who is Vinod Kumar Binny?

Vinod Kumar Binny is an MLA (Member of Legislative Assembly, the Lower House of a State Legislature) from the Laxmi Nagar constituency of Delhi. He belongs to the Aam Aadmi Party (AAP). He has, in the past, twice been elected to the Delhi Municipal Corporation as an independent candidate. He was with the Congress for some time before joining the AAP in 2013.

Why is he in the news?

Recently, Binny held a press conference and talked about the issues that he had with the functioning of the Delhi government, headed by Arvind Kejriwal. According to him, the government was not fulfilling the promises that the party had made in its manifesto in the true sense. He has now threatened to sit on an indefinite hunger strike from the 27^th of this month if the promises are not kept. Let us look at the four major allegations made by him:

700 litres of free water

Promise: The AAP, in its election manifesto, promised up to 700 litres of free water.

Action: Kejriwal contends that this promise is fulfilled as the AAP government has announced that any household whose water use is limited to 667 litres will not be charged a single rupee.

Allegation: Binny’s allegation is that this promise hasn’t actually been fulfilled as after the elections, a clause was cleverly included whereby anyone who exceeds the limit, even by 1 litre, will have to pay the entire amount.

50% reduction in power tariffs

Promise: The AAP promised a 50% cut in electricity tariffs.

Action: The Delhi government has provided a 50% subsidy to households consuming power up to 400 units.

Allegation: Binny says, “The manifesto clearly said power tariff will be cut by 50 per cent (implying the rate cut should have been across the board and not just limited to certain households). 10 lakh, 52 thousand people followed Arvind's disobedience and did not pay their bills. They were promised bills would be waived off. That promise wasn't kept either.”

Passage of Jan Lokpal Bill

Promise: Arvind Kejriwal promised that if the party came to power it would pass the Jan Lokpal Bill within 15 days by holding an open Assembly session at Ram Leela Maidan. Technically, a Lokpal is for looking at corruption cases in the Central government and for the State, the position is called Lokayukta and Delhi already has a Lokayukta. In principle, Kejriwal meant that he would strengthen the existing Lokayukta Act by including strict provisions of the Jan Lokpal Bill, the draft popularised by Anna Hazare.

Action: The present situation is such that Kejriwal has said he will bring the promised Bill by the first week of February.

Allegation: Binny says, “AAP came into power on December 28.  15 days have passed. According to their promise, the Jan Lokpal should have been executed.”

Commando force for protection of women

Promise: As a solution to the problem of increasing cases of crimes against women, the AAP had proposed the formation of a special commando force.

Action: No information could be gathered regarding the government’s decision on this.

Allegation:  Highlighting the recent gang rape of a Danish woman in the city, Binny said, “If any other government was in power, AAP would have protested Danish woman gang-rape. You (he is addressing Kejriwal) should be ashamed. You said you would make a commando force, you haven't even started discussing it.”

The politics behind all this!

These were the four major issues raised by him. Apart from these, he even made certain political statements. He called Arvind Kejriwal a dictator. The AAP had said it wouldn’t take decisions behind closed doors but Binny says that the same thing is happening and Kejriwal, along with four-five people, takes all the decisions. According to him, Kejriwal doesn’t give regard to other’s views and shouts at people if they disagree with him. He even alleged corruption in the ticket distribution process.

Kejriwal has dismissed these allegations saying, “There’s nothing I can do about what he is saying. First, he had come for minister ship, we refused. After that, he wanted to contest the Lok Sabha polls. He came to my house to ask for the ticket. The party has decided that all sitting MLA’s would not be given tickets for the Lok Sabha polls.”

Binny says that he never wanted to be a Minister. In fact, he says that his name was initially there on the list of Ministers but he himself had withdrawn his name.

Reality: It is a fact that in the end of December when Binny had come to know that his name was not there in the list of MLA’s who would take oath as ministers, he had met Kejriwal and was seen leaving his house looking annoyed. Even then, he had promised to hold a press conference to expose Arvind Kejriwal but then the matter died down.

Secondly, he even criticized the party for not taking action with regard to corruption allegations against the Sheila Dixit (former Chief Minister of Delhi) government. He attributed this to what he alleged Kejriwal’s closeness to Sandeep Dixit, son of Sheila Dixit and a Congress spokesperson.

Kejriwal has always maintained that no corrupt person would be spared, whether he was from the Congress, BJP or even the AAP.

Present Situation:

The AAP has issued a show cause notice to Binny. Senior party leader Yogendra Yadav said that a meeting of all party MLA’s was held but Mr. Binny did not raise these issues at that meeting. He requested the angry MLA not to put personal ambitions ahead of the people’s hopes and expectations. Whether it is a case of sour grapes or Mr. Binny is raising certain pertinent issues, only time will tell.

What did Baba Ramdev say?

(image source:indianexpress.com)

Let’s pick up from where we left last week. In last week’s post “What did the PrimeMinister say?”, we saw that one of the more noticed statements of the PM was that it would be disastrous for the country to have Shri Narendra Modi as PM. Defending Mr. Modi, Ramdev said that it was the Congress party which was disastrous. The reason cited by him was that the wrong economic policies of the Congress had resulted in inflation (increase in prices). He went on to present his economic vision for the country, the central theme of which was the abolition of all taxes in the country. This week, we take a look at the issues connected with his proposal.

Who is Baba Ramdev?

Ramkrishna Yadav, or Baba Ramdev as he is popularly known, is primarily a Yoga guru.

Why are we talking about him if he is just a Yoga guru?

We need to pay attention to what he says because of late, he has become quite vocal about political issues. He is a known supporter of Mr. Narendra Modi, the PM candidate of the National Democratic Alliance (NDA) (the coalition headed by the BJP). And recently, Mr. Modi shared a stage with him and joined him in saying that the taxation laws of the country were a burden on the common man and needed to be reformed. Interestingly, an NGO, in the presence of Baba Ramdev, gave a presentation to top BJP leaders (including Mr. Modi) in the capital regarding this issue and the BJP is said to be seriously considering the inclusion of a similar proposal in its Vision Document 2025.

This brings us to Baba Ramdev’s proposal on taxation.

The proposal is very simple. It seeks to abolish all kinds of taxes in the country, except the custom/import duty (the duty that is charged from people who bring goods from abroad into the country) and replace them with a single Banking Transaction Tax (BTT). But as they say, “The devil lies in details”, so let us dig a little deeper and look at it from various points of view.

From the view point of an individual:

·         The first argument in favour of the BTT is that it will make the taxation procedure hassle-free for the people. No longer would you have to call up your Chartered Accountant on the night of 14^th December (15^th December being the last date for payment of one installment of Advance Tax). No longer would you have to worry about the filing of returns. No longer would you receive a letter from the Income Tax department demanding more tax. All this would be possible because if the proposal is implemented then a charge of 1-2% would be deducted by the bank on each transaction that would be routed through it.

But then this same feature of the tax has a disadvantage also.

·         From an individual’s point of view, this is a regressive system of taxation. At present, not everyone who has an income source has to pay tax. Also, there are various slabs which determine how much tax you have to pay according to the level of your income. But with the levy of BTT, no matter who you are, if you receive some money in your bank account, you will be charged the tax at 1-2% of the amount. And a 1-2% charge on a person who earns Rs.1000 is certainly much more burdening than a 1-2% charge on a person who earns Rs.100000.

From the view point of the Government:

·         BTT would lead to higher revenues for the Government. This is on two counts. Firstly, it would reduce collection costs to almost nil. Secondly, the proponents of this theory say that there would be less tax evasion as all banking transactions would fill the Government’s coffers without any doubt.

      However, the opponents of BTT argue that this is not true.

·         Firstly, India is not a country where each and every person carries out all transactions through banks. So the tax base (the number of people who are liable to pay tax) would widen just theoretically. Practically, it would actually narrow.

·         Secondly, there would be more cases of tax evasion as even those who used to bank their incomes would shift to cash transactions to avoid the tax. Even if cash transactions above Rs.2000 are declared illegal (as proposed by Ramdev) and all higher denomination currency notes like Rs.500 and Rs.1000 notes are withdrawn to reduce tax evasion, this will lead to the creation of a parallel black economy which the country cannot afford.

So will this actually happen if the BJP comes to power?

Having looked at the proposal logically, it is now necessary to look at the views of the politicians regarding this, especially the decision makers in the BJP in order to assess what can happen if the BJP were to come to power.

Nitin Gadkari, former BJP President, and presently, the man who is the Chairman of the committee which is drafting this Vision Document, 2025 has openly talked about seriously considering this proposal. But the latest information is that Mr. Arun Jaitley, the Leader of Opposition in the Rajya Sabha (Also, a lawyer by profession and a Commerce graduate from Shri Ram College of Commerce, Delhi) has said that the proposed changes could blur the distinction between the rich and the poor. The poor would end up paying the same amount of tax as the rich. Mr. Yashwant Sinha, former Finance Minister of India (from the BJP), also reportedly disagrees with Mr. Gadkari who is trying to woo the middle class with this ‘seductive at first sight’ promise of abolishing taxes.

In the end, it remains to be seen whether reforms of the present taxation structure are proposed or a complete overhaul is promised.

What did the Prime Minister say?

Prime Minister Dr. Manmohan Singh interacted with the media on 3^rd January, 2014. This was the third time that he did so ever since he took over as PM in 2004. Let us take a look at what he said on various issues:

On 2014:

Like most press conferences, this one also started with an opening statement. Dr. Singh, in the last part of his opening statement, said: “In a few months time, after the general election, I will hand the baton over to a new Prime Minister.”

His announcement that he won’t be a candidate for the PM’s post after the Lok Sabha elections this year comes just before the All India Congress Committee (AICC) meeting scheduled to take place on the 17^th of this month, in which the Indian National Congress (INC) is expected to announce its PM candidate (no prizes for guessing who it will be – Rahul Gandhi).

On Rahul Gandhi V/S Narendra Modi:

When asked about Rahul Gandhi (presently, the Vice-President of the INC) as PM, he said that Rahul Gandhi has outstanding credentials to be nominated as the Prime Minister (though he didn’t elaborate on those “credentials”).

On Narendra Modi, he gave a rather uncharacteristically aggressive response. He said: “It will be disastrous for the country to have Shri Narendra Modi as the Prime Minister.”

Replying to another question about the perception that he has been a weak PM, Dr. Singh again chose to take a pot-shot at Mr. Modi by saying, “I do not believe that I have been a weak PM. That is for the historians to judge. The BJP and its associates may say whatever they like. But if by “strong PM”, you mean that you preside over a mass massacre of innocent citizens on the streets of Ahmedabad (obvious reference to the Gujarat riots in 2002), that is the measure of strength, I do not believe that sort of strength this country needs, least of all, in its Prime Minister.”

On the economy:

Leaving the political statements aside, Singh also talked on issues. He accepted the fact that his government had failed to curb corruption and tame inflation. He also rued the fact that he had not been as successful as he needed to be in generating employment in the manufacturing sector.

But this didn’t stop him from highlighting the fact that the period 2004-2013 had seen the highest rate of economic growth in India in any nine year period. He also mentioned that the farmers had benefitted from inflation as they received higher prices for their produce.

On the best moment of his tenure as PM:

He cited the signing of the nuclear deal with the United States in 2008 as his best moment. This is not surprising since he had to face a lot of opposition against the deal not only from coalition partners (the Left front which had been supporting the UPA1 government withdrew its support on this issue) but also from within his party. But he asserted himself and eventually with the backing of Sonia Gandhi (INC President), he was successful in getting through with it.

But the fact to be noted here is that in the second tenure of the UPA, there have been many problems in the implementation of the deal and hardly anything has actually materialized to provide benefits to the people of India in spite of the fact that 5 years have passed.

All in all, he answered a lot of questions (the interaction lasted for more than an hour) ranging from corruption to relations with Pakistan and US in his usual soft-spoken and diplomatic manner but the interaction left a lot more to be desired because of the fact that he didn’t give any direct answers to various questions relating to both corruption and the economy. In fact, these two are the areas where he could have done something extraordinary considering the fact that he had a clean image and he was a renowned economist before becoming the Prime Minister.

 There is a buzz around that he may continue doing these interactions every month till the elections.  Do watch this space for more information.