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Demonetisation: One more in a series of long-awaited reforms

The far-reaching implications of this policy are not restricted to immobilising undisclosed income, or curbing cross-border terrorism, or increasing tax collections. The move will enable the Reserve Bank of India to write-off a substantial liability off its books.

Vikas Khemani
"I promise to pay the bearer the sum of five hundred rupees."

These words were taken for granted; till the prime minister, in a landmark move, declared that five hundred and one thousand rupee notes shall cease to be legal tender.

It is a well-thought-out move intended to curb the parallel economy by stifling the movement of black money. There might be a few teething problems, but largely these would be limited to the short term.

The far-reaching implications of this policy are not restricted to immobilising undisclosed income, or curbing cross-border terrorism, or increasing tax collections. The move will enable the Reserve Bank of India to write-off a substantial liability off its books.

At 12 per cent, India is among the countries with the largest money in the form of hard cash. In value terms, it amounts to Rs 16.42 lakh crore. Of this, almost 86 per cent, or Rs 14.18 lakh crore, is in the form of five hundred and one thousand rupee notes. It is estimated that 20-30 per cent total outstanding currency is unlikely to get deposited and/or exchanged, which amounts to Rs 3-4 lakh crore, which the Reserve Bank of India could write off its balance sheet.

This write-off provides it various options. It could, for instance, declare a dividend to the government, which would narrow the fiscal deficit by almost half. This could lead to fall in inflation, strengthening of the currency and subsequent improvement in ratings.

Another course of action could be recapitalisation of public sector banks. The finance minister had set aside Rs 75,000 crore over three years for this in the Budget earlier this year. The additional infusion could strengthen the balance sheet of PSU banks.

Lastly, the government could increase spending on welfare schemes to benefit the marginalised sections of society. With the push already provided to inclusive banking and direct benefit transfer, this increased spending would be more efficient and impactful.

This move shall go a long way in structurally strengthening the Indian economy. The prime minister's continued efforts to curb black money/corruption, undertake tax reforms, and bring transparency & accountability in governance are the reforms India has needed for a long time. I am happy that he is taking them one by one but in a coherent manner.

As the prime minister said, there comes a time in the nation's history when its citizens must come together and support radical initiatives undertaken by the government. We stand behind him and the nation to make acchhe din a reality, sooner than later.   

The writer is CEO, Edelweiss Securities