An Indian motorist pays with a 1,000 rupee note at the Nivedita Setu Toll Plaza at Rajchandrapur, on
the outskirts of Kolkata. Photo credit: DIBYANGSHU SARKAR/AFP/GettyImages.
An Indian motorist pays with a 1,000 rupee note at the Nivedita Setu Toll Plaza at Rajchandrapur, on the outskirts of Kolkata. Photo credit: DIBYANGSHU SARKAR/AFP/GettyImages. 
Economy

Take Note: Toll Plazas Big Pointers For Cash Movement

BySubhomoy Bhattacharjee

The flow of traffic has to be monitored carefully to figure out the depth to which currency notes has returned.

It will also provide an excellent feedback loop to the RBI – which will review its interest rate policy on 6 December.

Toll plazas on the national highways are the test case to figure out if adequate currency stocks have reached everywhere. As soon as the free flow of traffic past toll booths stopped from Saturday morning, snarls enveloped the busier of the 370 odd booths. As of 3 December, the payment of toll in old currency was stopped.

It is a test case at the national level. The flow of traffic has to be monitored carefully to figure out the depth to which currency notes has returned, particularly with the segment of the public who are clearly large spenders (car and commercial vehicle owners). Banks were reportedly asked to build up currency reserves at these plazas to provide them with change for toll paid at the booths. How it holds up will determine if the pain of the demonetisation has indeed begun to ebb. The big test will be of course on Monday morning, at the key plazas around the metros.

Demonetisation And Interest Rates

Cash movements at toll plazas will also provide an excellent feedback loop to the Reserve Bank of India (RBI) – which will review its interest rate policy on 6 December - on whether precautionary reasons for people holding money have risen. If that is the case, this will be a new monetary policy dimension for India. Due to persisting inflation, Indians have used money largely for transaction purposes. Use of money as a store of wealth is correspondingly pretty low—the only exceptions are a percentage of black money holders for whom the store of money as an asset is useful because it can rarely earn any interest (gold or realty are also largely interest free).

According to the Keynesian view, money held for transactions and precautions are not interest sensitive. So if RBI Governor Urjit Patel clips interest rates on Tuesday, the sum held for precaution will not dissolve. In which case, the money hoarded as cash, as some experts surmise, would not return to circulation. This is also possible as the public unaccustomed to holding money as a precaution may not have any direction finder and could increase its holding of cash. This holds for Tobin’s Portfolio Approach theory too.

Demonetisation And Tax

There has been plenty of discussion on whether the Narendra Modi government has let off tax evaders with its new Taxation Laws (Second Amendment) Bill, 2016 The bill has been panned for being lenient towards those who have black money. Let’s look at the provisions carefully.

First, despite the noises about imposing 200 per cent penalty on undisclosed income, it is fiendishly difficult to do so. It is to get around this problem the government and the revenue department have come out with the tax plan of 50 per cent on undisclosed income, including penalty. Without this provision there would have been a peculiar situation. The income tax department has found to its cost over the years that courts do not look charitably at imposition of penalty. Any attempt to do so gets struck down.

Consequently, once penalty is blown out of the court, the only tax chargeable on black money would be the 33 per cent maximum rate that everyone with declared income also pays. To overcome the problem, the bill has set a combined 50 per cent tax rate. It is higher than the 45 per cent rate of tax set for the Income Declaration Scheme of September. Adding the interest one has to forego on the compulsory saving locked in bank accounts, the total tax rate becomes 60 per cent.

Demonetisation And Gold

There was a scare, possibly created by those with vested interests that the tax man was coming for your gold. In fact, right from the first hours after the announcement of demonetisation, there has been periodic episodes when social media has gone into overdrive with scare stories. There is little doubt why this is so. In the first few hours immediately following the demonetisation announcement, people rushed out to buy gold with their undeclared income, sending its price to absurd heights. The gold merchants have not exactly covered themselves with glory in the entire episode as, even later, there is anecdotal evidence to show that they have made attempts to convert their unaccounted cash into gold. So there is good reason for this constituency to create preemptive noise on gold.

But the demonetisation plan by the government is obviously not targeted at unaccounted deposits of gold. Unearthing unaccounted for gold is the task of the income tax officials and that too based on painstaking gleaning of evidence. As matters stand, the government has made it clear it has not established any gold control order. In fact, in the absence of strong enforcement machinery, it would be counter-productive to do so.

The rules, which go back to 1994, relates to how much jewellery can a family hold. There is no limit a person or a family can hold—which is intuitive. It is only about being able to prove that a hoard which is discovered has been purchased legally, which is a fair requirement. Forget the misinformation trail in the social media. Since there is no Gold Control Act, the tax man cannot just walk into any house and demand to inspect the gold held in it. The rules apply only in cases where the tax department decides to conduct a search and seizure operation for tax evasion. It is obviously fair that in such cases the officers would want to inspect the jewellery holding of the family. This has always been the case.

Under the 1994 rules, which have not been changed, a married woman can claim a holding of 500 grams of gold, an unmarried woman 250 grams and men 100 grams, without having to establish receipts. This limit will not be seized, even if prima facie, it does not seem to be matching with income records and would instead be released on the spot. Even for higher holdings those conducting the search have the discretion “not to seize even higher quantity of gold jewellery based on factors including family customs and traditions”.

Demonetisation And Shortage Of Cash

The RBI’s indent for printing of Rs 500 notes is 5.7 billion for the current year and that for Rs 1,000 notes is 2.2 billion. Note, the figures are not about the value of the notes but the actual number. So the total number of notes of high denomination to be printed is 7.9 billion pieces.

In five months, the automated currency note printing presses at Mysuru and Salboni, which can run 24 hours without a break, have to print the same number of Rs 2,000 and Rs 500 notes earmarked for the earlier Rs 500 and Rs 1,000 notes that was meant to do so over 12 months. So, as I wrote in this article in Business Standard, the gap is likely to close out by the middle of the last quarter of this financial year.