CEA: Move to benefit govt coffers

Chief economic adviser Arvind Subramanian said on Thursday that demonetisation of Rs 500 and Rs 1,000 notes should be seen as transfer of wealth to the government for the amount which doesn’t come back to banks for exchange.

“It is a wealth transfer and not wealth destruction move,” Mr Subramanian said, adding that unaccounted wealth will be affected to some extent.

“But instead of seeing it as reduction in unaccounted wealth, it should be seen more as the transfer of that unaccounted wealth from private to government and public sector,” he said.

To the extent unaccounted notes don’t come back, Mr Subramanian said, is a boost to the RBI and eventually to the government.

“So if private sector spend less, the government can offset it with its activity so as to keep overall activity,” said the chief economic adviser.

On reports of people burning old Rs 500 and Rs 1,000 notes, revenue secretary Hasmukh Adhia said that government has no problem in that as it will reduce the liability of the government. “We have no problem. The amount of money which will not come back to the government is good. We have no problem,” said the secretary. He indicated that government has borrowed Rs 14 lakh crore from public and burning of notes will only decrease that liability.

In a report Edelweiss said that around 20 per cent elimination can lead to reduction in RBI’s liability by Rs 3 trillion ($45 billion). “A large portion of unaccounted money may not get presented in the banking system and hence reduce RBI’s and government’s liability. This money can now get utilised for various economic reforms’ funding,” it said.

The RBI could utilise it for more productive purposes such as higher dividend to Centre and can significantly prune fiscal deficit — more than 50 per cent. It could be used for PSU banks recapitalisation and increase spending towards socio-economic pursuits.