Post-demonetization the Way forward

CII has been consistently submitting suggestions to help manage the disruptions caused by demonetization, especially for SMEs, farmers, and the common people. The Government has now indicated that businesses that are coming into the formal sector will not be harassed by the Income Tax Department and instructions in this regard have been issued under Section 119.

Small and Medium enterprises (sMes)

SMEs are facing some liquidity issues due to currency withdrawal limits for meeting operational expenses incurred for running their businesses. These include paying daily wage contract workers, local transportation, paying entry taxes, and other petty expenses incurred daily.

Further, SMEs working on projects in sites located in remote areas need a lot of cash. The insufficient flow of currency has badly affected work in such projects. There is a great chance of project time over-run due to this crisis. Since the level of digitization at the micro enterprises level in smaller towns is limited, SMEs are also facing cash inflow issues.

CII has suggested an increase in the cash withdrawal limits from the current accounts for SMEs, and has also suggested that the Government conduct awareness sessions in partnership with industry bodies. This would help acquaint small enterprises with various digital payment services to assist them in the smooth transition to cashless transactions.

Farmers In the current agricultural marketing system, payments to the farmers are made in cash by the market intermediaries, notably arthiyas in the regulated mandis, and village traders, etc. The farmers are accustomed to cash payments, which also make it convenient for them to purchase inputs immediately thereafter.

A large number of farmers hold cash which is legitimate, as they are exempt from Income Tax. CII has therefore recommended an increase in the daily withdrawal limits for farmers, and allowing higher level of deposits without scrutiny.

Financial sector

Non Banking Financial Companies (NBFCs) lend significantly to segments such as transport operators, farmers, equipment hirers, SMEs, and small traders, and are repaid on a routine basis through cash collections. The biggest risk for NBFCs is a rise in defaults and Non Performing Assets (NPAs). As most large NBFCs are borrowers from banks and money markets, the rise in default could pose systemic risks. CII has therefore recommended that the RBI may consider relaxation in the provisioning norms for NBFCs and MFIs till March 2017.

Similarly, in the insurance sector, default or delay in payment could result in losses to policy-holders and to the company, as the company would already have incurred significant expenses during the sale. CII has requested that insurers be allowed to relax lapsation and other terms of policies to protect the interests of policy-holders.

Suggestions for an economic turnaround

Some measures can be taken to ease the short-term difficulties of the public and build towards a sustainable turnaround in the economy. CII suggestions in this regard include:

• The personal income tax rate should be lowered, along with a reduction in the corporate tax rate, in the forthcoming Budget. CII has recommended that, after removal of exemptions, the corporate tax rate should be lowered to 18%. Likewise, the highest tax rate for individual tax payers should be brought down to boost demand and compensate for deflationary tendencies. More people will then be encouraged to enter the tax net.

• Public investment should be stepped up to offset the job losses that have taken place. The Government, in consultation with the States, can identify specific projects that can be expedited. These projects should be labor-intensive and create jobs in rural areas where many workers have returned. Examples of such projects include road building, minor irrigation works, and projects related to agricultural warehousing and marketing. Post-demonetization the Way forward COVER STORY Communiqué January 2017 | 13

• The Government has actively moved towards a ‘plastic economy.’ There is a need to roll out digital connectivity and smart phones to the last mile, as also educate users, especially in small towns and villages. Rural areas need to be prioritized in terms of cash availability, since farmers are used to being paid in cash, and penetration of the banking system is low.

• CII suggests that the Government and Reserve Bank of India devise appropriate savings instruments so that households do not maintain savings in cash. Micro financial products that are easily accessible would be the way to go.

• The use of cash in the unorganized sector needs to be reduced by encou raging tiny enterprises to enter the formal market. In addition, the ease of doing business should be facili t a ted to encou rage enterprises to grow, and step into the formal sector.

• There is a need to tackle cash use in specific sectors such as real estate, by reducing stamp duty, and gems and jewelry, by lowering import duty, etc.

• Applicable charges on credit and debit cards need to be studied and reduced to the lowest possible. Customers should not be charged at all, and, if possible, some incentives should be given to them for the use of electronic payments.

• The penetration of smart phones is much lower than that of ordinary mobile phones. Payment methods without smartphones have been developed, but are not yet being widely used. Pilot projects for such payments must be encouraged across the country.

Source: CII Communique  January 2017

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