The Preparatory Phase

A comprehensive study will need to be carried out to understand the effects of the proposal on the micro level, on all segments of Society and the Economy. Only the Government has the wherewithal and the resources necessary for conducting such an exercise.

Banks will have to invest in technology for efficient management and infrastructure for deeper penetration into areas of low presence. This will be a long-term process and Banks will have to plan their strategies accordingly.

The citizens will have to be informed about the new system over a certain period through the use of every possible means and media. A nationwide effort will have to be made using all existing administrative network to issue unique P.A. Numbers / Social Security no. and cards to each and every citizen.

The implementation phase

The system can be brought into force without any major change in the constitution. It is truly benevolent and fair system, in line with the basic socialistic philosophy of nation. System can implement in following steps,

  • Carefully planning in phased manner.
  • Timeline for all phases
  • Abolition of the existing Tax system.
    • Abolition of the existing Tax system will be effective from a single predetermined date. Simultaneously, the deducting of Transaction Tax from all bank transactions will commence.
  • No currency notes of denomination higher than Rs. 50/-.
    • Currency notes of denomination higher than Rs. 50/- will be phased out in a time - bound manner. All this money will attract the standard deduction of Transaction Tax and the balance will be treated as a legitimate wealth thereafter. Regulations governing Cash transactions will also come into force.
  • Anticipation of the magnitude and time of revenue generation.
    • The magnitude and time of revenue generation by this system needs to be anticipated. Initially there will be huge deposits of cash of high denomination into banks, and there will be huge inflows of revenue throughout the phase of currency compression.
    • To handle and manage such huge transactions, banks will need to widen their network, and upgrade their operating system comparable to international standards
  • Monitoring the effects of implementation steps
    • The effects of these steps will need to be carefully monitored and fine-tuning action will have to be taken as and where required. Tools of monetary governance will have to be judiciously used to control inflation.
  • A strict watch on Government spending.
    • Post implementation, a strict watch will have to be maintained on Government spending. The highest degree of transparency will have to be brought into all Government spending decisions

Round the clock, round the year continuous stream of revenue to the Government. The day when currency compression is completed, and 50 rupees is the highest denomination in force, all currency money can be assumed to have come back into the system. Thereafter, all subsequent transactions will yield transaction tax and the Government will receive revenue in a continuous stream, round the clock, round the year.

Expectations from government

In the initial transition period, people are likely to move to cash transactions rather than transactions through bank where the Transaction Tax is going to be implemented. Therefore, in a given time frame, the finance ministry / RBI must make provisions to remove the higher denomination currency notes from circulation. Say, within a year, the highest currency denomination should be Rs. 50.

With only low valued currency available for cash transactions, people will have no choice but to go for transactions through banks, thus helping boost the government revenue collection. All cash money in higher denomination will have to be deposited in banks within this time frame and will attract 2 % Transaction tax. Source of this money will not be asked.

Government should make legal provisions to restrict cash transactions up to a certain limit (say Rs. 2000/-). Recognizing cash transactions only up to this defined limit as legal transactions can serve the purpose. And also, government should make strict/stern legal provisions against dishonored bank transactions.

Expectations from banks

The role of banking system can be compared to the circulatory system within the human body. Just like the blood vessels carry the essential nutrients to all the parts of the human body, the banking system is expected to supply the "money capital" to the all the individuals and the institutions.

Role of Capital in the economy is like that of the blood in the human body. As the blood carries the required nutrients to the individual cell, capital promotes productivity in the economic system. Any disorder in the circulatory system leads to disease in the entire body. Similarly, a flawed capital creation and distribution system has an equally debilitating effect on the economic system.

Banks will have a very special role to play. Since it has been proved over a considerable time period that present Banking System is quite reliable in view of its efficient operating standards, cultivated and trained human resource, least corrupt status among financial.