On May 16 the government of India announced that it would impose a TCS (tax collected at source) of 20% on all international credit and debit card transactions made by Indians on their foreign travels from July 1, 2023 onwards. On May 19, the Reserve Bank of India announced that the 2000 rupee notes would be withdrawn from circulation though they would continue to be legal tender. The general consensus seems to be that both these are non-events. They will not impact many people and will not cause any real damage to the Indian economy. These predictions may well prove correct. But the interpretation misses the wood for the trees. We need to take a step back and understand that both announcements are problematic.
First, it is not clear why either of these announcements was necessary. The 2000 rupee note was introduced during the demonetisation episode of 2016 partly as a means to rapidly remonetise the economy till the time that currency notes of other denominations became available. As per the RBI’s recent notification, these notes have served their purpose, and are no longer commonly used for transactions. If this claim is correct, then why was there a need to withdraw them from circulation now instead of letting the notes become naturally redundant over time? The RBI could have simply instructed the banks to stop dispensing these notes.
Moreover, since the notes are not being demonetised and will continue to retain their value, the RBI could have also allowed users to exchange or deposit them over an unlimited period of time, instead of imposing a deadline of September 30, 2023 to do so. It is not clear why this deadline is necessary, nor is it clear why this announcement was sprung as a surprise instead of giving the users and the banks ample notice so that they could prepare for the change. Even if the 2000 rupee notes account for only 10.8% of the total notes in circulation, withdrawing them in this manner will cause inconvenience for many people, especially those in the cash-based informal sector that is still recovering from the devastating impact of the pandemic.
The rationale behind the imposition of TCS is even less clear. If the purpose is to collect information about a few people who are allegedly spending large amounts abroad using credit or debit cards thereby bypassing the foreign purchase limit of $2,50,000 permitted under the LRS (Liberalised Remittance Scheme), then this announcement is a disproportionate response because it will end up penalising every Indian who travels abroad to make perfectly legitimate international transactions. This is similar to the demonetisation episode when the entire country was inconvenienced in order to punish a few.
More fundamentally, the Indian economy has benefitted enormously from the liberalisation reforms of the early 1990s. During the last three decades, Indians have undertaken vast amounts of cross-border transactions. A significant percentage of Indians today live in a globalised world where they can easily travel to other countries for leisure or education or business purposes. We need to further encourage free flow of people and money across borders to be able to enjoy the fruits of globalisation. The ability to spend using credit or debit cards anywhere in the world is a critical element of this process. By making these purchases costlier, the recent TCS rule disrupts the financial freedom that a growing number of Indians have come to enjoy over the years, both at an individual level as well as from a business perspective.
Second, it seems ironic that these announcements were made when the country is trying to internationalise its currency, for example by using it to trade with other countries. An important pre-requisite for a currency to become international is people having confidence in it. Frequent withdrawal of currency notes without any prior warnings or increasing the cost of using the currency in other countries dent the credibility of the rupee and move India farther away from the goal of making it an international currency.
Finally, both these announcements come at a time when the Indian economy is struggling to find its feet. Forecasts by major organisations show that the economy is going to slow down in 2023-24. Much of the growth witnessed in the last year was due to the release of pent-up demand once the pandemic related mobility restrictions were fully removed. By now, that pent-up demand is exhausted. The two main engines of growth have also not been performing well. Non-oil goods exports contracted on a year on year basis in the quarter ending March 31, 2023, and private sector investment continues to be sluggish. At such a juncture, it is important for the government to create an environment in which the private sector feels confident to start investing again. Instead, the surprise withdrawal of the 2000 rupee notes bringing back memories of the 2016 demonetisation and the abrupt TCS announcement, undermine confidence in the policy framework. This kind of uncertainty discourages private investment even further.
In order to revive rapid economic growth, it is essential to ensure policy stability and predictability. The two announcements of last week are likely to create the opposite effect. This kind of sudden announcements act as a reminder that the government without any warning can introduce rules that may disrupt investment plans and hamper economic freedom. A proliferation of rules and regulations in this manner may seem non-events at first brush but cause long-term damage to the economy.
