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India needs a Rs200 note, not a Rs2,000 note and the science behind it
What should be the size of the Apple Mac screen? Technically, Apple can produce hundreds of different sizes, but they have settled on four: 13.3 inch, 15.4 inch, 21.5 inch, and 27 inch. The four are spaced close enough, and far enough to satisfy most Apple consumers.

Industrial design has a mathematical concept called preferred numbers. Way back in 1870s, a French engineer Charles Renard proposed a system based on logarithmic scale to produce a limited number of sizes to cover a wide range. A variant of that internationally accepted system is the 1-2-5 series, which is widely used in minting coins and printing notes.

The 1, 2, 5, 10, 20, 50, 100, 200, 500, 1000… is that series. The beauty of the series is that any adjacent numbers differs by a product of 2 or 2.5. As a result, they are spaced close enough but cover a wide ground. How? Let us look at an Indian street vendor who still measures the fruit he sells on old-fashioned scales. If he has weights of 100gms, 200gms, 500gms and 1 kg, he can give you fruits in multiples of 100gms by using a maximum of three weights. E.g. 800 (500+200+100), 900 (500+200+200). In no case does the seller need to use four weights. If you must follow the decimal system, this is an extremely efficient system.

Now look at the Indian banknotes. Until 8 November 2016, India had currency (notes or coins) with a denomination of 1, 2, 5, 10, 20, 50, 100, 500 and 1000 rupees. Below Rs100, transactions were efficient. The gap between Rs100 and Rs500 (1:5) has been too large. Over the last few years, it has produced inconvenience (certainly) and contributed to inflation (probably). It is well known that bigger values and larger gaps can increase prices. In January 2002, when most European currencies converted to Euro, prices rose on many goods as a result of rounding up. This rounding up phenomenon has made coins below one rupee disappear from India.

I had hoped that Reserve Bank of India (RBI) would use the demonetization to introduce a Rs200 note. That would have bridged the gap between Rs100 and Rs500 and made the cash economy efficient. What we got instead was a Rs2,000 note.

With the death of the Rs1,000 note, the new ratio of Rs500-Rs2,000 (1:4) to follow the already inefficient Rs100- Rs500 (1:5) is not sustainable, now or in future. And since the new Rs500 note is as yet rarely available, the ratio currently is Rs100-Rs2000 (1:20). When the maximum prescribed ratio for efficiency is 1:2.5, in practice we have 1:20, which is catastrophic. That is why; we have millions of people with wads of Rs2,000 notes unable or unwilling to make a small purchase of Rs200.

This is pure and simple mathematical illiteracy. I expect the Reserve Bank to be aware of the Renard series, which is an ISO standard. Politics and economics can be subject to opinions, but not mathematics. You invite disaster when you do not follow the basic number rules.

What India needs to do urgently is to introduce an Rs200 note. And if Rs1,000 is to be permanently abandoned, then to withdraw Rs2,000 as well. For efficient transactions, the ratio in the 1-2-5 series must never exceed 2.5.

(Ravi Abhyankar is an independent analyst and strategic advisor.)

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### Gaurav Aggarwal

In Reply to Anoop Sharma 2 years ago

### Gaurav Aggarwal

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### Pankaj Jangid

In Reply to Dilip SK 2 years ago

### Probably, this is true. And probably ₹2000 note will go away in very short time.

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### The damage has already happened and now it is time to think of alternate solutions to reduce the difficulties faced by common man. As suggested it would have been better to introduce Rs.200/- or Rs.250/- denomination currency notes instead of high value note of Rs.2000/- which has created the confusion and matters becoming worse for the common man. Yet another suggestion is to introduce Coins for all denomination currencies of Rs.20/- and below. Though the step for demonotisation was welcomed, I think Mody was ill-informed of the possible consequences by the bureaucrats in Finance ministry and RBI. Or even they do not want to be on the wrong side of Mody's books. Urjit Patel took over only a few weeks back and may crave for a post in the next ministry. What happened to the learned economists in Finance ministry and and DBOD ?. Now the worst is yet to come unless immediate proactive steps are not being initiated . To err is human but not with the lives of innocent millions in the country.

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Demonetisation: Implementation is highly anti-poor, says Dr KC Chakrabarty
Here is an interview with Dr K C Chakrabarty, former Deputy Governor of the Reserve Bank of India with Moneylife. Dr Chakrabarty gives us his no-nonsense views, for which he is famous, on how to tackle the issues raised by demonetisation of currency. A banker for over 40 years, his is an insider account…

Moneylife (ML): Based on what you have observed so far, there is no doubt that demonetisation ought to have been planned better. Would you have suggestions on how to salvage the situation or improve things even now, to minimize the negative impact?

Dr KC Chakrabarty (KCC): The negative impact is that you have to print new notes and you have to distribute them equitably. I believe that the present system of implementation is highly anti-poor. A person who has five bank accounts can withdraw Rs1.20 lakh. A person, who has only one bank account in a rural area, is not able to withdraw anything and is standing in the queue. The policy seems to be that the poorer you are the more you will be hurt. Look at another example. If I have five ATM cards, I can draw Rs10,000 even today. Nobody has bothered about this issue. When something is in short supply, you cannot manage things with a rule. I would say if you want to permit withdrawal beyond Rs2,000, you impose a fee. A sort of cash transaction charge.

ML: A charge to withdraw my own money? That is a radical suggestion. Won’t it hurt the poor?

KCC: Oh yes, a charge to withdraw money. That is because you are not able to give everybody the cash they want. You will have to ration it. One way is to make it equitable is to levy a fee, so that people only withdraw what they really need. You can reimburse the poor like you do with the LPG subsidy. Otherwise, you are not going to be able to control the situation.

In addition, if you want to encourage digital transactions, it will not happen by speech alone. You have to make it more expensive to do cash transactions while digital transactions must be free or even incentivized. As it is banks are charging you for withdrawing money from ATMs (more than three withdrawals a month), but they do not charge you to withdraw money from the branch.

Another important issue is the geographical distribution of currency notes that are being printed.  You have to be able to reach the currency to the last mile. Transporting currency is not easy. You can have Air Force planes carrying it up to a point, usually to locations where there is an airstrip. But you need to distribute it securely even after that.

I have dealt with these situations before. It is all very well to say that the army or the Central Reserve Police Force (CRPF) will provide security, but the fights begin over who will pay the charges for it. There is bureaucracy and red tape everywhere.

These issues need to be monitored on a real time basis. We need an on-going declaration by the RBI of what denomination notes – especially Rs500 and Rs100 have been supplied to which area on a daily basis and how many have been received from the security presses. The disclosure must be complete in terms of production, transportation, distribution and last mile availability, only then will you have a snapshot of what is happening at the ground level. Today, all this information is computerised and available; why can’t it be put in the public domain? Do we know where the Rs100 notes are going? Is it to metro cities or rural areas?

If we expect people to bear the pain and suffer for some time, then we should also know how much I am suffering vis-à-vis other people.

When something is in short supply, the big question is, is the currency being rationally, equitably distributed in terms of denomination and geography.

ML: Will you explain the currency situation today, based on your knowledge as a Bank Chairman, Central Banker and a statistician:  We believe that the government has put on hold printing of Rs2,000 notes and has asked RBI presses to print Rs500. How long before these flow into the market and when can we see some mitigation of the situation?

KCC: If they work very efficiently, it will take at least five to six months’ time before the situation stabilizes and they are able to supply all denomination notes. We need to print more Rs500 notes and Rs100 notes and distribute them swiftly. When anything is in short supply, even currency, there will be hoarding.

There are several issues in achieving this. I am privy to certain information so I can tell you that the second press is in a mess for the last two years. The Chairman and Managing Director of Security Printing and Minting Corporation of India (SPMCIL), which is under the central government, was sacked just a few months ago following a public interest litigation. This is in the public domain. There have been other problems earlier too.  How will you manage a crisis situation when you do not have a chairman of the company? A joint secretary, who does not understand issues involved in high security currency printing.

ML: How can the printing process be hastened? There are some estimates about the presses working in two shifts and there is talk about whether they can work in three-shifts. What is your view?

KCC: That is not possible. Do you have people even to work in two-shifts? If you try to push them to do more, there could be a breakdown because of wear and tear of old machines. What happens then? People must also understand that currency printing is done in a highly secure environment. Even if I entered the security press, I have to go through a series of checks. My pockets are also checked, even as chairman of the company. Therefore, you cannot simply put temporary people on the job in the printing press and ask them to produce more currency.

KCC: I believe that the banking system will not be able to deliver so you need a master plan to deliver currency – first to various hubs and then to the last mile.  You need to have a franchisee model where people pay for the cash. In rural areas, people have to travel 10 to 20kms to get cash, so they incur expenses already.

It is a myth that you do not want to burden the poor- the reality is that they pay more for everything even today, if nothing else in terms of time and productive work hours lost. We are used to giving lip sympathy to the poor.  So the poor will not mind a charge if the system works and they get their money without hardship– you can always reimburse them by way of a direct refund into the accounts of the really needy.

Earlier we used to make foreign exchange available at bank counters. If they could make forex available, why cannot they do so with domestic currency?
Our public sector banks (PSBs) are not competent to ensure last-mile reach despite their network and non-public sector banks do not have a network. So it has to be done on a commercial basis. You may need to regulate the fee charged, but unless you create franchisees, you will not be able to reach currency through the banking system.

Do you know there used to be a flourishing business for procuring and distributing small change, small denomination new currency (Rs5, Rs10 and Rs20)? The business operates very close to Reserve Bank’s regional offices and RBI employees are fully aware of it. Go and check who are the people in the queue to procure new currency or exchange soiled notes—they are all touts.

When anything is in short supply (clean notes) there is a premium for it. RBI officers are fully aware of what is going on, that is why I had said, RBI should not distribute any currency at its offices; they should concentrate on banking supervision. However, my suggestion was opposed by the employee unions.

So my solution is that you need a franchisee model to ensure distribution of currency to the last mile – you can regulate the business, fix a price and give direct subsidies to the poor into their bank account, but initially everybody must pay. That is the only solution. Instead, today you have the Prime Minister’s Office (PMO) doing workshops on digital payments and mobile. That is not the job of the PMO.

ML: We are still not clear if this franchisee idea will be accepted.

KCC: As a deputy governor, I had recommended this in a report, sometime in 2013, when Dr D Subbarao was the governor (of RBI). I was heading a committee comprising to looking into the shortage of coins and notes in the system and how to improve the distribution.  My report is lying with the Finance Ministry. They have not even made the report public.  The report clearly said that you will not be able to improve last mile availability of notes and coins unless you have a franchisee model.

ML: You have been a big proponent of empowering those who do not have bank accounts.  A large number of no-frills accounts were opened during your tenure as deputy governor. Will demonetisation and the desperation for cash change things?  What are your thoughts on digital transactions?

KCC: You have to bring down the banking transaction costs. The fact is that banking transaction costs are so high that people are afraid of going to the bank. This is true across the globe. Even in the US, 20% to 25% of the people do not use bank accounts because cost of banking transactions is very high.

In India, at the very least we should have a proper consumer protection system in place. You may push a person to do digital transaction, but once a person has lost money at an ATM or in a digital transaction, he will stay away for 10 years. All over the world, unless the bank can prove that the customer is at fault, his money should first be credited to his account. That is a global rule. This is not yet implemented in India – there is only a draft notification. So you have to make things cheaper and safer for people. When the rich lose money, it makes news, but when the poor lose money, especially in a remote rural area, they have nobody to turn to and it is lost forever.

ML: Would you have any specific thoughts on how to tackle black money?

KCC: There are three sources of black money in our country –
election, religion and administration. So first, you make all political donations cashless. The second source is religion. If you put money in a hundi at the temple, the minute they put it in the bank account, it becomes white. There is no know your customer (KYC) for that, but in a JanDhan account you are going to investigate all deposits above Rs250,000. The third is administration. All the perquisites enjoyed by government officials, members of Parliament (MPs), ministers and judges must be taxed at market value and valued on the basis of cost-to-company or country. Our ministers stay in a free residence, that is tax-free – why should it be priced at market value? Same goes for telephone calls and travel. You can pay them Rs1 crore as salary, but ensure that everything is taxed and priced at market rates.

(Disclosure: Dr KC Chakrabarty is on the board of trustees of our sister entity Moneylife Foundation, a not-for-profit organization engaged in advocacy for savers and spreading financial literacy

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### A few notable points and responses to them - When KCC says : Our public sector banks (PSBs) are not competent - - what did you (KCC) do in office as Dy.RBI Gov. to ensure that these PSBs are made competent ? - can the evil of competency Vs. in-competency be dealt with overnight ? - who hired those people as - Bank Employees with just 25% marks (just because they enjoy constitutional reservation) - to be competent enough to run the bank ? - you (KCC) might come under fire for issuing such statements - as incompetent Bank staff of the PSBs. Well, there are things people can throw up on you - e.g. you are from Upper Caste and you are insulting the reserve castes ! Now on the case of when KCC says - my suggestion was opposed by the employee unions - who allowed these unions or formulated them ? All in all - I did NOT see such articles OR interviews from KCC years ago - what was he doing during those days - 15.06.2009 to 25.04.2014 ( 1776 days OR 253 weeks and 5 days OR 42,624 hours )

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### Govinda Warrier

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### Govinda Warrier

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### vswami

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### Govinda Warrier

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### Mohan Krishnan

In Reply to Govinda Warrier 2 years ago

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### Those who are in charge of governance and policy formulation should keep these ideas in view while planning for the future. The 2013 report the Ex-Deputy Governor mentioned(lying in the Finance Ministry) also should be examined by the ministry on a priority basis. In view of the disclosure at the end, no comments on the general criticism of the system. The Privatisation of currency distribution may not be in the best interest of the nation at this stage.

Withdrawal from Jan Dhan accounts cut to Rs 10,000 a month
In view of reports of Jan Dhan accounts being used to hoard unaccounted money, the Reserve Bank of India has curtailed the withdrawal limit from such accounts to Rs10,000 per month.

"Fully KYC compliant account holders may be allowed to withdraw Rs10,000 from their account, in a month," RBI said on Wednesday.

"The branch managers may allow further withdrawals beyond Rs10,000 within the current applicable limits only after ascertaining the genuineness of such withdrawals and duly documenting the same on bank's record," it said.

For non-KYC compliant accounts, the withdrawal limit has been fixed at Rs5,000 per month from the amount deposited after November 9, with an overall ceiling of Rs10,000.

"The decision has been taken to protect the farmers and rural account holders of Pradhan Mantri Jan Dhan Yojana from activities of money launderers and legal consequences under the benami property transaction and money laundering laws," it said.

Earlier, the government had warned people from letting their Jan Dhan accounts being used by people to park their unaccounted cash.

The Finance Ministry had set an upper limit of Rs50,000 for deposits into Jan Dhan accounts.

Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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# Essar Steel: An Intense Battle for Control that May Not End in the Indian...

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