The ban on INR 500 and INR 1,000 banknotes by India has left many Nepali people and traders in panic after Nepal also banned the sale and exchange of these notes. This has put at risk the high denomination Indian currency notes that Nepalis have been holding. As per traders, the value of high denomination Indian notes that Nepalis have besides the amount in the banking channel could be worth billions of rupees, which needs exchange facility from the government. Vice President of the Federation of Nepalese Chambers of Commerce and Industry Shekhar Golchha spoke to Sujan Dhungana of The Himalayan Times on the impact of the ban of INR 500 and INR 1,000 notes to businesses in Nepal and about the steps that could be taken to solve this problem from the private sector’s point of view.

Excerpts:

How has Nepal’s private sector taken the decision of the Indian government to ban INR 500 and INR 1,000 notes?

I do not want to comment on the decision made by the Indian government to ban high denomination Indian notes. But, one thing for certain is that we have failed to properly handle the situation that has resulted after the ban of INR 500 and INR 1,000 banknotes. It was highly disappointing when the central bank — Nepal Rastra Bank (NRB) — issued a notice saying that there is only around Rs 33 million in Indian currency notes of INR 500 and INR 1,000 denominations with banks and financial institutions in the country. NRB’s notice came as if the ban imposed on high denomination notes would not be a big issue to Nepal as Nepal does not have a huge amount of high denomination Indian notes in the banking channel. It seems that the government overlooked the fact that people in Nepal, especially in western Nepal and in the border areas, use a large volume of Indian currency for day to day transactions. People living close to the Indian border who had high denomination Indian currency notes in stock for everyday use and businesses are awaiting government’s facilitation to exchange their Indian notes. However, the government has overlooked the problems being faced by the general people due to the ban on INR 500 and INR 1,000 notes. The other aspect is that a large volume of Nepal’s trade with India is carried out in cash and the government had not prevented traders from doing business in cash. Basically, trading of food grains, vegetables and fruits, among others is carried out in cash. This is why there is a big flow of INR 500 and INR 1,000 notes in the Nepali market. Furthermore, the government itself allows people to hold up to Rs 25,000 in Indian currency. Despite all these facts, the government has not done anything concrete to address the problem and has not provided any assurance regarding exchange facility of high denomination Indian notes.

Besides the banking channel, how much money do you think do domestic traders have in INR 500 and INR 1,000 denominations?

We can’t deny the fact that a large volume of Nepal’s trade with India is being carried out through non-banking channels. Similarly, Indian currency notes are used on a daily basis in the far western districts. Hence, there could be billions of rupees in INR 500 and INR 1,000 denominations in Nepal, besides the formal banking channel. However, nobody has the exact figure.

It is assumed that traders have a huge amount of high denomination Indian notes, which are now not in use resulting in severe cash shortage for them. How has this affected their businesses and investment?

It is certain that regular businesses have been disturbed and traders’ investment has been affected. In fact, cash trade with India has been affected a lot. Due to the proximity factor, a huge volume of high denomination Indian currency notes are used for Nepal-India trade and other businesses. This in a way had been providing momentum to Nepal’s economy by generating jobs and revenue for the government. I assume that the current halt in transactions and trade through INR 500 and INR 1,000 notes will slow down Nepal’s economy as well. Similarly, the situation is sure to hit the country’s inflation as well. If all trade and business is to be done through the banking channel, this will drive the cost upward. However, on the other hand, transactions through the banking channel will help increase government revenue and promote fair trade in the country.

 There are expectations that the Indian government could exchange the now banned notes worth up to INR 25,000 held by the public on NRB’s request to Reserve Bank of India. This will help ease the problem to a certain extent. But what will traders do with the banned notes they have if they don’t get exchange facility?

There are positive signals that the Indian government may arrange for exchange facility of the now banned INR 500 and INR 1,000 notes worth up to at least INR 25,000 held by the public. If this does happen then it will provide huge relief to the common man. However, traders will certainly face a crisis if the government does not arrange exchange facility. Traders are in a wait and see mode. If the government is unable to offer any solution then the traders might come up with a solution on their own to exchange the high denomination Indian notes they have.

The Indian government’s ban of its high denomination notes is aimed at formalising the economy. Can Nepal learn any lessons from this move?

In Nepal the situation is completely different. Unlike India, the concept of black money and white money does not exist as such here. Nepal has a small parallel economy as compared to India as the tax brackets are low here as compared to those in India. The government here has been imposing 20 per cent income tax in industrial sector and 25 per cent in trading businesses, which are relatively reasonable. At one time, India had imposed up to 60 per cent income tax. In this sense, Nepal does not have rampant black money. Another major thing is that Value Added Tax (VAT) has already been implemented in Nepal. Implementation of VAT assures accountability in different sectors as VAT helps track the entire transaction from its origin to the end.

Citing that rampant use of Indian notes in Nepal has resulted in the problems being faced by the public and traders at present, some have urged for the need to control increasing use of Indian notes in Nepal. What is your take on this?

It would be a disaster developing perspectives on this issue sitting in Kathmandu because people in the Tarai and border areas have easy access to India and are culturally bound. People of both countries regularly move across the border as if they are living in the same community. In some districts like Baitadi and Darchula, people use Indian notes more than Nepali notes for daily transactions. In such a context, the government should try to control the flow of Indian banknotes in a gradual manner. It should not be done in one move.

Lastly, what do you think could be the solution to the current situation in Nepal after the ban on high denomination Indian notes?

I only see one solution and that is the government should take people’s problems as its own and should arrange for a proper exchange facility of INR 500 and INR 1,000 notes. Forget about traders and businessmen, the ban on INR 500 and INR 1,000 notes has left thousands of common Nepali people in panic. More than four million Nepalis are working in India who have been sending money to their families in Nepal and their hard earned money is at risk. Should not the government solve the problems of its public?