• Mayank Mehraa CFA, FRM

Open Letter to the Finance Minister

As sent to the Ministry of Finance- Union of India


Dear Ma'am,

 I have certain suggestions upon the current economic situation which if you at least review I would be truly honoured.

With respect to the current economic situation, I strongly believe the following are namely responsible and the second part should advise you on how one lynchpin reform could change the entire situation. 

The current economy is facing a crisis dominated by lower spending and capital liquidity being crunched. 

While the demonetization was a revolutionary step to curbing the parallel black economy, I feel it momentarily succeeded but people out of force of habit continue to hoard money. Now with GST and the PAN/ ADHAAR being enforced in full force this hoarded money has come out of the system and can not contribute to the churn. This delay in the churn of capital has increased defaults and credit risk in the general system. The rising risk has eventually caused fear of unemployment in the masses decreasing consumption expenses and increasing capital laying in banks. This increase in the capital in a savings account has required the banks to hold a higher reserve of free capital and hence reduce loan outflows which in turn impacts business growth, completing the vicious cycle which has trapped the entire economy as we know it.

Considering you agree with my assessment of the situation, I would like to point out a few suggestions

1.  Interest on Savings Should be reduced to 1.2% for students, 2% for the general people and kept at 6% for senior citizens while introducing shorter-term FDs.

2.  The government would introduce "No Questions Asked" Bearer Bonds that can be purchased with cash carry a 4% pa interest payable only at the time of redemption. Redeemable only into bank accounts.

The 1st Step would focus on making sure money moves into consumption, the FDs would decrease problems of ALMs for the banking system and allow them to loan out more capital since they will need to hold lesser money. 

The 2nd step would focus on the hoarded capital in the form of cash lying in households, while the money would enter the system the only way for people to get that back would be at the time of declaring their identity and only into banks.


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Sincerely

A proud citizen of the Country

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