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Q. Need to increase OD Limits: Discuss how increasing the overdraft limit will helps in reviving the disrupted economic activity due to demonetisation.
Nov 23, 2016 Related to : GS Paper-3

Ans :

Introduction-
The decision to demonetise the high value currencies (Rs.500 and 1000) have disrupted the economic activity in the country and it has hurt mainly small business holders. Though government is undertaking various steps, but it takes time to get back to normal situation.
Issue-
  • Shortage of currency notes is breaking down the supply chain of companies and halting production.  Supply chains are getting choked as consumers are holding on to their cash to make essential purchases, leading to a dip in sales in retail outlets.
  • Majority of the nine million odd retailers in India deal only in cash. Inability to sell to customers is rippling upwards through the supply chain.
  • As the supply chain comprises wholesalers, stockists and retailers. As retailer does not have cash to pay, this disrupts the distribution chain. 
Solution-
  • The immediate solution to this problem is to let credit stand in for cash, so that supply relations are not broken.
  • An overdraft is a loan on tap up to a specified limit. Links in the supply chain can use the credit available from enhanced OD limits to meet their payment obligation through the banking system
  • If banks raise overdraft limits of all current accounts, it will help businesses to tide over the currency shortage that is breaking down the supply chain of companies and halting production.
Conclusion-
The decision of demonetisation, however well intended but has created disruption in the economic system at least in the short run. As 86% of currency in circulation turned out to be invalid, it is quite natural in disrupting the economy as lead to cash crunch. In the shortage of cash in market, the immediate solution lies in making available credit by enhancing the credit limit. It helps in containing disruption in the distribution chain.

 


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