-*Dr. S.
Vijay Kumar
Prime Minister Narender Modi’s in
his election campaign in 2014 promised Rs. 15 lakh would be credited into the
bank accounts of every citizen by brining black money from Swiss Bank. But, it
became a joke. Before forgetting this joke, on November 8th
2016 Prime Minister Narendra Modi, in a surprise abolished Rs 500 and Rs 1,000
notes overnight in a bid to end black money in the country. They constituted 86
percent of India's currency in circulation at the time. The government replaced old Rs 500 notes with new
ones, but no replacement for Rs 1000 notes has been made. Instead, a new Rs
2,000 note was introduced post note ban. Besides, new Rs 500 and Rs 2000 notes,
the RBI has also printed new Rs 200 notes and released on 25 - 06- 2017. Now,
let us try to analyze the results, whether the recent demobilization in our
country is successful or a failure?
Impact of
Demonetization - Facts and Analysis:
· On 30 August 2017, the RBI annual report
published that people had returned Rs 15.28 lakh crore of the Rs 15.44 lakh
banned currency or 98.96 percent of the scrapped Rs 500 and Rs 1,000 notes to
the banking system.
After announcing the demonetization of
currency notes, it was said the government estimated at least Rs 3 lakh crore
would not return to the system. This would mean an equal amount black money
would get extinguished and liability of the RBI would reduce. But, the results are quite disappointing,
99% of banned notes back in banking system ,thus the very purpose of the demonetization is being defeated giving a scope that demonetization helped to convert black
money in to white. The common citizen supported the demonetization move
admirably, but the ground realities are different.
· The Reserve Bank
of India on 30 August, 2017 confirmed that
8.9 crore old Rs 1,000 notes out of 632.6 crore have not been returned post the
note ban last November.
· ‘Unusual’
cash deposits totaling Rs 1.6-1.7 lakh crore were made during the
demonetization period.
· Only 1% i.e.
Rs. 16,000 crore did not return to banks.
· Demonetization was a
failure because the government succeeded in impounding or confiscating just 1
percent of the banned currency. The real success is the mainstreaming of
the unorganized and the subterranean economy.
·
Money in
circulation in 96% , 86% demonetized.
·
Estimated, Rs. 4, 500 black money.
·
According
to RBI report the cost of printing of currency notes more than doubled to Rs 7,965
crore in 2016-17 from Rs 3,421 crore in the previous year on account of new
currency printing. The net transfer
of profits to the Union Government as a result have fallen drastically during
this year by 53.5 per cent. "In the
current case, there is a seigniorage loss (profit made by a government by issuing
currency, especially the difference between the face value of coins and their
production costs), as the face value of Rs 15.28 trillion of Rs 17.1 trillion has
been printed," it said.
·
Demonetization and GST Bite - Data
released by the Central Statistics Office (CSO) on 31/08/2017 showed the economy grew 5.7% in April-June
2017, the first quarter of the current fiscal year, slower
than the previous quarter's 6.1% and much lower than
the 7.9% growth registered in the first quarter of 2016-17. India's
April-June growth of 5.7% is below China's 6.9% expansion during the same period and puts pressure on policymakers to unveil
measures to revive the economy.
· Detailing the
impact of demonetization on currency composition, the RBI said that the value
of banknotes in circulation declined by 20.2 percent over the year to Rs 13.1
lakh crore as of end-March 2017. The volume of banknotes, however, increased by
11.1 percent, mainly due to higher infusion of banknotes of lower denomination
in circulation following the demonetization.
· In value terms,
the share of Rs 500 and above banknotes stood at 73.4 percent compared to 86.4
percent before demonetization.
· The
share of Rs 2,000 banknotes in the total value of banknotes in circulation was
50.2 percent at end-March 2017.
RBI’s
Annual Accounts:
· The
RBI's balance sheet increased by 1.88 percent in the year ended June 30, 2017,
showed the report.
·
RBI's income for the year decreased by 23.56 percent
·
RBI's
expenditure for the year increased by 107.84 percent
·
RBI had a
surplus of Rs 30,659 crore during the year
RBI Annual Report 2016-17:
· The increase on the asset
side was due to increase in foreign investments and domestic investments by
2.70 percent and 7.45 percent, respectively, and capital contribution to the
subsidiaries of the Reserve Bank. On the liability side, the increase was
mainly due to increase in Deposits by 76.96 percent.
· Factors that impacted the RBI’s balance sheet during the
year included the need for more intervention due to a surge in liquidity post
demonetization. As deposits came in and liquidity surged, the RBI sucked out
this excess liquidity through tools such as reverse repo operations. The
central bank pays an interest to banks on the amount that they park with it
through such a window.
·
The RBI also incurred
higher costs on printing currency.
· Expenditure on
currency printing rose to Rs 7,965 crore in 2016-17 compared to Rs 3,420 crore
in 2015-16.
· Nearly
60% of demonetization deposits have stayed with banks, RBI Deputy Governor S.S.
Mundra told BloombergQuint in an interview last week.
· Increase in Deposits: Aggregate deposits of scheduled
commercial banks stood at Rs 106.5 lakh crore as of July 7, 2017, compared to
Rs 96.2 lakh crore as of July 8, 2016, according to RBI data.
Doubts About Demonetization Announcement – Raghuram
Rajan’s Clarification: According to
“First Post. Updated Date: Sep 04, 2017 11:55 am
and Published on 5/09/2017. There are two questions about demonetization. One, if Raghuram Rajan
didn’t approve of demonetization "at any point during his term", how
did the government claim it got the Reserve Bank of India (RBI) on board some
six months before the launch to start preparations for the massively disruptive
exercise in the economy? Rajan left the RBI on 4 September 2016 and
demonetization was announced just two months later, on 8 November 2016. Two, if the RBI, under Rajan, had duly warned the government that short-term
costs of the move could outweigh the long-term benefits, particularly if not
executed well, and there are alternative ways to achieve this objective, then
why did the government still go ahead with the plan ignoring the advice from
the monetary authority and custodian of currency, in an economy where growth
hadn’t taken a firm hold yet? In hindsight, we
all know that the government and RBI miserably failed to plan it properly. The
immediate context of these two questions is the revelations by Rajan in his new
book, title The immediate context of these two
questions is the revelations by Rajan in his new book, titled I Do What I Do: On Reforms Rhetoric and
Resolve and through
his interviews to media in this context. In an interview to The Times
of India, Rajan said although RBI was consulted, at no point during his
term was it asked to take a decision on demonetization. He added that he had handed over a note to the government
outlining the potential cost and benefits of demonetization as well as
alternatives to achieve similar aims. He further said:
"If the government, on weighing the pros and cons, still decided to go
ahead with demonetization, the note outlined the preparation that would be
needed and the time that the preparation would take. The RBI flagged what would
happen if preparation was inadequate." The government then set up a
committee to consider the issues, Rajan said, adding that "the deputy governor
in charge of currency attended these meetings and at no point during my term
was the RBI asked to make a decision on demonetization". By this, it
is crystal clear that the former RBI Governor was reluctant to “Modi’s
Demonetization with in short time that to without proper preparation.” Hence,
he was compelled to resign and Modi’s favorite person Urjit Patel was brought
as RBI Governor. Hence, demonetization
is a “hasty decision without proper preparation at the cost of the nation.”
All in all, the tangible costs of
demonetization has far exceeded the gains, so far. The government had initially
expected about Rs 3 lakh crore to Rs 4 lakh crore of currency would not come
back to the system and this will be a windfall gain. But, it didn’t happen. The
economy has paid a heavy price for this exercise, with GDP falling to 6.1
percent in the March quarter and further to 5.7 percent in the June quarter.
There are reports of major job losses in informal sector. Even the right-wing
labour unions have accused the Modi-government for destroying jobs with the
ill-prepared demonetization move. There are claims and counter claims about the stated objectives
of demonetization after 10 months. There were three main objectives to it in
the beginning before the government began shifting the goal posts after each
stage. These were fighting black money, cash-based corruption and terror
funding. And later the objectives of digital-shift and cashless economy were
added when Modi spoke about this in his Mann ki Baat programme. Subsequently,
much stress was given to mainstreaming of money and expanding the tax base as
the major victories of demonetization.
There are not any solid evidences of
demonetization achieving any of these objectives contrary to the government’s
claims. There was a spike in digital transactions post demonetization when cash
was not available in the system and now it has come back to the “trend growth
line”, data suggests that tax payer base might have gone up on account of note
ban and how many of these will actually contribute to higher tax revenue is
debatable. Clearly, corruption and terror funding have not been impacted much
due to note ban. As far as black money is concerned, the only way
demonetization can be salvaged now is when taxman unearths substantial amount
of illicit money from the money deposited in bank accounts post demonetization.
But, here, Rajan cautions. “The government can investigate the deposits, and
some of it may turn out to be black money but it does imply that a greater
effort is required and could also mean - and this is something a number of commentators
have pointed out - more harassment for the general public that has honestly
deposited money that was lying for one reason or the other in various accounts.
So that benefit - if it comes - let us see at what cost it comes.”
If one looks
at the record of India’s corrupt, under-equipped tax department, the rate of
success If one looks at the record of India’s corrupt, under-equipped tax
department, the rate of success in the battle against tax cheats aren’t very
encouraging. The government and taxmen will have to work hard to change this
record. But, as Rajan cautioned,
giving a free hand to taxmen and pushing them for targets could also lead to
harassment of even legitimate depositors. The government needs to be careful
not to let this happen. The gains of demonetization on black money continue to
be uncertain. But, the moot question here is this: If the RBI didn’t
approve of demonetization until 5 September and warned about its likely
damaging effects on economy, then why did the government go for this dangerous
gambit? Was it worth the pain for common man and the economy? And more
importantly, if the government hasn’t still learned any lesson from the demonetization
episode (finance minister Arun Jaitley believes the exercise has achieved its
objectives) and is confident that it didn’t hurt the political prospects
(evident from UP polls), will it go for similar gambles yet again in the
economy? Rajan’s revelations only raise more uncomfortable questions. In hindsight, it is quite clear now that
Modi would have done well listening to Rajan on demonetization. Government's argument is that “black money doesn't become
white just because it is deposited in bank accounts, it has to be analyzed.” Let
us see how much black money will come out due to demonetization.
RBI
doesn’t know how much black money was eliminated by demonetization:
The RBI has told a parliamentary panel
that it has “no information” on how much black money has been extinguished as a
result of demonetization of Rs 500/1,000 notes or about unaccounted cash
legitimized through exchange of currency post note ban. Stating that an
estimated Rs 15.28 lakh crore in junked notes has come back “subject to future
corrections based on verification process.” Replying to queries from the panel, the RBI said the
verification for authenticity and numerical accuracy are still on, while some
of the specified bank notes (old Rs 500/1,000 notes) which were accepted by
banks and post offices are still lying in currency chests. The central bank
also informed the panel that the completion of the process of verification will
take time in view of the large volume involved.
Beyond Savings Accounts & Into Mutual Funds: While the initial deposits came into current accounts and savings accounts (CASA), over time the funds have started to disperse across different products but appear to be staying within the financial sector. Paresh Sukthankar, deputy managing director at HDFC Bank, on Monday said that a substantial proportion of the demonetization deposits have proved to be sticky. He added that over the past few months, money has moved from low cost CASA accounts to fixed deposits and other financial instruments. Data suggests that mutual funds have been among the beneficiaries. Mutual fund assets stood at Rs 18.96 lakh crore as of June-end, compared to Rs 16.28 lakh crore at the end of October 2016 before demonetization was announced. That works out to an average increase of about Rs 33,500 crore each month over the eight month period. In contrast, the pace of monthly additions during the eight months between October 2015 and June 2016 stood at just over Rs 7,000 crore. To be sure, mutual fund inflows had picked up even before demonetization with systematic investment plans starting to come in vogue. Demonetization appears to have added to this trend.
Demonetization lead to a
shift towards financial assets?
Viral Acharya, deputy
governor RBI said there has been a “non-linear shift” in Indian household
savings towards the financial sector. Products such as mutual funds, structured
investments and insurance have benefited from this shift, Acharya pointed out.
Insurance
Inflows Get A Boost Too: Inflows into the
insurance sector have picked up as well, although the pace of increase has been
volatile for the sector. In November 2016, the month when demonetization was
announced, first year premium collected nearly doubled, shows data available on
the insurance regulator’s website. In the months since, the year-on-year growth
rates have varied between 27 percent and (-)12 percent. In the months before
demonetization, growth rates ranged from a high of 60 percent in September 2016
to a low of 3.6 percent in October. Between November 2016 and June 2017, first
year premium of Rs 1.2 lakh crore has been collected by the life insurance
industry, shows the data. Between November 2015 and June 2016, about Rs 1 lakh
crore in first year premium had been collected. The stickiness of this money
will be determined over a longer period of time when data on long term
persistency becomes available. Acharya also mentioned a move into structured
products, consolidated data for which is not available. However,
there appears to be a fair amount of evidence to support Acharya’s claim of a
move towards financial assets in the aftermath of demonetization. There “is
merit in allowing the money to remain in the system as the money starts to earn,”
said
RBI Deputy Governor S.
S. Mundra.
Merits
of Demonetization:
·
Politics
aside, analysts claim that the economic benefits of demonetization will emerge
over a time.
· As
a result of demonetization, government has been gradually making enrolment to its national electronic database
'Aadhaar' mandatory for tax
returns, opening of bank accounts and any purchases above 50,000 rupees. It is
estimated that over 99 percent of Indians aged 18 and above are now enrolled in
the scheme. This means that the
government can expect to see the benefits of taxation on previously hidden
black money over the coming months and years.
· India's
finance ministry says it is probing 1.8 million bank accounts where cash
inflows during the demonetization period "did not appear in line with its
tax profile," meaning it can expect some belated tax payments.
· "There
are also long-term benefits from demonetization in terms of increasing income
tax payments going forward and encouraging the use of digital payments over
cash, a means of encouraging better tax compliance among businesses."
· Most important positive impact of
demonetization is to bring more people in to the banking system and under tax
purview to generate more revenue to the Government.
· Demonetization
has initiated a kick start to cashless economy, where many people have started
using internet channels for payment of money.
· Many
wealthy Indians turned to friends and relatives to help them funnel previously
undeclared cash into the banking system, while others “advance paid”
salaries for large numbers of workers.
· A major step to various e-payment portals and the drive towards
the digitalization on the nation.
· Un Organized Sector has been brought under Organized Sector via demonetization
program which in turn leads to increase in economic growth.
· Transactions
through banking channels have led to moving informal business into formal
business as payments are made via them.
·
Curbing the black money which has been one of the main agenda of
demonetization will get the major push as the black money hoarded in the form
of banned currency will no longer be in use.
· Fake Indian Currency Notes (FICN) which were mainly used to fund
the terrorists will be dismantled.
· The people will get reward in the form of lower price of real
estate as most of the black money are converted into assets in which real
estate and gold tops the lists.
·
The introduction of new currency notes of Rs. 2000 and Rs. 500
Rs. 200 have come with fine security design to avoid the production of
counterfeit notes.
·
The
government added 9.1 million new taxpayers in 2016-17, an 80% increase over the
typical yearly rise, highlighting the impact of India’s November, 2016
demonetization of high-value currencies.
·
Due to demonetization tax evaders and money hoarders came into
light where a heavy duty was imposed on them and it is a major setback to them.
Demerits of
Demonetization:
·
In the country where 90% of transaction takes place in cash in
the market, where only 40% have bank account in that country government banned
those notes which had 86%of share in the market which led to great hustle in
the market.
·
The dividend paid by the Reserve Bank to the government for the
financial year 2016-17 was Rs. 30.7 lakh crore, as against the expectation of
Rs. 74.9 lakh crore.
This was less than half the dividend of Rs. 65.9 lakh crore paid
by the RBI in 2015-16. This decrease was due to demonetization.
·
The demonetization resulted in economic slowdown of 5.7% in April-June 2017, the first quarter of the current
fiscal year, slower than the previous
quarter's 6.1% and much lower than
the 7.9% growth registered in the first quarter of 2016-17.
·
Cash-dependent small businesses, daily wagers and poorer have
been badly affected.
·
The
bank’s estimate follows media reports that complex money-laundering networks
sprang up in the wake of the demonetization to help wealthy Indians deposit
huge volumes of previously undeclared currency without exposing themselves
to tax authorities. Such people allegedly sold the old notes, at a discount, to
brokers who then dispatched low-income Indians to deposit or exchange them at
banks.
· Some
wealthier Indians had burnt, or dumped, their illicit cash to avoid official
scrutiny.
·
More
more number of people has converted
their cash in to gold, agricultural lands, houses, fruit gardens, house plots
and flats.
·
Demonetization
had an adverse effect on farmers and villagers who did not have bank account
and had mostly the demonetization of 500 and 1000 rupee notes after the sale of
their crops.
·
Due
to the demonetization many people lost their life either because of standing in
long queues or denial by hospitals to give treatment in exchange of old
currency notes which led to death of many people.
· Small
business faced the major loss and people also had to skip their work in order
to withdraw money from ATMs by standing in serpentine queues.
·
There
was poor coordination between the banks and the government.
·
The
frequent changes of the policy by the RBI gave the idea about the lacking in
systematic planning.
·
This off-guard step was greatly criticized by the oppositions
where many rallies were taken out in protest of such changes.
·
Families which were having marriage ceremony were greatly
affected as they had to withdraw cash of Rs 500 and Rs1000 and more over they
were not allowed to with draw not more than 2 lakhs.
·
There
was a loss of jobs due to demonetization, particularly in the unorganized and informal
sector and in small enterprises. Labour union jobs were crashed.
·
The verdict is clear. It was a monetary
policy blunder. It achieved next to nothing, and inflicted a large cost on the
poor and the informal sector.
Reactions of
Prominent Economists and Politicians to Demonetization:
·
Strongly
reacting to the RBI data on demonetization, former finance minister P
Chidambaram tweeted, “Rs 16000 crore out of demonetized notes of Rs 15,44,000
crore did not come back to RBI. That is 1%. Shame on RBI which ‘recommended’
demonetization. RBI ‘gained’ Rs 16000 crore, but ‘lost’ Rs 21000 crore in
printing new notes! The economists deserve Nobel Prize99% notes legally
exchanged! Was demonetization a scheme designed to convert black money into
white?”
·
Dr.
Manmohan Singh warned for the economy post note ban
that “the GDP of the country can decline by about 2 percentage points as a
result of what has been done”. It became reality.
·
Former
Governor Raghuram Rajan, "My sense is the clever find ways around it. They
find ways to divide up their hoard into many smaller pieces. You do find that
people who haven't thought of a way to convert black to white throw it into the
Hundi in some temples. I think there are ways around demonetization."
·
Y V Reddy,
a former RBI Governor, "I believe our economic system is ripe for a
change, and demonetization 2016 has triggered the possibility of a change not
because of the questionable decision, but because of the nature of reactions of
the masses to the enigmatic decision of Prime Minister Modi. I believe that an
invisible, non-quantifiable message from the people's response to the crisis is
actually an implicit mandate for the authorities as well as for the society as
a whole.''
·
The Indian Supreme Court while hearing one among a slew of cases
filed against the sudden demonetization decision in various courts, observed
that it "appears to be carpet bombing and not surgical strike" which
government repeatedly claims it to be.
·
Nobel laureate Indian economist Amartya Sen, severely criticized the demonetization move calling it a
"despotic action" among other things.
·
Former Senior
Vice-President and Chief Economist of the World Bank, Kaushik Basu,
called it a 'major mistake' and said that the 'damage' is likely to be much
greater than any possible benefits.
· Pronab Sen, former Chief Statistician and Planning Commission of
India member, called it a "hollow move" since it did not really
address any of the purported goals of tackling black money or fake currency.
· Prabhat Patnaik,
a former professor of economics at the Jawaharlal
Nehru University, Delhi called the
move 'witless' and 'anti-people'. He criticized the simple way in which black
money was assumed as "a hoard of cash", saying that it would have
little effect in eliminating "black activities" while "causing
much hardship to common people."
·
Noted
economist and journalist, T. N. Ninan wrote in the Business Standard that
demonetization 'looks like a bad idea, badly executed on the basis of some
half-baked notions.'
· Deepak Parekh (Chairman
of HDFC) had initially appreciated the decision to ban the Rs 500
and Rs 1000 notes, but later said that the move had derailed the economy, and
expressed skepticism about its outcome.
·
Industrialist Rajiv Bajaj criticized the demonetization, saying that not just the
execution, but the concept of demonetization was wrong in itself.
·
Rahul Gandhi,
leader of the opposition Congress party, tweeted: “A colossal failure
which cost innocent lives and ruined the economy. Will the PM own up?”
·
Chief
Ministers of several Indian states like Mamata Banerjee, Arvind Kejriwal and Pinarayi Vijayan have
criticized and led major protests against the decision in their states and in
parliament. Initially, the move to demonetize and try to hinder black money was
appreciated, but the manner in which it was carried out by causing hardships to
common people was criticized.
To
conclude, though demonetization has failed in short term, but due to its impact
several benefits like cashless transactions, brining informal business in to
formal business via banks, bring more people in to
the banking system and under tax purview, digitalization were achieved to a certain
extent. In the long run we can expect even more benefits like increase in GDP
growth rate, more revenue to the Government through increased tax payers,
curbing black money and fake notes.
References:
View: Is Demonetization
a success or failure? By Narendra Nathan: The Economic Times, Up dated and Published
on: 31/08/2017.
Look at the
facts of demonetization, not politics written by Kaushik Basu, The Indian Express: Published on 11/05/2017.
Raghuram Rajan’s Revelations on Demonetization: Narendra Modi shouldn’t have
ignored his caution, First Post. Published on 5/09/2017.
Raghuram Rajan breaks silence, says neither he nor RBI under him wanted demonetization,
Hindustan Times: Updated and Published on 5/09/2017.
Raghuram Rajan’s book out today: Sneak peek on what
he writes about demonetization, social media and more, Hindustan Times: Updated
and Published on 5/09/2017.
2016 Indian Bank Note Demonetization: Wikipedia
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