BREAKING NEWS

BREAKING NEWS ""**Expected DA for Bank Employees from Aug 2024 MINIMUM 7 SLAB AND MAXIMUM 24 SLAB*****I *****

VISITOR FROM WORLD

Free counters!

YOU ARE VISITOR

Blog Archive

LIVE

BREAKING NEWS ""**If we want PSU bank to compete with Pvt bank ---Give them a break Saturday first****Outcome of Today’s meeting with IBA - 31.01.2023*********

Thursday, August 30, 2018

RBI Drives the Final Nail in the Demonetisation Coffin

The Reserve Bank of India's annual report for 2017-2018, was released yesterday. The central bank made some interesting observations regarding demonetisation. Let's take a look at them, one by one.
1) On November 8, 2016, the Narendra Modi government demonetised Rs 500 and Rs 1,000 notes. The total value of these notes was at Rs 15.44 lakh crore. These notes had to be deposited into banks before December 30, 2016.
The ministry of finance press release accompanying this decision had said that the idea behind demonetisation was to eliminate "Black Money which casts a long shadow of parallel economy on our real economy". The press release also pointed out: "Use of high denomination notes for storage of unaccounted wealth has been evident from cash recoveries made by law enforcement agencies from time to time. High denomination notes are known to facilitate generation of black money."
How would demonetisation achieve this? On November 10, 2016, the finance minister Arun Jaitley explained the logic in an interview, where he said: "Obviously people who have used cash for crime purposes are not foolhardy enough to try and risk and bring the cash back into the system because there will be questions asked."
Things did not turn out to be as obvious. The Reserve Bank of India (RBI) in the 2017-2018 annual report has said that the processing of the demonetised notes has been completed. Rs 15.31 lakh crore worth of notes were deposited back into the banks. This made up for 99.3% of the demonetised notes. In the process, everyone who had black money held in the form of cash, deposited money into the banks, and more or less got away with it.
2) The currency in circulation as on March 31, 2018, stood at 18.29 lakh crore. The RBI said this amounted to 101.8% of the pre-demonetisation level currency. As the economy grows the currency in circulation is bound to grow. Hence, we need to look at currency in circulation as a proportion of the gross domestic product (a measure of economic size).
As of March 31, 2018, the currency in circulation was at 10.9% of GDP. Take a look at Figure 1, which plots the currency to GDP ratio.
Figure 1:
 
As of March 31, 2017, the currency in circulation was at 8.8% of the GDP. A year later it had risen to 10.9% of the GDP. As the RBI annual report put it: "India's currency to GDP ratio moved up to 10.9 per cent in 2017-18, returning to being amongst the highest levels of currency usage in peer emerging market economies (EMEs) and advanced economies (AEs) as well."
Everyone who had said that demonetisation will lead to a lower currency in circulation has proved out to be wrong. Also, the currency in circulation as a proportion of the GDP is still growing, and in a year or two, should reach its earlier level of 11.5-12% of the GDP. Of course, this comes with the caveat that the Indian economy, keeps growing at 7-8%.
Also, the increase in currency in circulation is good news. It tells us that the ill effects of demonetisation are finally going away. An increase currency in circulation is a good indicator of the fact that people are back to carrying out economic transactions the way they were before demonetisation. And this will only add to economic growth.
3) Demonetisation was also supposed to increase digital payments. While, this aim wasn't mentioned in the original press release, it first found a mention in the mann ki baat programme in late November 2016. In this programme Modi said: "The great task that the country wants to accomplish today is the realisation of our dream of a 'Cashless Society'. It is true that a hundred percent cashless society is not possible. But why should India not make a beginning in creating a 'less-cash society'? Once we embark on our journey to create a 'less-cash society', the goal of 'cashless society' will not remain very far."
This is what the RBI says in its latest annual report regarding digital payments: "The use of digital payments, which had surged to a peak in December 2016 in the aftermath of demonetisation fell back to the elevated post demonetisation trend before rising in recent months."
The point being that digital payments have gone up a little in comparison to the past. Nevertheless, they were growing even before demonetisation. And if all the handholding on the digital payment front that the government has carried out post demonetisation, would have been carried out even without demonetisation, the digital payments would have grown any way.
4) The high denomination Rs 500 and Rs 1,000 notes formed around 86% of the currency in circulation, before the were demonetised. As the press release accompanying demonetisation pointed out: "High denomination notes are known to facilitate generation of black money.In this connection, it may be noted that while the total number of bank notes in circulation rose by 40% between 2011 and 2016, the increase in number of notes of Rs 500/- denomination was 76% and for Rs 1,000/- denomination was 109% during this period."
Post demonetisation, the high denomination notes of Rs 500 and Rs 2,000, form around 79% of currency in circulation. While this lower than the pre-demonetisation level, the difference isn't really much.
Also, if the idea was to make it difficult for people to store black money in the form of cash, the basic question of how does replacing a Rs 1,000 note with a Rs 2,000 note help, remains.
5) The RBI annual report also points out that the "deposit growth slowed sharply after the post-demonetisation bulge of the preceding half and also reflected the pronounced deceleration in domestic economic activity in the first quarter of 2017-18."
Deposit growth slowed sharply primarily because of a slowdown in economic activity. In order to save money, people need to first earn it, and that is difficult in an environment where economic activity has slowed down.
6) Demonetisation also aimed at eliminating fake notes. As the press release accompanying demonetisation pointed out: "Fake Indian Currency Notes (FICN) in circulation in these denominations are comparatively larger as compared to those in other denominations. For a common person, the fake notes look similar to genuine notes. Use of FICN facilitates financing of terrorism and drug trafficking... New Series bank notes of Rs.500/- and Rs.2,000/- denominations will be introduced for circulation from 10th November, 2016. Infusion of Rs.2,000/- bank notes will be monitored and regulated by RBI. Introduction of new series of banknotes which will be distinctly different from the current ones in terms of look, design, size and colour has been planned."
The point being that the new notes of Rs 500 and Rs 2,000 will be difficult to fake. In fact, that hasn't turned out to be the case. As the RBI annual report points out: "In the Mahatma Gandhi (New) Series of banknotes in the denominations of Rs 500 and Rs 2,000, counterfeit notes detected during 2017-18 were 9,892 and 17,929 as against 199 and 638, respectively."
To conclude, the RBI annual report of 2017-2018, is the last nail in the demonetisation coffin. It was a huge mistake on part of the government. While the Modi government will not admit to it, but the fact that they rarely talk about the success of demonetisation these days, is evidence enough.
FROM VIVEK KAUL'S DAIRY

No comments:

URGES FOR RESTORATION OF OLD PENSION SCHEME! INSTEAD OF NPS

CITU DENOUNCES UNIFIED PENSION SCHEME! ANOTHER DUBIOUS DESPERATE EFFORT DECEIVING EMPLOYEES! URGES FOR RESTORATION OF OLD PENSION SCHEME! Ce...

script async src="https://pagead2.googlesyndication.com/pagead/js/adsbygoogle.js">