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Friday, September 1, 2017

Impact of Demonetisation

DEFINITION of     'Demonetization'
My opinion on impact of 'Demonetization' is given below 
Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs whenever there is a change of national currency: The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins. Sometimes, a country completely replaces the old currency with new currency.
The opposite of demonetization is remonetization, in which a form of payment is restored as legal tender.

There are multiple reasons why nations demonetize their local units of currency:
 1. To combat  inflation
 2. To combat Corruption and crime ( Tax evasion, fake note, terror funding etc)
 3. To discourage cash transaction and to promote digital transaction
4.  To facilitate Trade

India's Demonetization

In 2016, the Indian government decided to demonetize the 500- and 1000- rupee notes, the two biggest denominations in its currency system; these notes accounted for 86% of the country’s circulating cash. With little warning, India's Prime Minister Narendra Modi announced to the citizenry on Nov. 8 that those notes were worthless, effective immediately – and they had until the end of the year to deposit or exchange them for newly introduced 2000 rupee and 500 rupee bills.

Chaos ensued in the cash-dependent economy (some 78% of all Indian customer transactions are in cash), as long, snaking lines formed outside ATMs and Banks, which had to shut down for a day. 

The new rupee notes have different specifications, including size and thickness, requiring re-calibration of ATMs: 

only 60% of the country’s 200,000 ATMs were operational. 

Even those dispensing bills of lower denominations faced shortages. The government’s restriction on daily withdrawal amounts added to the misery, though a waiver on transaction fees did help a bit.

Small businesses and households struggled to find cash and reports of daily wage workers not receiving their dues surfaced. The rupee fell sharply against the dollar. 

The government’s goal (and rationale for the abrupt announcement) was 

To combat India's thriving underground economy on several fronts: 
To eradicate counterfeit currency, 
To fight tax evasion (only 1% of the population pays taxes), 
To eliminate black money gotten from money laundering and terrorist-financing activities, and 
To promote a cashless economy. 

Individuals and entities with huge sums of black money gotten from parallel cash systems were forced to take their large-denomination notes to a bank, which was by law required to acquire tax information on them. If the owner could not provide proof of making any tax payments on the cash, a penalty of 200% of the owed amount was imposed.

As per RBI report published 

As per the data released by the RBI in its annual report on Wednesday, of the Rs 15.44 lakh crore of notes taken out of circulation with demonetisation of Rs 500 and Rs 1,000 notes on 8 November, Rs 15.28 lakh crore returned to the system by way of deposits by the public.

89 million pieces of the banned Rs 1,000 totalling Rs 8,900 crore had not been returned, out of 6,858 million such notes. This amounts to 1.3 percent of the Rs 1,000 notes in circulation before the demonetisation announcement on 8 November 2016.
"Subject to future corrections based on verification process when completed, the estimated value of SBNs (specified bank notes) received as on June 30, 2017 is Rs 15.28 trillion," the RBI said in the report.
Some experts and some hard core opponents of Mr. Narendra Modi , PM of this country have concluded  that data published by RBI on demonetisation shows the exercise was an utter failure. They mean to say that since entire money has come back to RBI , government has not gained anything, entire black money got white colour and on the contrary RBI had to incur huge loss in profit due to unwarranted expenses incurred on printing of new notes.
Demonetisation success: Benefits Explained in numbers 
( copied from Times of India ) published on 31.08.2017
In the backdrop of the RBI's report stating that 99 per cent of the demonetised cash had come back into the banking system, 
the government  released data to substantiate its claim that note ban has achieved all its objectives.

Following are key points which reflects benefits which accrued after demonetisation

1.  Scrutiny of suspected 18 lakh accounts done
2. Cash deposits worth Rs 2.89 lakh crore under investigation
3. Advance data analytics tools identified 5.56 lakhs new suspect cases
4. 4,73,003 suspicious transactions detected
5. Undisclosed income worth Rs. 29,213 crore detected and admitted.
6. Black money worth Rs 16,000 crore did not return post demonetisation 
7. 21 per cent reduction in currency in circulation


1. 56 lakh new tax payers added
2. Number of returns filed increase 24.7 per cent compared to 9.9 per cent in previous year
3. Advance tax collections of personal income tax grow at 41.79 per cent over same period of last year 
4. Personal income tax under self-assessment tax grow at 34.25 per cent over same period last year.
5. Transactions of more than three lakh suspected shell companies under the radar

6. 2.1 lakh shell companies de-registered
7. Around 450 companies delisted and 800 untraceable companies to be further delisted 
8. More than 400 benami transactions identified and market value of properties attached more that Rs 800 crore

9.  Deposits in the banking system increased around Rs 3 lakh crore
10. Additional liquidity helped reduce interest rates by 100 basis points
11.  Digital payments increase by 56 per cent from 71.27 crore transactions in October 2016 to 111.45 crore transaction in May, 2017
12. More than one crore workers added to EPF and ESIC system post-demonetisation 
13. Bank accounts opened for about 50 lakh workers to get their wages credited directly in their accounts

View: Those who slam Modi's note ban are completely missing these points -By Sri R. Sriram-This is published in Economic Times 

On the morning of November 9, 2016, the mood of the nation could be summed up in one word: Bewilderment. PM Narendra Modi's decision to cancel the tender of 85 per cent of currency in circulation was greeted with delight in some quarters and anger in others but the overwhelming feeling was one of bewilderment. 

If the BJP and its supporters thought that 'notebandi' would be a tremendous success, people's experience of its implementation in the first few weeks would have left them nervous and agitated. 

The long queues, the cash crunch, the collapse in economic activity were not good tidings especially if you are going to fight elections in the country's largest state in a few months. Political condemnation of the move was to be expected. 

After all, no party wants its money generating operations to be affected and other party to get maximum mileage, but the surprisingly virulent condemnation of the move from the media/intellectual elite in Delhi and other cities told a different story. 

Nearly a year later, the same intellectual class that told you demonetisation would be a political disaster and latched on to charade that was the Akhilesh Yadav/Rahul Gandhi bandwagon during the UP elections are now crying `demonetisation debacle' and promoting the myth that it was a failure after the release of the RBI annual report. 

Politically, the move has been a grand success. The massive win in UP, Nitish Kumar's return to the NDA fold, the silent and sometimes not so silent support given by other parties like the BJD, the NCP, the YSR Congress to the BJP; All this would not have been possible without demonetisation's tremendous popularity among the masses. Very often, political parties win largely through the support of floating voters. 

Critics of demonetisation make two major arguments against it. 

One, that it was expensive, ill-timed, unnecessary. 

Second, that it did not root out black money and the move has failed since all the money has come back. 

There is one major counter argument to this. The Modi government has taken a number of initiatives to root out black money. 

Demonetisation is just one of them. 

The others are 

The drive against Benami Property, 

Implementation of  GST, 

The push towards a less-cash economy. 

You can't analyse or  fully appreciate the black money crackdown by only focusing on demonetisation. It is a major move all right but one of the many aimed at rooting out black money. 

Second point. The big number on demonetisation is not the amount of money that has come back into the system. It is the amount of suspicious transactions that have been uncovered by the banks, the RBI after the deposits. This amount, according to various estimates, is about Rs 1.6-1.7 lakh crore. 

It has to be kept in mind that money doesn't become white just because it is deposited in banks. 

The money leaves an address, a trail. The depositors become known to bankers and the income tax department. Suppose businessman A has rupees one crore of illegal money stashed away in his house. He is forced to deposit it in his account but this does not mean he has escaped scrutiny. 

The tax department can now go after him and unearth his income and financial transactions for the year and demand  appropriate tax. 

Not only that, they can also question his income of previous years' income and demand tax on that. They can go after any benami property he has. There is no escape once you become known as a tax evader. 

PM Modi's move to give a short window of four hours on November 8 was a master stroke. It ensured that the guilty could not escape and had to show themselves. The main reason for the money coming back was that people with ill-gotten wealth did not know what to do .

They were forced to deposit with banks and now have to face the music from the tax guys. 

Is this not a major move against black money? 

Demonetisation economic benefits are only beginning to tell. 

The rise in digital transactions, the transparency and reduced corruption caused by less use of cash and the widening of the tax base all means that India is in the midst of a major clean-up. The corrupt will no longer be able to hide. 

That's the big message from demonetisation and black money initiatives.

Disadvantage / Loss occurred due to demonetisation are also focused by opponents of ruling party. Following are some figures in favour of opponents to tease Modi and BJP government . But in my opinion, points explained below have got no value once you understand the positive points explained above. Reason behind erosion in profit of RBI or for lesser amount of dividend paid to Government of India are also explained while concluding the message.

RBI’s income for its financial year ending 30 June fell 23.56% to Rs61,818 crore. It’s income fell because of a couple of reasons.

One, the central bank’s income from foreign sources fell 35.3% because of the appreciation of the rupee and the lower yield on foreign currency assets. This was lower at 0.8% in 2016-17 compared to 1.3% a year earlier.

Two, net income from domestic sources fell 17.11%. This was largely because RBI had to pay interest of Rs17,426 crore as it mopped up excess liquidity in the banking system after people rushed to deposit invalidated currency notes at banks. The previous year, the RBI earned an interest of Rs506 crore in its liquidity management operations.

On the expenditure side, the central bank spent Rs7,965 crore on printing currency notes in 2016-17, more than double the Rs3,420 crore spent a year ago. In its efforts to quickly remonetise the economy, the RBI issued 29 billion currency note pieces in 2016-17 compared to 21.2 billion a year earlier.

“The upsurge in expenditure during the year was on account of change in the production plan of printing presses due to the introduction of new design notes in higher denominations as well as the requirement of larger volume of notes for replacement of the demonetised currency,” the central bank said in it annual report.

“To ensure availability of banknotes across the country at the shortest possible time subsequent to the demonetisation, banknotes had to be frequently air-lifted from the presses.”

The second large expense was the Rs13,100 crore provision that the central bank made towards it contingency fund. This fund is for meeting unexpected and unforeseen requirements such as a depreciation in the value of securities, risks arising out of monetary/exchange rate policy operations, systemic risks etc.

In the final analysis, putting it simplistically, RBI’s extra interest expenses of Rs17,426 crore, the extra printing cost of Rs4,545 crore and provision of Rs13,100 crore together make up just about the Rs35,217 crore decrease in net profit.

Major part of above write-up is collected from various newspaper and reports. 

Views of various eminent persons are given below:-----

Mr. P Chidambram says:

Former Union Finance Minister P. Chidambaram has slammed the Reserve Bank of India for recommending demonetisation, which according to data released by the central bank saw only 1% of the banned currency not return. “Rs 16000 cr out of demonetised notes of Rs 1544,000 cr did not come back to RBI. That is 1%. Shame on RBI which ‘recommended’ demonetisation,” Mr. Chidambaram said in a series of tweets on August 30, after the RBI released its annual report.
“RBI ‘gained’ Rs 16000 crore, but ‘lost’ Rs 21000 crore in printing new notes! The economists deserve Nobel Prize,”

If PC thinks that since almost entire money has been deposited in bank after demonetisation, it proves complete failure of the step of the government, I think Mr. PC has not released his reaction in the capacity of an economist but purely as a politician.

MAN OF FEW WORDS It�s ironical that Prime Minister Manmohan Singh, who was instrumental in opening up India�s economy in the 90s, is today leading a government that is seen as being regressive on policy issues

Mr. Arun Jaitley has rightly reacted as follows on the statement made by PC
Objective of demonetisation was not confiscation of money, says Arun Jaitley
“India has continued to be on path of one of the strongest growths in the world. The two big measures of demonetisation and introduction of GST were humongous measures which had changed the structural and ethical foundations of the Indian economy. Government has been able to manage the transition extremely, effectively and with the least pain,” .

Also read following article published in India Today

Why calling demonetisation a failure is a premature verdict

Denouncing demonetisation as a failure just after 10 months may not be the correct assessment of its effect on Indian economy. Here are the reasons

My Opinion are as follows on why GDP growth has seen fall compared to past quarters.

There is however a matter of serious concern which is fall in GDP growth. Some people directly put blame on demonetisation responsible for fall in GDP rate of growth. 

There is no doubt in it that demonetisation had adversely affected the growth in manufacturing as well as in trade and services sector due to confusion created after announcement of demonetisation , shortage of cash in the market caused sharp fall in sale at least for two quarters ending March 2017 and June 2017 , bankers were getting no time to sanction fresh credit to needy business men and the most important was that business men and service men who were holding black money remained engaged in changing the colour of their money and as soon as they deposited their ill-acquired money in banks , they became busy in shielding them from swords of Income tax authorities. During this period , trade slowed down, manufacturing went down and opposite to this, business of professionals like Chartered Accountant rose to sky high.

It was expected that growth speed will be restored in two quarters as soon as impact of cash shortage is dealt with adequately by RBI , i.e. in the quarter subsequent to June 2017.

But unfortunately from July 2017  , Government introduced new system of taxation that is called as Goods and Services Tax . Though the proposed tax system to replace all previous tax policies may yield good returns in coming years , there is no doubt that GST has added new pain to business community at least in the current quarter. It will take its own time in restoring business volume of preceding  years and then  giving a boost to business cycle , to trade growth, to services  and to manufacturing of goods to reach new heights. But there is little doubt that GDP will be adversely affected in current quarter too.

However in my view, root cause behind fall in GDP growth is not demonetisation or GST in the same proportion as it is projected by critics of Modi government or by financial experts. There are definitely other factors which are contributing  erosion in growth indirectly which we have to take care of .

Root causes lies in poor credit off-take from banking industry ,poor recovery of money from defaulting borrowers and hence weakening and stopping of recycling of funds banks possess. Unbated rise in bad loans is due to poor quality of lending and incompetent legal and administrative set up to help banks in getting its money back.  Politicians add fuel to fire by building pressure on banks for credit to their kith and kin , friends and relatives and then build pressure for write off and waiver of loan when the account goes bad. And due to this, there is always a fear syndrome in bank officers while sanctioning new loans. Root cause lies in target based lending and culture of hiding bad loans to project good growth .

Due to such  long cherished culture of bad lending and negligence in recovery of loans, volume of bad debts in banks has been consistently increasing .Some banks have declared bad debts partially  and all banks still have huge amount of hidden bad debts not treated as Non Performing Asset NPA. 

It is not due to demonetisation or due to GST. Bad debts have been in the system since long. During Government run by Congress Party or by UPA , it was a dictated culture on banks to hide bad loans and to extend bulk credit to corporate to earn profit . Government run by BJP and other parties also left no stone unturned to exploit banks for enriching their vote banks. 

None of bank officers had the courage to consider or declare bad debts as bad debts. Target oriented lending culture imposed by previous governments on Public sector banks forced them to compromise with quality of lending. Bank officers did not apply their mind in credit processing or bankers had no skill to distinguish between good and bad borrowers . Both ways , it was the quality of loan which faced erosion year after year. Only those Bank officers got promotion after promotion who took part in reckless lending and then in hiding bad loans so that banks could earn more and more profit . A culture of flattery and bribery developed at all levels in banks and politicians added fuel to fire by taking advantage of imposed target oriented lending culture. 

After Mr. Raghuram Rajan took the charge of Governor RBI, it started becoming more and more difficult   for bank officials  to conceal  bad debts . As a result, bank officers under a unwritten strategy decided to declare hidden bad debts in phased manner. RBI has been insisting  for cleaning of balance sheet every quarter for last ten years , still bankers continue to hide bad loans on some plea of the other. Restructuring of loan or ever greening of loan or tampering data with use of technology were few methods to hide bad loans and to book profit on them. Unfortunately RBI remained silent spectator of evil works going on in banks and all evil and mischievous steps announced by politicians for vote banks.

As Modi government also started putting pressure on banks for cleaning of balance sheet and for recovery of dues from defaulting borrowers. bank officers slowly and gradually coming out with higher and higher NPA figures every quarter . Government of India under leadership of Mr. Narendra Modi then formed a new body called as BBB Bureau of Bank Boards headed by renowned figure Mr. Vinod Roy. As a direct outcome of this continued pressure from the government and then periodical analysis of bad accounts , some of bankers ( very few in number ) had to face disciplinary action . Bank officers became more busy in recovery of bad loans than in sanction of new credit. This is why credit growth from 25% in UPA era has come down to less than 10% in NDA era . Fear in the mind of bankers about non-recovery of money from defaulting borrowers plays a big role in bringing down the credit growth.

Now it is worthwhile to mention that GDP growth of a country depends largely on bank credit. It also depends on ease of doing business and support extended by government and bureaucracy. It also depends of infrastructure development and availability of all inputs . There is no doubt in saying that Modi government has got success in increasing ease of doing business by improving infrastructure, by following pending projects, by improving power generation and distribution, by pulling non performing officers and ministers, by getting support from foreign countries and by creating an environment for growth . 

Despite all, I think Modi government will remain far away from success in achieving desired GDP growth , until they bring about desired transformation and reformation in culture of lending in banks and in time taken in recovery of money from defaulters through legal and administrative processes. They have to reform banks from grass root level and they cannot do so  only by Changing CEOs. They have to stop political exploitation of banks which has been continuing since the days of Janardhan Pujari , say since eighties .

I have during last ten years written several times about evil culture in banks and in politics which are responsible for continuous rise in bad debts. I have written to many key dignitaries and enlightened elaborately from time to time on falling health of public sector banks in particular and banks in general. 

RBI has in fact has not discharged  its duty during last three decades in keeping good health of banks either due to ignorance or due to mischievous acts of the government under which they have to work. Whatsoever may be the reason, you may put blame of past government or past governors of RBI or bank officers or politicians who rule this country , there is no doubt in saying that system failed completely in maintaining quality of lending , quality of work culture and quality of treatment to work force. Motivation to performers lacked completely and award of promotion went to flatterers and bribe earner in all sphere of life. 

As such Modi government has to do a lot to changes in the culture in banking as well as in politics to achieve targeted , consistent and sustainable GDP growth .Otherwise the wise step of demonetisation and introduction of GST will be blamed for none of their fault in falling GDP.


  1. Read this information of the year when Manmohan Singh was PM of this country.

  2. Also click on following link to read more about failure of MMS ,

  3. Read this information of the year when Manmohan Singh was PM of this country.

  4. MAN OF FEW WORDS It�s ironical that Prime Minister Manmohan Singh, who was instrumental in opening up India�s economy in the 90s, is today leading a government that is seen as being regressive on policy issues


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