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
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.
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.
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