Demonetization: Putting Indian Economy on Right Trajectory

By: Sagar Raichura

(edited and added by Shreepal Singh)

There have been conflicting claims from the rival political and economic camps about the success or failure of the intended benefits from the demonetization exercise initiated by Indian government about ten months back. There have been many assessments of the same by the quarters, which were in public perception “pro” and “anti” government.  A few days back, a report from the Reserve Bank of India detailing the number of demonetized old currency notes of 500 and 1000 received back in the economy has also come in public domain, which has spurred once again many more such assessments of this exercise.

In any assessment on this subject, one thing that has been missed by most of them is the gradation of the “importance” of the actual result or outcome of this exercise. Most of these assessments confine their results to “immediate yielding” as against the “future prospects” having a bearing on Indian economy. This is not the correct way of making an assessment of their impact on Indian economy. There are many times when an exercise may seem detrimental – or even may be in fact detrimental – to an economy in its present impact but which in the long run may be panacea in its consequences to that economy.

Therefore, it is always prudent to “grade” the importance of the yielded outcome of an economic exercise like the present demonization. In the backdrop of this cacophony of “failure” or “success” of the demonization exercise undertaken by the Indian government, let us make an assessment of its worth and also let us grade them in accordance with their importance. We have used an importance scale of 1 to 5, where 1 is the highest and 5 is the lowest, and others are in between.

1. The demonetisation report says that with Rs 14.2 lakh crores of currency the economy is able to meet all its transactional requirements. This means that the economy now has roughly Rs 5 lakh crores of cash lesser than the amount it would have had if demonetisation had not happened. This essentially means that the amount of cash stashed away by citizens has come down. This is advantageous to the economy since the hoarding of cash delivers no value to the country’s economic growth. (No. 5 on the scale of importance – Low).

2. Deposits of Rs 2 lakh and more were made since November 8 which are under scrutiny. Rs 7 lakh crore was deposited in more than 60 lakh such accounts since the government banned high-value banknotes. Income Tax Notices have been sent to all and tax money will be recovered from them. (No. 5 on the scale of importance – Low).

3. The number of people who have filed self assessment forms for the financial year 2016-17 grew by 23.8 per cent. Demonetisation has sent a clear message that those who evade tax are engaging in a form of financial terrorism and that the law is now going to come after them. (No. 3 on the scale of importance – High).

4. Approx 1 crore new assesses joined the tax base in FY 2016-17. In years gone by, the increase in the number of assesses has usually been in the range of 20-25 lakh. A strong message has gone out that there’s no point any longer in hiding income. (No. 1 on the scale of importance – Higest).

5. The impressive revenue collection under GST is partially attributable to demonetisation. Total revenue of GST remitted till 29 Aug 2017 is Rs. 92,283 crore, that too with only 64.42% of assesses having completed the payments. (No. 2 on the scale of importance – High).

6. Before demonetisation roughly 1 lakh new pan cards were issued every day. Now the number of new PAN cards issued every day averages between 2-3 lakhs. (No. 3 on the scale of importance – High).

7. One of the big advantages of demonetisation has been the move to a more formal digital economy. In FY 2016-17, there were a total of 300 crore digital transactions. If the rate seen in the first few weeks of FY 2017-18 continues, then the government estimates that this year there will be more than 2500 crore digital transactions. (No. 1 on the scale of importance – Highest).

8. The usage of mobile wallets like PayTM, SBI Buddy, FreeCharge is already worth more than Rs 200 crore per day. In the five months since its launch, 2 crore people have downloaded the BHIM app. The BHIM and UPI payment gateways are already averaging a daily transactional value of Rs 140 crore per day. (No. 2 on the scale of importance – High).

9. The number of active contributors under the Employee Provident Fund (EPF) scheme has gone up from 3.7 crores before demonetisation to 4.5 crores by March 2017. This means that more companies have now started paying EPF to their employees. (No. 4 on the scale of importance – Low).

10. Demonetisation has also helped ensure that the advance of a RBI rate cut is actually passed on to the consumer. Between January 2015 and October 2016, the RBI reduced interest rates by 175 basis points. However, on an average banks passed on only about 50 basis point rate cut to the consumer. After demonetisation, though, banks have already reduced the Marginal Cost of Fund Based Lending Rates (MCLR) by around 100 basis points and the government expects that the reduction will continue in the coming months. (No. 3 on the scale of importance – High).

11. The advantage of reduced interest rates is felt most notably by the medium and small scale industries. The government’s calculation is that thousands of SMEs will cross the threshold of viability thanks to the reduction in interest rates spurred by demonetisation. (No. 2 on the scale of importance – High).

12. Demonetisation is also giving a boost to reviving the housing sector which has been in the doldrums for the last few years. Interest rate for individual borrowers is already done to 8.2 per cent. Before demonetisation, interest rates hovered at around 9.3 per cent. (No. 4 on the scale of importance – Low).