Bankers, Economists Say Demonetisation Had Other Successes Even If It Lost Black Money Fight

Data released by the Reserve Bank of India on Wednesday showed that nearly all of the currency that was scrapped during demonetisation returned to the banking system as deposits.

Of the Rs 15.28 lakh crore worth in bank notes demonetised in November 2016, 99 percent was deposited with banks as of June 30, according to the central bank's annual report.

Prime Minister Narendra Modi's surprise ban on old Rs 500 and Rs 1,000 notes was initially intended to kill the stock of black or untaxed money generated mostly in India’s informal sector, and reduce counterfeiting. The latest figures raise doubts on whether either were achieved.

Also Read: RBI Data Shows Amount Of Fake Currency Insignificant

“Yes a lot of money has returned to the banking system. People have found ingenious ways of converting their cash into bank deposits. But the positives of demonetisation are many,” said leading banker Keki Mistry, vice chairman and chief executive officer of HDFC Ltd.

Mistry listed two main ones

• Physical cash has been converted into financial assets which has created so much liquidity in the banking system and that liquidity is slowly finding its way into financial investments, including the stock market. So, unproductive cash has gotten converted into productive assets which is long term beneficial to the economy.
• The income tax department now probably has access to information about lakhs of people who were never paying taxes in the past and now have deposited large amounts of money in their bank accounts. The tax department will now go after these individuals, get them to pay taxes in the future, probably make them pay taxes for past years and in the process improve the tax/GDP ratio which is very low in India.

Also Read: Demonetisation Was Not Designed Only To Fight Black Money, Says Finance Minister Jaitley

'Structural Shift'

The numbers released by the RBI suggest that people found ways to bring back black money held as cash into the system, according to Aditi Nayar of ratings agency ICRA.

However, she added that demonetisation brought about a “behavioural change” that led to people opting for more digital transactions than before, which has helped increase the size of the formal economy.

This combined with the Goods and Services Tax will bring about a structural shift with fewer transactions escaping the tax net, Nayar said.

Also Read: RBI Annual Report: 99% Of Demonetised Currency Returned

Money Trails And Non Cash-Payments

“I suspect that the government was not betting on a large amount of cash being extinguished. That’s because the rationale provided was that this time around, the amount of black money held in cash was very low, compared with the earlier instance of demonetisation,” said Abheek Barua of HDFC Bank.

Barua listed the two effects of demonetisation as the promotion of non-cash methods of payment and the creation of a money trail.

Barua said that the government is using a two-pronged strategy as GST will boost the indirect tax to GDP ratio, while demonetisation data will help authorities in increasing tax compliance and penalties.

Also Read: Detection Of Fake Currency Jumps In FY17, Shows RBI’s Annual Report

Loss Of Seigniorage For RBI

Demonetisation resulted in a net loss of seigniorage which is the profit that RBI makes by issuing currency, according to Soumya Kanti Ghosh, the chief economic adviser of State Bank of India.

Ghosh said in a research note that the cost of printing notes and minting coins has also increased during the year. Though, he added that the figures should be treated as provisional because notes recieved by currency chests will be processed further for numerical accuracy and authenticity.

He called the increase in small denomination currency a "highly positive sign".