On 8 November, 2016 Prime Minister Narendra Modi announced the scrapping of ₹ 500 and ₹ ,000 notes, which constituted 86% of the currency in circulation. Exactly three months later, where does the Indian economy stand today?

From Demonetisation to Remonetisation

In an interview to Mint after the Union budget, economic affairs secretary Shaktikanta Das claimed that remonetisation process is nearly complete.

Latest data from the Reserve Bank of India, or RBI (for week ending 20 January, 2017) shows that cash with public is still 40% less than what it was a year ago.

On the other hand, year-on-year increase in currency with banks has returned to its normal level, suggesting that banks have deposited all demonetised currency with the RBI.

Overall currency in circulation is 57% of what it was before note-ban decision. The comparisons have been made for latest data available for week ending 27 January, 2017 and 4 November, 2016.

To be sure, the government has suggested that it does not intend to replenish the entire stock of demonetised currency and the gap would be taken care of by digital payment methods. However, unless concrete figures are given vis-à-vis such policy change, remonetisation claims would be seen with a degree of scepticism.

Black money discovered

Note-ban’s primary stated objective was to unearth the stock of unaccounted incomes or black money. The government’s affidavit in the Supreme Court on demonetisation says that note-ban would “nullify the advantage of holding black money by destroying the value of these hordes". Unofficial estimates of money which would not return to the system after note-ban varied from ₹ 1.5 to 4.8 trillion. Finance Minister Arun Jaitley suggested in his budget speech that ₹ 10.38 trillion, almost two-thirds of the value of demonetised currency, had come back in deposits which were more than ₹ 2 lakh. Out of this, ₹ 4.89 trillion has come in deposits of ₹ 80 lakh or more. It is likely that those who have made such high value deposits are confident of dealing with tax department’s queries, which diminishes hopes of a windfall in unearthing of black money.

Growth in digital payments

The liquidity squeeze after note-ban forced people to adopt digital payment methods. However, as was pointed out in this Mark to Market column, statistics show a decline in growth of average value of such transactions, suggesting a cutback in overall spending.

To be sure, this is not completely unexpected as even the less well to do must have started using such methods unlike the past, when only well-off people were using these methods.

However, latest data from the RBI shows that digital payments are slowing down in both value and volume terms. When seen with the trend of increase in cash with public, it shows that phenomenal growth in use of digital payment methods is clearly unsustainable once liquidity crisis eases.

Overall effect on economic activity

Multiple estimates of note-ban’s effect on economic activity have been given since 8 November. Unfortunately, there is no credible short term data on either GDP or employment in our country. While first estimates of GDP for 2016-17 would be available only in May 2017, we would not have any credible data to capture temporary job losses due to employment. This is because only credible estimates of employment in India are based on National Sample Survey Organisation surveys, which happen once in five years. The Nikkei India Manufacturing Purchasing Manager’s Index (PMI), which fell below 50 – signifying contraction – in December 2016. While the index has reversed its falling trend in January, 2017, when seen in comparison with China’s PMI, it is clear that Indian manufacturing had to pay a price due to the liquidity crunch after demonetisation.

The short point is, after one full quarter since the note-ban decision, gains are still uncertain while the economy has suffered definite losses, even though they might be transient in nature.

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