DEMONETISATION: MOST SUCCESSFUL GAME CHANGER FOR INDIAN ECONOMY
EARTH NEWS SERVICE :
18 Sept. 2017 : As a matter of fact, demonetisation has won the battle resoundingly on a whole host of fronts. Those who accuse the Government of shifting goalposts, reek of mala fide ignorance because economies and economic goalposts have always been fluid, dynamic and ever changing in contemporary times
This is the first instance in India’s history when the Government and the people have fought shoulder to shoulder,” said Prime Minister Narendra Modi on the impact of demonetisation, thereby summing up its very essence. By far, demonetisation has been the most revolutionary and disruptive game-changer in India’s post-independent history. Its full impact in transforming India from a cash-driven economy to a digital economy is already showing tremendous results. Collating data, that is available in the public domain, makes it amply clear that digital transactions in all modes rose by 23 per cent to 27.5 million in May this year from 22.4 million in November 2016. The highest jump was recorded in Unified Payments Interface (UPI) — from one million per day to a resounding 30 million per day in the said period.
A public sector bank, like the State Bank of India, for instance, recorded a solid 30 per cent jump in debit and credit card transactions alone in the said period.
Transactions at point-of-sale (PoS) terminal, at merchant locations, surged to 328 million from less than 109 million by way of volume between November 2016 and May 2017. Again, demonetisation led to a massive scale-up in digital infrastructure with one million additional PoS terminals being added within just three months of note recall, thereby taking their total number to more than 2.52 million. Also, prepaid payment instructions (PPIs), including mobile wallets, registered a whopping 375 per cent jump at 342 million in March this year from 72 million pre-demonetisation.
Needless to add, demonetisation has had pathbreaking attendant benefits. All thanks to the vision of one man who chose to defy stereotypes to tread a path that none would have dared to. And that man is none other than Prime Minister Narendra Modi, who, with his note recall move, carved out a new normal for India and its 1.27 billion strong populace.
Naysayers, including a former Finance Minister, who perpetrated the 6,000 crore National Spot Exchange Limited scam, leaving 13,000 hapless investors in the lurch, and whose son is currently under the Enforcement Directorate’s (ED) scanner for money laundering, claims that demonetisation is a failure because 99 per cent of the notes that were declared illegal tender, are back into the banking system.
So what if the 99 per cent of the Rs 15.44 lakh crore, that was demonetised, is back with the banks? Not all of that 99 per cent is white! Also, a large part of the money that is back with the banks is unaccounted for! This is evident from the fact that 18 lakh bank accounts are under the scanner of the ED, as money deposited is not in sync with the tax profiles concerned. Hence, critics of demonetisation seem to have completely missed the plot here.
Again, individuals and entities, who deposited a total of more than two lakh crore rupees in cash during demonetisation, had never ever filed income tax return, Finance Ministry data revealed. Of a total of 22.22 lakh tax evaders, 21.12 lakh were individuals, 11,579 companies, and the rest comprised of firms (57,693), trusts, Associates of Person (AoP), Hindu Undivided Family (HUF), and Artificial Judicial Persons (AJPs).
The Central Board Of Direct Taxes (CBDT) and the Financial Intelligence Unit (FIU) have identified two sets of people and entities. In the first set, they identified people who made cumulative cash deposits between two lakh rupees to Rs 80 lakh during the first 50 days of demonetisation, in which, a total of Rs 5.4 lakh crore of cash was deposited via 99.40 lakh transactions. In the second set, the super rich made cash deposits worth more than Rs 80 lakh, via 1.41 lakh transactions.
The biggest success of demonetisation, therefore, is the fact that anywhere between two lakh crore rupees — Rs 5.4 lakh crore of money that was outside the ambit of the tax net and largely unaccounted for, is now a part of the formal banking system. In other words, gross domestic product (GDP) between 1.3 per cent to 3.6 per cent, that was outside the formal banking channels, is now very much a part of the formal taxation process.
Also, while short-term benefits of note recall have been sweeping and significant, equally, the tectonic long-term impact in bringing the informal economy into the formal fold cannot be underestimated. Assuming the informal economy at 20 per cent of the GDP; and assuming the formal sector is taxed at an average rate ranging between 15-20 per cent, with demonetisation, once the informal and formal merge, the boost to GDP on this count alone could be between three to four per cent.
Demonetisation results have already started showing — advance tax collections showed a growth of 42 per cent as on August 5 this year over the corresponding period in 2016-17. Growth in the number of people filing income tax returns rose by 25 per cent in the said period, with 56 lakh new tax payers coming into the tax net versus a prior period growth of only 9.9 per cent. Again, direct tax collections for April to July this year grew at 19 per cent versus an otherwise routine growth of 14 per cent in earlier quarters.
It is no coincidence that post-note recall, low cost Current Account and Savings Account deposits (Casa) with banks went up by almost four per cent, thereby bringing down the overall cost and improving the cost to income ratio of the banks. This in-turn manifested itself in lower lending rates on home loans and personal loans.
It is pertinent to note that the marginal cost of funds-based lending rate (MCLR) for most banks has come down from 9.15 per cent to eight per cent. A 50bps fall in interest rate on one crore rupees home loan for 20 years could lead to a savings of eight lakhs rupees over the tenure of the loan and a 100bps fall, a savings of a whopping Rs 16 lakh over the loan tenure!
Again, between November 2016 and March 2017, deposits with the banks went up by Rs 3.5 lakh crore, aiding overall margins. Deposits in Pradhan Mantri Jan-Dhan Yojana accounts alone rose to more than Rs 6,4000 crore with 18 million new Jan Dhan accounts being added during this period.
Besides Jan Dhan accounts, what critics conveniently forget is that Rs 80,000 crore of money was repaid in cash for prior period loans taken — Rs 10,700 crore cash came into bank accounts in north-eastern States and another Rs 16,000 crore came into regional rural banks — all thanks to demonetisation.
Critics of the Modi Government need to take a hard look at the aforesaid numbers to realise the fact that the note-recall exercise, far from beings futile, as is being propounded by vested interests, is actually one that struck at the heart of corruption. Black money hoarders learnt the hard way that stashing piles of unaccounted notes under mattresses is unforgivable.
The more underrated and yet significant positive aspect of demonetisation, however, is the perceptible shift from physical to financial savings, which is evident from the 142 per cent growth in insurance premium collected by the Life Insurance Corporation of India in November 2016 — a 50 per cent growth seen by private insurers, 18 per cent growth in assets under management by the mutual fund industry, with assets touching a new high of Rs 20 lakh crore between November 2016 and July 2017.
More than 77 lakh new portfolios were added to the mutual fund industry, largely from tier-II towns and small investors in the financial year 2016-17 versus a little over 35 lakh portfolios that were added in financial year 2015-16 — a 120 per cent growth. Also, the fact that 2.09 lakh shell companies had their bank accounts frozen and names struck off from the Registrar of Companies list, is a glowing testimony to the clampdown on black money and illicit funding that demonetisation dealt a body-blow too.
Of late, there’s been a huge brouhaha about the lower Reserve Bank of India (RBI) dividend for the year ended June 30 this year, at Rs 30,659 crore. Ignoramuses, frivolous economists included, say that the lower dividend is due to the huge costs incurred by the RBI, thanks to demonetisation. This is absolutely false. The cost of printing new notes was only Rs 7,965 crore. Lower dividend pay out by the RBI was primarily due to the rise in US bond yields.
US one-year bond yields rose from 0.4 per cent to 1.2 per cent between July 2016 and June this year, while the US’s 10-year bond yields rose from 1.4 per cent to 2.3 per cent in the said period. Since, the RBI holds a large part of its forex assets by way of the US Government treasury bills; and since the RBI follows the mark to market (MTM) accounting practice, wherein assets are valued at current market price and not at the price at which they are bought, the rise in the US yields led to MTM losses, reducing the ‘surplus’ available with the RBI.
Also, between January to June this year, the Indian rupee rose by almost five per cent. Appreciation in the local currency reduced the RBI’s income, as it had to sterilise the surge in overseas inflows by selling dollars and buying the rupee to prevent any further and undue rupee appreciation that could have adversely affected India’s competitiveness and terms of trade.
Needless to add, this sterilisation came at a cost but the RBI had to do what it had to do! Excess rupee liquidity due to a surge in bank deposits also meant higher interest outgo for the RBI, as it had to pay banks between 5.75 per cent to six per cent for the money that banks parked with the RBI as a part of the reverse repo transactions conducted by the RBI. In effect, demonetisation did play a part but only an incidental one, in the lower dividend pay-out.
Again, those harping about the Government possibly breaching its fiscal deficit target of 3.2 per cent for the financial year 2017-18, due to lower dividend received from the RBI, have totally missed the plot. The Government’s disinvestment agenda kicked off to a stellar start, with the Government collecting Rs 1,204 crore by selling 9.2 per cent stake in National Aluminium Company Limited, with Rs 250 crore coming from retail investors alone.
Recently, the Government raised Rs 9,100 crore by divesting seven per cent stake in the National Thermal Power Corporation Limited. Also, public sector undertakings insurers, like the General Insurance Corporation of India and the New India Assurance, that will be tapping the equity markets soon, which should raise more than Rs 10,000 crore. And there is a lot more to come.
Be it inflation, bond yields, tax revenues, bank deposits, financialisation of physical savings, lower home loan rates, falling property prices, closure of fictitious firms, disclosure of massive unaccounted wealth, et al, demonetisation has won the battle resoundingly on a whole host of fronts and those who accuse the Government of shifting goalposts, reek of mala fide ignorance because economies and economic goalposts have always been fluid, dynamic and ever changing, more so, in contemporary times.