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Demonetisation - A roller-coaster ride

Last Updated 22 May 2017, 10:49 IST

Last year on November 8, at exactly 8 pm, Prime Minister Narendra Modi, in an unscheduled address to the nation, declared the scrapping of the then prevalent Rs 500 and Rs 1,000 notes. Calling it a “surgical strike on black money”, the Prime Minister asked citizens to bear with him.

The move that was initially welcomed by all, even the staunch critics of the government, soon turned out to be a source of disillusionment. The move sent the entire country into a wild-goose chase. Bank ATMs became the most sought after places in the country, though most times than naught, they disappointed people. There was a severe cash crisis existing in the country. To pacify agitated masses, the Prime Minister and Finance Minister Arun Jaitley came up with repeated assurances about the smooth functioning of the economy, albeit like bullets fired aimlessly.

Now after six months, there needs to be an overall introspection of the benefits derived out of demonetisation.

Overall economy
According to the latest numbers available with the Reserve Bank of India, the currency available with the public was 20% lower as on April 28, compared with pre-demonetisation numbers of October 28, 2016. While the currency with the public before demonetisation stood at Rs 17,01,380 crore, the numbers on April 28, stood at Rs 13,53,970 crore. The country defied the growth targets and achieved higher targets, albeit with lot of controversy surrounding the credibility of the numbers. “The much vaulted objective of demonetisation, while causing large scale disruption in the economy and bringing enormous hardship to the unorganised sector and poor, has failed in its objective of ending black economy, terror financing and counterfeit currency.  To consider it as a reform is a travesty of truth,” says Govinda Rao, Member, 14th Finance Commission, calling the measure as a “deform”.

Manufacturing sector
The Highlights of Index of Industrial Production (IIP) registered a negative growth of 1.2% in February 2017, over the index of February 2016. The growth of the index of Manufacturing, Mining and Electricity was (-)2.0%, 3.3% and 0.3%, respectively, during the month. “The manufacturing sector, particularly the unorganised and small-scale manufacturing sector employing a large number of workers has suffered a great deal on account of demonetisation. This has adversely impacted both small-scale manufacturing and unorganised workers,” adds Rao.

Banking sector
The biggest beneficiary of demonetisation seems to be the banking sector. Reeling under the huge stress of NPAs during 2016-17, banks registered tremendous increase in profits, despite increase in their provision coverage ratio. The aggregate deposits by scheduled commercial banks (SCBs) showed an impressive growth of 5.48% on October 14, 2016, to April 28, this year. According to the data with the RBI, the aggregate deposits by SCBs on April 28 stood at Rs 1,05,09,340 crore, while the bank credit numbers were measured at Rs 75,45,420. The banks maintained their net interest margin despite this disparity between the growth of advances and declines.

According to an Axis Bank official, who did not wish to be named, only 75% of the ATMs dispense cash as on date, with currency crunch resulting out of demonetisation, being the major reason behind it.

“I think the shock therapy of demonetisation has certainly increased awareness about digi-money, telebanking, and Internet banking," says Charan Singh, visiting faculty at IIMB, and former director of banking research at the RBI.

The limited data available so far also shows that along with awareness, usage of e-money has increased, he says.

“Thus, a paradigm shift is apparent in an otherwise lazy, routine chalta hai-type, traditional way of banking. Consequently, the shake-up in commercial banks, along with related sectors in banking like ewallets, including the regulator, RBI, is clear. It is sometimes necessary to be disruptive to trigger ‘Schumpeterian’ type innovations and inventions in the sector,” opines Singh.

If RBI data is looked upon, the value of transactions done through electronic payment systems has increased by an astounding 59%, to Rs 1,49,58,913 crore in March 2017, from Rs 94,00,418 crore in November 2016. On the volumes too, e-transactions showed an increase of 33%, to 893.9 million in March 2017, from 671.5 million in November 2016.

Stocks and forex
The stocks, unexpectedly, shot up post demonetisation, after an initial glitch. The stock markets touched an all-time high last week on the back of a continuous rally, with the 50-Share S&P BSE Sensex closing on record 30,659 points on Wednesday, followed by a correction on Thursday, on the back of profit-booking. There was a huge outflow of foreign investors initially in November from the market. Most experts attribute it to the combination of uncertainty due to a combined Trump effect and demonetisation. Most people ignore that a major role in the stock bear in November was dictated by expectations of an interest rate hike by the US Federal Reserve in December. But post that, stocks have been bullish, with stocks touching an all-time high this week. Experts attribute this bull charge in the markets to excess liquidity in the economy created due to the demonetisation.

“With the economy and banks not doing so well, excess liquidity created out of demonetisation found its way to the stock markets,” says Rajan Govil, Co-founder of Marketnomix, a market advisory.

The government has also managed to keep the rupee depreciation under check. Govil says that interest rate measures by the RBI played an important role in this. “The bull in the market was hugely domestically driven. This led to an increased demand for Indian stocks from foreign investors as well. And hence, the demand-supply equilibrium of the rupee was maintained,” he adds.

It is said that the policy is as good as it is implemented. The Reserve Bank constantly tweeked the rules post demonetisation. There was a severe cash crunch in the economy. And as Rao says, it has failed in all three of its objectives. Although the small fish with black money have been caught, but let’s be honest — the Income Tax Department deserves credit for that and not demonetisation. The counterfeits of new notes are already in circulation. Also, terror activities have increased in the past six months.


It needs to be pondered upon, whether it was necessary to send the economy into a wild-goose chase for all the “long-term benefits” of demonetisation.

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(Published 21 May 2017, 18:34 IST)

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