Demonetisation was probably the biggest disruption that was caused by the NDA government which took several dramatic twists and turns. Even today the impact though diluted still remains. While the scheme was announced as one being introduced to attack black money and check counterfeit currency, the objective changed to digitise the economy and while both supporters and detractors had their strong views, at the end of the day, the programme was successfully implemented with acquiescence from all people.
While the jury is still not out in terms of plain numbers that are involved and whether the initial objectives were achieved, the impact after 6 months can be looked at from the point of view of various participants of this grand game.
The government was the protagonist and can look back with some satisfaction that the scheme has been implemented and all the old notes have been flushed out. There is still no clear number available on the amount of black money that has been unearthed, but for sure there has been some difference in the way in which we use money. Hence there can be some satisfaction on the digitisation front, though one has to wait and see. Based on RBI data on use of digitised money, total volumes of transactions which were Rs 105 lakh crore in December came down in January and February, but peaked at Rs 150 lakh crore in March, being the year end. But numbers have come down in April to Rs 110 lakh crore. But for sure, there has been greater use of digital modes of transactions though the average value has come down.
There were also expectations of higher tax collections under the second income declaration scheme. The impressionistic view is that the collections are unlikely to be significant as even the first scheme did not deliver substantial tax revenue (Rs 65,000 crore approximately declared with tax revenue of around Rs 30,000 crore).
The other protagonist was the RBI which was also the instrument used for carrying out this project. The RBI had to face the flak from the common man as the supply of currency had not kept pace with either the absorption of old notes or the requirements of the households. After some bit of stumbling with regards to the recalibrating of ATMs, the RBI has done well with supplying new notes. The total volume of currency at Rs 14 lakh crore is still lesser than last year by around Rs 3 lakh crore. One cannot be too sure of the reason behind this shortfall . It could be a combination of three factors. The first is that there is still slack in terms of getting the requisite paper to print the notes. The second is that customers are demanding less currency, as old notes have gotten converted into deposits which yield interest income. Hence, unless money is meant for precautionary purposes, it is unlikely that households would withdraw all money from the deposits. Third, it could be a conscious move to circulate less currency so that people move to digital modes.
The RBI has also had the comfort of looking at monetary policy in a different manner. The call was to lower rates and hence, there was always pressure on the central bank to lower the repo rate. Due to demonetisation banks had surplus funds which automatically led to more liquidity which made them lower deposit rates as well as lending rates. Hence, the objective of lowering rates was met without really lowering the repo rate.
On the flip side however, the RBI and government has to bear the cost of surplus liquidity which is being absorbed by a combination of Cash Management Bills under the Market Stabilization scheme and reverse-repo auctions. With around Rs 4 lakh crore of such surplus funds around, the cost of about Rs 24,000 crore has to be borne by the official bodies at 6 percent interest cost. Further, surplus liquidity has also put pressure on forex rate management. Presently, with the rupee appreciating sharply, any intervention by the RBI through buying up of dollars will aggrandize the liquidity situation thus calling for further absorption and cost to the system.
The third element is banks. They have had a harrowing time for the last two months of the project where attention was diverted fully to just handling cash and ensuring that an irate public was pacified all the time. Issues like NPAs, which is now the main concern, was put in the back burner and they have done fairly well in handling this disruption. There was a short phase when excess liquidity was a burden which had to be kept under CRR, but the introduction of MSS bonds helped them tide over this issue. Today, with a return of just a little over 6 percent on these bonds, banks are able to cover the cost of deposits. They have however managed to lower deposits and lending rates and have gone back to equilibrium.
The fourth corner of the square is the customer who is still wondering why the nation got into such a scheme, where the results do not seem to support the initial objective of getting at the bad guys in the system. While stoicism helped to tide over the inconvenience caused by the scheme, the return to cash looks more likely once the central bank is able to provide the requisite currency to the system. The use of digital money though enticing, has not gone with any lowering of cost of using, say cards, where neither the government is willing to give subsidy nor the companies lowering the cost. There has been heavy investment made by the government to enable the same, but unless the cost comes down, it may not be that accessible to the common folks.
Some lessons learnt from this exercise are the following. Black money may not really reside in currency to a significant extent. Experimenting with this scheme in retrospect though not successful was worth a try. The disturbance caused in the system was sharp not just in terms of inconvenience caused but also loss of economic growth as the CSO projects GDP growth to be lower than that last year by 0.8 percent (7.1 percent as against 7.9 percent) at a time when everything was going right. Jobs have been lost and consumer demand eroded. These two, however, will mean revert in course of time.
We are now probably more cognizant of the elements that need to be kept in place like availability of notes, recalibration of ATMs, logistics of supply etc. when embarking on such a project. Disruptions have been many, at the end of banks, households and RBI which have a cost in terms of time and money. Should we have such ventures again? Probably not with similar motivations, but if they are invoked, should be better planned and executed.
(The writer is chief economist, CARE Ratings. Views are personal)
Updated Date: May 09, 2017 12:16 PM