RBI says 99% of banned notes returned: A cost-benefit analysis of demonetisation in five points

On Wednesday the Reserve Bank of India published its annual report for 2016-2017. The report throws light on one of the most disruptive steps taken by the government in the last many years - demonetisation.

Ever since Prime Minister Narendra Modi announced the demonetisation of Rs 500 and Rs 1,000 notes on 8 November 2016, there has been many debates over its impact on the Indian economy.

Many have criticised the move that was taken without adequate ground work saying it has impacted the economic growth. Meanwhile, the government has been of the view that it has had positive effect on the economy.

From assets and liabilities of the RBI, here we draw up the debit and credit of demonetisation:

1) Rhetoric

Demonetisaiton will result in at least Rs 3 lakh crore not getting returned (may be burnt down) by tax evaders because they wont be able to account for it.

Reality

99.3 percent of all the old notes have been returned: Rs 15.44 lakh crore demonetised vs Rs 15.28 lakh crore returned.

2) Rhetoric

Fake notes are flooding the system; demonetisation of all 500, 1000 rupee notes will end all these fakes and new 2000 rupee notes with new security features will repalce them.

Reality

Yes number of counterfeit notes caught have risen by 20 percent but total number of counterfeits caught account for 0.0007 percent of total notes in circulation. And by the way, 638 notes of the new 2000 notes were also found to be fake.

3) Rhetoric

The demonetisation exercise was always intended to get cash into the banking system. Now watch the rise in new tax registrations and taxes collected.

Reality

Yes number of new tax filers increased by 25 percent; but there have been years in the past when new tax registrations have risen even by 27 percent; total income tax collections rose 20 percent in FY17; they rose over 16 percent in FY15. Demonetisation obviously has not been all that gamechanging at least so far.

4) Rhetoric

Demonetisation was all about increasing digitisation.

Reality

Nandan Nilekani’s Aadhaar, NPCIL’s UPI and Vijay Shekahr Sharma’s PayTm are sounder ways to increase digitisation without such a big fat human cost; in any case RBI itself reported in April a fall in the pace of digitisation as cash returned to the system.

5) Rhetoic: Long-term gains

Long-term tax growth, long-term digitisatiion of economy

Reality: Short term costs

GVA in Q3 FY17 was 6.7 percent vs 7.3 percent year ago; GVA in Q4 FY17 was 5.6 percent vs 8.7 percent year ago.

RBI spent Rs 7,900 crore in note printing in FY17, vs only Rs 3,400 crore in FY16.

RBI spent Rs 17,400 crore mopping-up idle cash in FY17 against earning over Rs 500 crore year ago.

And we still can’t put a number to unorganised sector output and job losses.

One clear short term gain: PM Modi emerges as an undisputed crusader against the evil rich. Was that the unspoken rhetoric and reality after all.