Demonetisation -A gamble or panacea

Demonetisation -A gamble or panacea

The demonetisation is an attempt to eliminate black money besides countering the phenomenon of counterfeit currency.

The govt. also declared that it is also for switching to digital transactions.

Though demonetisation effect can’t be known in short term but its yardsticks can be decided beforehand for evaluation.


Money disappearance:

The first parameter to evaluate the scheme can be how much money disappears from the system.

There is a projection that a large part of the currency in high denomination notes – around Rs. 14.25 lakh crore – would not enter the banking system, thus making it redundant.

At present, Rs. 10 lakh crore have been deposited in banks Hence, whether 10% or 20% or 30% money will not be returning may determine the success rate.

A ratio of 20-30% will justify the quantum of vast exercise. The reason is that the cost of demonetisation for 50 days from November 8 to Dec 30 is expect to cost Rs 1,28,000 crore which includes loss of business or sales, cost to households, the expenses for printing fresh currency notes to the government and the RBI besides for banks.

Thus, the government will have to show gains in form of penalties and additional taxes from those who have been found violating the rules or have evaded taxes.


Control on Jan Dhan accounts

In respect to it, the second metric can be identification of people hoarding money. There have been reports of transactions converting cash to bank deposits through the Jan Dhan programme or any other means.

Identifying of such transactions will attract penalty cum fine which can vary across the spectrum. This will clearly bring in more revenue for the government.

Hence, it is expected that for every Rs. 1 lakh crore of identified black deposits could earn the Government a bonus of at least Rs. 50,000 crore revenue.

The success garnered here will reflect Government promptness in plugging loopholes that were being exploited by holders of black money.

Cash availability post 30th December

The third metric will be cash availability with banks and ATMs post 30th December when the window to deposit the scrapped notes and withdrawal limit will end. Currently, the cash crunch and long lines at banks and ATMs are signs of problems faced by citizens.

However, post 30th December, it needs to be seen how fast RVI revokes all the curbs on withdrawal of currency from banks and also sufficient cash in the economy.


GDP Decline

The GDP growth is expected to retard in Q3 of the year and thereby affect the economic growth process and thus affecting overall growth in the fiscal.

Hence the fourth metric will be how fast the re-monetisation scheme will help the recovery of GDP growth and help economy move upwards.

If Q4 growth is lower than Q3, than the demonetisation plan will prove that it hampered the growth. But if it attains normalcy, then it should be considered turning point in economy post Q3.

Real estate

The real estate hosts the maximum percentage of black money. Though there are varied views on how the sector will cope up post demonetisation, its litmus test will be on if the real estate prices come down or not.

The RBI or NHB price indices would provide some clue to whether there has been any moderation in the prices of property in the country.

Digital transactions

Demonetisation has also the objective of promoting digital payments. Hence, the sixth metric will be if the volume of cash holdings will come down with the time.

Over a period of 6 to 12 months, the ratio of currency to GDP should come down from the present level of around 12%.

If the households and businesses go back to holding similar amounts of currency, then the transformational objective would get vitiated. It would also mean that Indians require currency for the three classical purposes put forward by monetarists — transactional, precautionary and speculative.



Recreation of black money

The main target of demonetisation has been targeting black money and eliminating it.

Till now, most of the black money has resided in cash and hence it needs to be seen if another platform for black economy will be created or not considering the fact that high denomination notes of Rs. 2,000 become easier to hold.

But it will probably take 5 to 10 years for such an economy to come up; however, it can be delayed by more stringent tax laws. This is where the tax system must be tightened so that slippages are eliminated.


There are going to be considerable costs – some that can be measured and others that cannot.

The most tangible among it is loss of GDP and 50 bps cut in the GDP growth rate which would amount to around Rs. 70,000 crore. If the loss on an annual basis is higher, then the cost for the economy will increase proportionately.

There also are intangible costs such as time spent by households and businesspersons to deal with the new situation.

There will be distortion in market which includes stocks and GSecs in particular. The yields have become volatile as the RBI grapples with the excess liquidity problem in the system.

The banks have faced multiple challenges during the process such as late hours, reconciliation, overtime, recalibration of ATMs, security and so on, which would be considerable even as some cannot be quantified.

To Conclude:

The success of demonetisation will largely be seen post 12 months when the economy will show changes that were projected. It is expected that benefits should outweigh the costs once the system starts cleaning up. However, the challenge would be to see that the new black economy doesn’t get generated again


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