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‘Currency At Hand’ Is Still Down 22% Compared To Pre Demonetization!

Indian’s held around INR 17 Trillion in currency (all possible legal tenders) as of 28th Oct 2016. By 14th April, 2017, the same stands at INR 13.3 Trillion (~ 22%) below, pre-demonetization level. This is even 17% less than 31st Mar 2016 level and still 4% lower than the 31st Mar 2015 level.

The long lines at the ATM is nearly gone and money supply has also eased. This also becomes evident from the slowing growth in ‘currency with public’ from 12.5% as of 20th Jan 2017 (from last released figures, released every 2 weeks by RBI) to little over 5% by 14th April-2017. Juxtaposed this with our analysis of electronic transaction data post demonetization, it reiterates the fact that we may be stabilizing at a ‘lesser cash’ level compared to pre-demonetization. The higher acceptance of digital, initially by lack of choice (demonetization) and later by ease of doing (UPI, BHIM, Paytms of the world) becomes quite clear. Only question is whether this gets sustained over time (as proverb goes, old habits die hard!).

While the impact of demonetization on Indian ‘digital payment’ ecosystem is somewhat clear, a similar impact on corruption (which was the main stated driver for demonetization) is not so clear.

  1. It was initially expected and general people enjoyed the euphoria that a few lakh crores (a few Trillion) of the INR 17 Trillion as of 28th Oct 2016, was black money (cash) which would not get ploughed back to the system and hence decimating black cash by a significant %age. This turned out to be a dampener as Indian jugaad system ensured that nearly all of that came back into the system. It becomes more clear as RBI has started to duck the question on ‘currency returned’ (SS Mundra, DG RBI “The process is on for counting and reconciliation…what is important now is that instead of asking the same stale question, it will be important to look at this in totality,”
  2. Income tax authority has been spending ‘midnight oil’ for last few months to identify all huge cash transactions in last few months and trying to identify ‘corrupts’. In this endeavor, queries have been send to several thousand people but this is going to be a very slow process as there will be challenges of tracing all of it and also fighting it out in the court.
  3. Have people stopped taking bribes, have there been any follow up rules/ regulations that supposedly can give more teeth to law enforcement people to track & penalize bribe takers? This is all very ambiguous today. And this could have been driven without demonetization and the huge pains common people suffered. Actually this created a several new modes of corruption. Since there was rationing of cash, people tried all means to bypass the rules/ take advantage for own benefit (bankers etc). In economics this is call rent seeking!!!

Again another key driver for demonetization, it seems, was to minimize fake notes circulation by eliminating the existing high value notes whose security was compromised by subversive elements. Part of it is reflected in FICN (Fake Indian Currency Notes) tracked by RBI. How much of it has been curbed?  As per our earlier reportnearly 6.33 lakh FICN (Fake Indian currency notes) were detected only in banking system (FY1516 RBI data). We have to wait till RBI officially announces the FICN data estimate as part of the FY1617 annual report to understand impact, if any. But going by news report, there are already significant cases of people being held with new denomination FICN notes. Also if this was a primary driver, then the GOI should have asked RBI to speed up its ‘plastic currency’ project which is in pilot stage. Sure, that has now being pushed back by sometime as RBI would have been fiddling with demonetization challenges & now NPA issues and will be short of bandwidth there.

So to summarize, digital, yes we are seeing some positive impact; addressing corruption/ one time eradication of black cash seems to have failed/ minimal impact while as far as fake notes are concerned, those subversive elements are back to business. Hope we are missing some key points/ objectives which can justify the huge effort/ life lost by common people/ ordinary bankers in the 3 months of Nov16-Jan17 to support GOI ‘demonetization’. Various world economic reports/ economists are speaking of ‘long term gains’ but the details are very sketchy and short of evidence!.






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