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Did Demonetization Benefit outweigh the More than 165 Billion INR Cost?

A back of the envelope analysis based on RBI FY1617 annual report released today, puts the benefit at around 120 Billion INR for the year compared to a conservative estimate of the cost at ~165 Billion INR. Basically the whole exercise turns out to less than a zero sum game which put the entire country into jeopardy, people at huge discomfort & economy at risk for a mere trifle net benefit.

The below chart provides a quick snapshot of the ‘COST vs. BENEFIT’. A quick dirty calculation to put things into perspective. Only 89 Million 1000 Re Note did not come back to system which is just a fraction of initial estimates. Printing cost for RBI was more than double of last year!!! Pls. note estimate on 500 INR old that did not came back to the system is not readily available or deductible from the RBI report and hence have not been considered. But of half the value as 1000 and seeing the situation with 1000 notes, it can be assumed that more than 99% of the old 500 would have also got back into the system. But that strictly is still an assumption.

Consider this:

  1. Black Money that could not get into system: 89 Billion INR, Cost of replenishing cash for RBI: 49 Billion INR
  2. Benefit of digitization- reduced cost of cash: 30 Billion INR, Adverse impact on GDP80 Billion INR
  3. Total benefit estimate at 119 Billion INR while conservative cost estimate at 165 Billion INR
  4. At -(ve) ROI, even w/o considering the harassment, waste of time, economic contraction and money that turned white, demonetization was an extravaganza that proved too costly for a country

Now to qualitative cost & benefits highlighted by the RBI report (not exhaustive but a few excerpts)

Cost/ Challenges arising out of the demonetization move

  1. “Industrial output seemed to have been impacted, albeit transiently, by demonetisation as IIP growth during November 2016 to March 2017 was 2.6 percentage points lower than in the pre-demonetisation period (April – October 2016).”
  2. “…deceleration in services Gross Value Added (GVA).…slowdown was pronounced in H2 as construction and real estate sectors, which relied to a large extent on cash transactions, were severely impacted following demonetization”
  3. Credit growth touched a low in more than two decades on account of factors such as subdued state of economic activity,…and banks’ pre-occupation with exchange of notes and deposits following demonetization

Coming to benefits outlined:

  1. inflation reversed into a declining trajectory beginning August 2016, which got accentuated by
    falling food prices, especially those of vegetables, in the wake of demonetisation in November 2016″
  2. “currency demand appears to have attained a new normal (currently around 87 per cent of the pre-demonetisation peak) in view of the sharp increase in electronic modes of payments since demonetization”
  3. “This implies a significant pick-up in the rate of FICN detection at the Reserve Bank level in the post-demonetisation period as compared to a year ago”

There has been a few reports on cash & assets that were seized by IT during raids conducted at demonetization, more people being forced into tax net leading to higher tax revenue earned etc but could not have IT (Income Tax) done the same without going through this demonetization? They have many ways of identifying tax evaders and there have been earlier incidents of such recovery, tying it to demonetization is more like justifying the very act of demonetization.

Overall the demonetization drive seems to be have not worked in the way the GoI expected it to be. People found jugaads to ensure that black money is converted to white money by bringing it into banking channel while common people lost lives/ time & health trying to support a ill-conceived & badly implemented experimental drive (to understand more on implementation lacunae refer our story on implementation). People supported and even economists who spoke against demonetization effectiveness faced backlash from commoners who trusted the government on this move propagated as ‘the step’ to clean out black money one time. But, alas!, their trust was belied! The challenge probably lay in the fact that demonetization was more a decision led by political system and less a nuanced economic decision. RBI was allowed to just nod and align rather than evaluate & act!

Note: The above article has been revised as of 3rd Sep-11:30 AM to correct an error on the loss due to impact on GDP. The revised estimate is higher than the original resulting in the overall cost to outweigh the benefit of demonetization. The error is regretted!


Image: Business Line but sourced through following link http://www.angelbroking.com/blog/demonetization-one-more-step-for-curbing-black-money


RBI Annual report FY1617, FY1516, FY1415

RBI Money Supply data



https://www.forbes.com/sites/timworstall/2017/03/11/reserve-bank-of-india-report-gdp-effect-of-demonetisation-small-and-fleeting/#1934c469414a (1% impact on GDP as per HSBC: the lowest of all the estimates)

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