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The Mood(y) on Demonetization

Yesterday in a dramatic turn of events, Moody upgraded country rating of India after nearly 14 years and demonetization was cited as one of the economic reforms triggering the same, along with GST and others. While the upgrade caught everyone by surprise but citing demonetization is the more surprising element, especially at a time when there is a raging controversy on the futility of the grand but horrific (at-least to common people) event of demonetization. Our analysis indicates there is no perceptible trend that can be put as impact of demonetization and otherwise not achievable!

We covered the cost vs benefit of demonetization primarily w.r.t. black money and the cashless journey in our earlier article which clarifies why demonetization remains a very costly affair (Read demonetization-benefit-outweigh-100-billion-inr-cost/’). In this article, we will evaluate some trends which are being frequently touted as impact of demonetization.

1. Tax Collection

Supporters of demonetization has been hailing that direct tax collection has increased in FY1617 financial year because of demonetization. Now let’s look at data directly sourced from Income Tax Department.

3 key observations:

  • Growth rate for FY1617 at 14.5% is significantly higher than 6.6% at FY1516
  • There have been numerous years between 2000-2017 where direct tax collection growth has been significantly higher than 14.5% or very close to it. Case in point are 2012-13, 2013-14 very recently and 2002-03/ 2003-04 and none of it were preceded by demonetization
  • Buoyancy factor (Growth in Direct Tax/ Growth in GDP) of 1.2 observed in FY1617 is not that great and India has seen better buoyancy in some years as evident below.

To summarize, there has been improvement compared to last 1-2 years but similar or better growth has been seen in earlier years w/o demonetization. Hence assigning that to demonetization is farfetched or simply coincidental.

Similarly, if we analyze the direct tax contribution to overall tax collection, then also nothing so spectacular is observed. Collection figures are in INR Crore

Total tax growth rate of 17.68% in FY1617 is similar to 17.37% observed in FY1516

# of effective assesses in Individual category increased by 56 lac in FY1617 as per some TOI estimate (18th Nov 2017 under article ‘Next: 1billion UIDs…’ under box “What the Numbers say”). If we compare that YoY figures, the figure is astonishingly high compared to FY1516 but nothing so great if we compare to earlier years.

2.  Growth in Digital Payments

For this we will leverage data that is published by RBI. We have normalized the monthly data to an average of 30 days as otherwise Feb with 28 days may look bad compared to 31 days of Jan and yield erroneous outcome.

If we look at overall electronic payment growth (sample basis as published by RBI), there is a jump observed in Oct, which can be linked to festivities of Oct month. Otherwise it has been a gradual movement except a few peaks which happened just after demonetization.

Let us now look at other at specific digital payment options/ channels.

  • UPI with a low base has shown significant improvement M-o-M
  • Mobile banking seems to have peaked in Mar-17 and seeing downward trend in value transacted. Growth in volume is more marked which means that more small value payments are being done through mobile. This is similar to UPI as well and indicates that higher adoption of digital payments in day to day transactions (kirana stores, peer payments etc)
  • USSD seems to be losing sheen and downward trend is being observed both in value & volume except a few aberrations. This may be connected to more proliferation of smart phones even in semi urban areas.
  • Usage of cards at POS seems to have also been stable across months except significant uptake in Dec-16, Jan-17 for obvious immediate fallout of demonetization and also in Oct-17, being festive season.

Even if we look at full data which is released quarterly and is available till Aug 2017, the outcome remains same. (The full year data has not been normalized across months and hence that may be reason for Feb-17 to show contraction).

The more interesting data point will be to observe how the Aug to Aug growth figures (value transacted) look across years and search for any significant rise from Aug-16 that can be connected back to demonetization. Here also the trends fail to impress and quite distressingly mobile transactions sees drop in Aug 2017.

3. Consumer confidence

The 3rd parameter that we will see is how consumer reacted to demonetization and for that we will consider survey results of RBI on consumer confidence. While consumer participated whole heartedly in demonetization believing that stacked corrupt money in cash will get killed, the confidence seems to have taken back seat and has been moving southwards for last few quarters.

Sep-16 saw people showing confidence in economic condition only to lose it by next few quarters (PERCEPTION ON GENERAL ECONOMIC CONDITION). The story runs similar on nearly all the other parameters. Quite unfortunately, price level perception got worse in Sep-17 (more people believing that prices will rise) and this may be tied to roll out of GST which is known to lead to inflation in short term (read out article on GST)

Hence, if we have to summarize the logic behind the defense of demonetization looks weak and questions arises whether all of these touted improvements are simply coincidental! A costly experiment for sure and a case for study for economists! Moody seems to be moody in its choice of upgrade. We surely don’t mind it but improvement in basic fundamentals of the economy is what will make more sense now.


RBI Electronic Payment System Data (Representative)

RBI Table 43 Payment System Indicator Data

RBI Consumer Confidence Survey

Income Tax Time Series Data

TOI report

Featured image sourced from https://scroll.in/article/856960/as-india-debates-demonetisation-a-look-back-at-how-hard-the-note-ban-hit-ordinary-people

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