Demonetisation - Much about nothing - RBI report

The Hindu Businessline | August 30, 2018

The RBI, its annual report released on Wed Aug 28, 2018, has revealed that only  ₹16,050 crore out of the  ₹15,44,000 lakh crore (1.04%) of the scrapped higher denomination notes have not returned back into the banking system and therefore remain missing or unaccounted for. This data has raised questions about the overall gains and the impact on the economy, especially the informal sector, because of the disruption 'Demonetization' has caused. 

• The Modi government had framed the dramatic announcement as a move to clamp down on corruption and black money, cut off terrorist financing and tackle fake notes. But with almost all the demonetised notes coming back, everyone wonders whether the stated purpose of demonetisation has been served.
• Modi's hidden objectives of demonetisation were (i) its perceived windfall in terms of an enhanced dividend for the government from the RBI as government expected at least 30% (~₹5,00,000 crores) of cash, black money stacked will not get back into banking system and (ii) disarming opposition parties with all their stacked cash becoming worthless and thus paving his way to win UP elections effortlessly.  
• The initial narrative by the government was that a large amount of demonetised currency will not find its way back into the system. This purported benefit did not materialise in any significant way. It cannot be said that significant losses have been inflicted upon those holding black money.  
• The claim that it would lead to an increase in tax collection, nothing can be anything with confidence.
• During the reporting financial year, 522,783 pieces of counterfeit notes were detected in the banking system, which was 31.4% lower than in the previous year.
• The cash-based terror and criminal activities may have been disrupted for some time, as did cash-based legitimate activity, it is not clear that there has been any significant disruption.
• The liquidity surge in the banking system that came about in the aftermath of demonetisation complicated the RBI's conduct of monetary policy.
• RBI had to introduce many instruments to absorb demonetisation induced liquidity from banks.
• The increase in CRR dented bank's earnings.
• The mopping up of liquidity eroded the RBI’s earnings. 
• RBI's expenditure on printing of currency doubled from the previous year. 
• RBI's income for the year decreased by 23.56% and its expenditure increased by 107.8% resulting in a sharp decline in the RBI’s surplus.
• Demonetisation served as a negative shock to the economy. GDP growth in the Jan-Mar 2017 quarter slowed to 6.1%, and to 5.7% in the next quarter (April-June 2017). 
• A number of small-scale businesses were adversely affected. The unorganised sector especially bore the brunt of the sudden shock. Economic activity shrinkage is over ₹300,000 crores & loss of jobs at over 2 million, this is the worst any PM could do to any nation. 
• The value of banknotes in circulation increased by 37.7% over the year to ₹18,03,700 crore as at end-March 2018. The volume of banknotes, however, increased by 2.1%.
• While there no benefits at all (all pain & no gain), the clear lesson is that tax reforms and effective monitoring of suspicious transactions are a better alternative for addressing the stated objectives. 

What India has done to its money is sickening and immoral - Steve Forbes ... In November 2016, India's government perpetrated an unprecedented act that is not only damaging its economy and threatening destitution to countless millions of its already poor citizens but also breathtaking in its immorality. Without any warning India abruptly scrapped 85% of its currency. It claims the move will fight corruption and tax evasion by allegedly flushing out illegal cash, crippling criminal enterprises and terrorists and force-marching India into a digitized credit system. Human nature hasn't changed since we began roaming this planet. People will always find ways to engage in wrongdoing. Terrorists aren't about to quit their evil acts because of a currency change. There's no misunderstanding what this is truly about: attacking your privacy and inflicting more government control over your life. What India has done is commit a massive theft of people's property without even the pretense of due process--a shocking move for a democratically elected government. (One expects such things in places like Venezuela.) Not surprisingly, the government is downplaying the fact that this move will give India a onetime windfall of perhaps tens of billions of dollars. By stealing property, further impoverishing the least fortunate among its population and undermining social trust, thereby poisoning politics and hurting future investment, India has immorally and unnecessarily harmed its people, while setting a dreadful example for the rest of the world.