Demonetization: Analysis

Demonetization: Analysis

Demonetization has been the hottest topic of discussion in the entire country. Since the “Emergency” imposed by Mrs Gandhi this is the single biggest action of the government which has affected not only every Indian’s life, but also all foreign residents as well. Surprisingly, the act which has resulted in massive hardships has found support of a large number of Indians. I have done an analysis of the topic for the benefit of my students and visitors to No Frills Academy.

 Important Figures Related to Black Money

  • Estimated value of India’s GDP in 2016-17: Approximately Rs 150 lac crores.
  • Black money is generally believed to form approximately 30% of India’s GDP. This means it is approximately Rs 50 lac crores.
  • Estimate of black money in various forms:
    • Deposited/ invested abroad: (60%) $500 billion or Rs 34 lac crores.
    • Invested in Indian share market?
    • Invested in Gold?
    • Value of black money with political parties (held in various forms, including cash; 3-4 %): Rs 2 lac crores.
    • Value of black money invested in real estate: Estimated value is 11% of GDP; assuming that 20% of it is black money its value is approximately Rs 4 lac crores.
    • Value invested in foreign currency?
    • Value of black money held as cash: 6-8% or Rs 4 lac crores.

Understanding Impact of Demonetization

  • Cash value of total money supply in India is 12% of the total.
  • Rs 1000 & Rs 500 notes existing in the market as on 08 Nov 2016 was 86% of the total cash. The value was approximately Rs 15 lac crores.
  • Fake currency was estimated to be 0.002% of 1,000 notes, and 0.009% of Rs. 500 notes. The total value is estimated as approximately Rs10,000 crores.
  • Number of discrete currency notes that ceased to be legal tender on the midnight of 08 Nov 2016: 2,300 crore notes.
  • The capacity of the government’s and RBI’s printing presses was: 300 crore notes per month.
  • The duration  required to print the number of notes to replace the currency which was demonetized would be approximately 4 months.
  • Re-calibrating 2,15,000 ATMs will need approximately one month.

Bank Branches (Total: 1,38,626)
* Two-thirds are located in metro, urban and semi-urban areas.
* Only about 47,443 branches are located in rural areas and the distance to the nearest branch could be several km for some households.
ATMs (Total: 2,15,000)
* 55,690 ATMs are located in the seven metro cities.
* 90 per cent of all ATMs are located in 16 states.
* Only 10 per cent of all ATMs (21,810) are located in 13 states and 7 Union Territories.
* The seven states in the Northeast have only 5,199 ATMs, of which 3,645 are in Assam.

Cost of Demonetization to Society

  • Conservative assessment is 1 to 1.5 per cent of GDP,or in terms of rupees it is: Rs 1.5 to 2 lakh crore.
  • The Centre for Monitoring Indian Economy has calculated the cost of demonetization for the 50-day period from November 8 to December 30 as Rs 1,28,000 crore:
    • Households (queuing, transaction cost): Rs 15,000 crore.
    • Government & RBI printing cost: Rs 16,800 crore.
    • Business (loss of business, sales): Rs 61,500 crore.
    • Banks (staff cost): Rs 35,100 crore
  • Cost to the people who suffered tragedies like death was incalculable.

Benefits

  • Of the Rs 4 lac crores black money held as cash it can be estimated that at best 50% gets unearthed. Thus Rs 2 lac crore recovered roughly equates with the estimated loss of GDP.
  • It has definitely affected the terrorists, insurgents and Naxal activities.
  • The fake currency got removed from circulation. It will take time for it to re-enter circulation.
  • The shock treatment will promote use of non- cash transactions which is good for the economy.
  • Money supply has come to the banks and it will improve their lending capability, as also reduce the pressure being felt by the NPAs, which will fall in terms of percentage value.
  • Inflation should come down as money supply has been greatly reduced from the market.

No Major Impact on Black Money

Please see the data giving the forms in which black money was estimated to be held as on 08 Nov 2016. It will be apparent that the exercise has not impacted the following major issues:

  • Future generation of black money will continue almost as before 08 Nov 2016.
  • Black money held as
    • foreign investments,
    • foreign currency,
    • real estate,
    • shares,
    • and Gold remains unaffected.
  • The big fishes holding black money have been not as severely affected as the poor and rural population.

Comments on Demonetization

  • The exercise was okay, but implementation was poor. Better planning would have caused lesser hardships and the cost would have been lesser.
  • The exercise has not impacted black money as severely as is being advertised or as common people are tending to believe.

My Advice to PM Modi on Black Money

  • Clean up your party of black money by not accepting any cash. Other political parties will be forced to clean up. This will make a serious impact on future generation of black money.
  • Take serious action to unearth the major part of black money.
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