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Demonetisation Hits & Misses: Indian and International Experience

Key Note Address at Technical session INational Seminar on Demonetisation

Shree Narayana Guru Institute of Management StudiesCoimbatoreFeb 20, 2017

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Why did different countries went for Demonetisation?

Liquidity & Inflation

Counterfeiting

Black Market/ Money LaunderingOrganised Crimes/

TerrorismOther Economic

emergencies

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Countries that tried demonetisation and failed1

Soviet Union1991

To Address :Black Economy;

Inflation

Failed to arrest Inflation, Collapse

of the Union

North Korea2010

To Address :Control the economy;

Black markets.

Combined with a poor harvest-Severe Food

Shortage, Prices surged

Zaire1993

Withdraw obsolescent

currency

Surge in inflation; Collapse in the exchange rate against dollar.

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Countries that tried demonetisation and failed1

Myanmar1987

ADDRESS :Black Market

Deepening economic unease

Collapse of the Government

Ghana1982

ADDRESS :Tax evasion,Corruption,

Excess liquidity

Reduced confidence in

banking system;Investment in

foreign currency or physical assets

Nigeria1984

ADDRESS :Corruption

Failed to fix a debt-burdened and

inflation-ridden economy

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Countries that tried demonetisation and Succeeded2

European Union2002

Introduction of common currency

EURO

Economic development of

the region

Australia1992 & 96

ADDRESS :Black Money/ Counterfeits

The first country to have polymer

bank notes.Counterfeit

resistant

Zimbabwe2015

ADDRESS :Hyper Inflation

@ 231 mn%

Inflation reduced to single digit .

Economic Stabilisation

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Countries that tried demonetisation and Succeeded2

USA1969

ADDRESS :Black Money

Stepping stone for Development of the American banking system

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Demonetisation in India: 1946, 1978 & 2016

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Dr B R Ambedkar on Demonetisation

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Demonetisation in India: 1946 and 1978

Jan 12, 1946 Jan 16, 1978Objective To curb the black money menace

in India.To curb the black money & recover from the Emergency period problems.

Motivation Steps taken by the Government of France, Belgium and United Kingdom.

Earlier demonetisations including that of 1946.

Action Rs.1000, Rs.5000 and Rs.10000 were demonetised and exchanged for Rs. 100 or lower denominations

Rs 1000 notes were declared void.

Result Partially successful. It mostly became a conversion scheme rather a demonetization scheme.

A failure against 1946. Due to prior rumours black money hoarders converted money in lower denominations.

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Demonetisation in India Nov 8, 2016: The Rationale

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Demonetisation in India: The Rationale

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Demonetisation in India: The Rationale

Counterfeits Black money & Corruption.

Counterfeits to finance Drug Trafficking &

Terrorism

“Tuesday’s move could change the face of the Indian economy, improve the government’s fiscal position and tax compliance. The size of the cash economy will shrink, as will black money generation avenues, because of the better cash-flow trail.”

Report by CRISIL.

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• Currency in Circulation + Bankers’ Deposit with RBI + Other Deposits with RBI

• Currency valued at 14631 bn was in 500 and 1000 bills.

• DIRECTLY AFFECTED

M0 (Reserve Money)

• M0 + Demand Deposits with Banks• DIRECTLY AAFFECTEDM1• M2 = M1 + Post Office SD• M3 = M2 + TD with Banks• M4 = M3 + Other Deposits with Post Office• Not Directly Affected• Affected via M0 & M1.

M2, M3 & M4

Impact on Components of Money Supply

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Impact on Components of Money Supply (INR in Bn.)

(Source: rbi.org.in)

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

M0M1

Axis Title

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All demonetised currency have to be DEPOSITED back

Deposited currency to be ISSUED IN NEW DENOMINATIONS.

THREE POSSIBILITIES:1. Clean Money: Money will be exchanged

2. Unreported Money: Shall Attract Tax3. Bad Money: Won’t be deposited

Threat of CONVERSION

Impact on Money Supply

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Demonetisation

•Withdrawal of >85% of currency (value terms)•Gigantic difference for a cash dependent economy

Replenishment Challenge4

•Total ATMs ≈ 2 Lakhs•ATMs in Working Condition ≈ 1.2 Lakhs•Digital transfers are threatened by poor awareness level and lack of infra-enablers

Impact on Cash Supply & TransactionsDemonetisation: Hits & Misses

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FAKE CURRENCY in 500 & 1000 bills4

•Volume share > 60%•Value share > 90%•Basically this money funds terrorism & anti social activities•Out of market in one stroke

Reintroduction of 500 & 2000 bills5

•Zero sum Zero game •Cases of counterfeiting Rs 2000 notes reported within mere 5 days of banks issuing them.

Demonetisation: Hits & MissesImpact on Counterfeits

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• Helps in formation of capital

• Investment Facilitation

• INR 11.85 trillion out of INR 15.44 trillion is back in the system.

• Broad basing of GDP

• Larger Tax base

• More liquidity• Ease in lending

rate

Capital Accumula

tion

Recovery of Junk Notes

Merger of Parallel

economyEnhanced Liquidity

Demonetisation: Hits & Misses8

Impact on Economy

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Combating Human Trafficking•Human trafficking industry reduced up to 90%.6

•Nobel laureate Kailash Satyarthi - “demonetisation would be effective in combating exploitation of children & trafficking.”7

Human Trafficking Back on Rise

•However, 2 months later he expressed his disappointment on Rs 2000 notes being pushed into human trafficking in absence of other concrete steps.7

Demonetisation: Hits & MissesImpact on Trafficking

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•HIGHLIGHTS9

•469 Maoists have surrendered since the demonetisation

•Maoists' ability to procure firearms, ammunition, medicines, commodities of daily use and pay cash to cadres badly hit

•Developmental policies in affected areas also serving as an incentive to surrender

Demonetisation leads to highest ever surrender of Maoists in a monthNeeraj Chauhan| TNN | Updated: Nov 29, 2016, 08.20 AM IST

Demonetisation: Hits & Misses

Impact on Terrorism

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Kashmir sees sharp decline in stone-pelting cases•Zulfikar Majid, Srinagar: Nov 15, 2016, DHNS

No stone pelting on forces in Kashmir after demonetisation move, says Manohar Parrikar•TNN & Agencies | Updated: Nov 14, 2016, 11.13 PM IST

Terror hawala in Kashmir valley rendered trash, thanks to demonetisation•By Pradip R Sagar And Rakesh K Singh | Published: 12th November 2016 11:04 PM |

Demonetisation: Hits & MissesImpact on Terrorism

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Zero-balance Jan Dhan accounts that swelled by over Rs 21,000 cr. in just 2 weeks.11

May have been used to launder black money.

A total tax, penalty and surcharge of 50 % on voluntary disclosure.

Higher taxes and stiffer penalty of up to 85% await those who don't disclose but are caught.

Impact on

Black Money

& Tax

Demonetisation: Hits & Misses

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'Operation Clean Money‘ by Income Tax Dept.10

18 lakh people with 'suspicious' cash deposits have been asked for explanation.Over 1 crore accounts > Rs 2 lakh money deposits.Involves unique PAN of 70 lakh persons.All suspicious accounts are tracked.Data Analytics are hired.

Ultimate beneficiaries even layered accounts to be identified.

Tax Amendments Demonetisation: Hits & Misses

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GST to replace all indirect taxes. Short term loss of Revenues of State govts.

Demonetisation led Larger Tax Base may counter balance the loss.

Facilitation of GST implementation

Impact on

GST

Demonetisation: Hits & Misses

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0.0050.00

100.00150.00200.00250.00300.00350.00400.00450.00500.00

Credit Card Usage at POSDebit Card Usage at POS

Usage of Cards at POS3

(Value - INR in Bn)

0.00

500.00

1,000.00

1,500.00

2,000.00

Mobile Banking3 (Value- in INR Bn)

Surge in Digital Transaction

Demonetisation: Hits & Misses

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01/04/2016

01/05/2016

01/06/2016

01/07/2016

01/08/2016

01/09/2016

01/10/2016

01/11/2016

01/12/20160.00

20.00

40.00

60.00

80.00

100.00

120.00

46.72 49.95 53.47 53.40 56.46 56.28 60.2250.10

97.70

Prepaid Payment Instruments3(m-wallets, Cards, Vouchers) Value- INR in Bn

Surge in Digital Transaction

Demonetisation: Hits & Misses

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What called for Reissuance of High Denomination Currencies?

Remonetisation with Generic Security features of bills of 2000 & 500 notes poses the threats similar to pre-demonetisation.

India is yet not ready to go cash less: Low Infra penetration, Exclusions- Educational & Financial

Reissuance of high denomination currencies are hence called for, till the time India matures enough to go cash free.

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Reissuance of high denomination currencies would mean the same challenges. Leaving demonetisation as a mere game-changing strategy in interim.

Applies a temporary brake on the volume growth of counterfeiting/ shadow economy/ trafficking.

“It will not be enough just to do demonetization. It has to be matched with a better, more streamlined and integrated support system.”Jitendra Singh, Professor, Wharton

Demonetisation: Hits & Misses

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Details of foreign bank account & asset holders, forex etc.

Jewellery/ Precious Metal Conversions

Benami Property/ Accounts

Digitisation of Indian economy and Transaction transparency

Transformation to a CASH LESS ECONOMY

Way Forward

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“The year 2016 has overall been ‘a good year’ for India.…. The biggest wild card in all of this, of course, is demonetization.…. Any impact on economic activity and GDP will be temporary, and the long-term benefits such as an increase in cashless activity will be more permanent.”

Kartik Hosanagar, Professor in Wharton’s department of operations,

information and decisions

Way Forward

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The long term gains are in terms of 1. Reduction in the proportion of pure cash transactions, and 2. A Shift to digital mode of payment,3. Leading to Recording of all transactions, and 4. Thereby helping to widen tax net.

….note ban cannot be a standalone measure to prevent further accumulation of black money as it depends on future policies of the government such as 5. Improved transparency in governance, 6. Revised tax structures and administration, and7. Electoral reforms including funding for political parties.

C Rangarajan, Former RBI Governor,

32nd Conference of All India Reserve Bank Employees Association,Hyderabad, Feb 17, 2017

Way Forward

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Thought of the Moment

Change is always gradual, Transformation

Needs Revolution.

… An aggressive goal & a passionate

perseverance

DIGITAL REVOLUTION for a

DIGITAL TRANSFORMATION

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Are we on the Right Path?Clues from UNION BUDGET 2017

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CONCLUSION

The hits and misses aside, the merit of demonetisation subsumes

an opportunity for India to leapfrog towards

a more digital and less cash economy.

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References 1. http://economictimes.indiatimes.com/slideshows/nation-world/countries-that-tri

ed-demonetisation-and-failed/ghana/slideshow/55457330.cms2. http://www.spellerstep.com/information/demonetization-can-successful-6-countr

ies-proved/3. dbie.rbi.org.in4. RBI annual report 2015-16 data5. Hindustan Times, Nov 15, 20166. https://www.theguardian.com/global-development/2016/dec/22/india-currency-

note-ban-sparks-dramatic-fall-sex-trafficking7. http://economictimes.indiatimes.com/articleshow/56492015.cms?utm_source=c

ontentofinterest&utm_medium=text&utm_campaign=cppst8. http://economictimes.indiatimes.com/news/politics-and-nation/demonetisation-

has-positive-impact-says-arun-jaitley/articleshow/57113478.cms9. http://timesofindia.indiatimes.com/india/Demonetisation-leads-to-largest-Maoist

-surrenders/articleshow/55675983.cms10. http://timesofindia.indiatimes.com/business/india-business/cbdt-identifies-18-lak

h-people-with-suspicious-deposits/articleshow/56893519.cms11. http://timesofindia.indiatimes.com/business/india-business/Demonetisation-30-

tax-10-penalty-33-surcharge-proposed-on-undisclosed-income/articleshow/55665693.cms

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Thank youProf. (Dr) Ansuman ChatterjeeInstitute of Management,Christ University,Bangalore.

prof.ansuman@gmail.com