Where is the Indian Economy, Three Months After Demonetisation?

Fri, 10 Feb Pre-Open

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Rewind your life three months and you will find yourself back to 8^th November, 2016, the day when, in one fell swoop, the government demonetised some 86% of the currency in circulation.

The move was well-intended. The key drivers of demonetisation were: 1) Eradication of back money; 2) Purging counterfeit currency; and 3) Making India digital (although the government realized that one a bit late).

In fact, excess liquidity resulting to rate cut was also a heated argument.

But re-monetisation was where things really fell apart.

According to an article in the Mint, as of January 2017, the total currency in circulation is 57% of what it was before demonetisation. In fact, as per RBI data, the cash with public is 40% less than what it was one year ago. The government, of course, claims this gap will be bridged by digital payments.

Now, the interesting question here is: Are these drivers are still standing strong or fading away like an old note left in a pocket beaten by a dhobi? Let's see...

Eradication of Black Money: One of the primary objectives of demonetisation was to unearth black money. The government's estimate of total unaccounted money was around Rs 3-4.5 trillion.

By making black money illegal, demonetisation would have improved the bleeding balance sheet of the government.

However, if data is to be believed, the government's estimates for unaccounted money have gone for a toss. Around Rs 10.38 trillion (two third of the total demonetised currency) came back to the banks in deposits of Rs 2 lakh or above. Clearly, the estimate for the unaccounted money was wrong.

Interestingly, it looks like there was no major impact on the black money hoarders, if any. In fact, the basic premise of people hoarding black money in cash is now under question.

Counterfeit Currency: Even though It was given too much weightage, as for FY15-16 the counterfeit currency was just 0.63 million out of the total currency of 90.26 billion.

Digital India: A few days after the demonetization, the government realized that the black money story was failing, and began hailing a new story: Digital India. With broadband and point of sales penetration as low as they are in India, this exercise looked cumbersome to say the least.

Initially, the lack of liquidity led to fair increase in the digital payments, both in volumes and value. However, now with liquidity coming back to normal levels, the RBI data shows that digital payments are again falling.

One of the key reasons for this downward trend is the poor internet infrastructure in the country.

Interest Rate Cuts: Demonetisation at first meant excess liquidity with banks and RBI, and hence rate cut. The basic rationale was that increase in the low cost funding for banks would result in a cut in lending rates by the banks. In fact, it was expected that RBI would cut the interest rate as well.

However, RBI instead chose to keep the repo rates unchanged, throwing the low interest hypothesis for a loop.

Not only has demonetisation failed almost every promise it made, it has left the economy lurching in the process.

It has not only hindered the reviving India economy, but even outweighed the benefits of normal monsoons, and seventh pay commissions, among others.

Three months of demonetisation is more than enough to make it crystal clear it was, in fact, a failed economic experiment.

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