CONCEPT – DEMONETISATION 2016 OUTCOME

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CONCEPT – DEMONETISATION 2016 OUTCOME

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• Facts come out : The Reserve Bank of India’s annual report has revealed the data on amounts retrieved after the recent demonetisation drive. Rs. 500 and Rs. 1,000 banknotes were withdrawn as a means to combat counterfeiting, black money and the financing of terrorist activities. 

1. The report brings  out  that  as  much  as Rs. 15.28 lakh crore of the demonetised high-value currency returned to the banking system. This is around 99% of the total value of the withdrawn currency at the time of demonetisation. 
2. The bank has not received a part of the demonetised sum which is equal to Rs 16,050 cr.
3. The final deposit figures could still rise with influx of money from District Central Cooperative Banks.
4. Also,  RBI  is  in  discussions  with  the  govt. to  accept  the demonetised notes held by citizens and FIs in Nepal.

• Favourable outcomes of demonetisation : 

1. The whole process has brought more accountability to money and the anonymity with cash transactions is reduced. 
2. Big data analytics of deposits and increase in suspicious transaction reports have thrown better light on holdings of black money.
3. The reports by banks are also helping in identification of shell firms and taking necessary actions against money laundering activities.
4. This could possibly lead to an increase in future tax revenues with better tax compliance.
5. The  recent  surge  in  digital  transactions,  inflows  into  mutual  funds  and insurance companies, the rise in new income tax assesses are evident of transformation to a modern economy.
6. The  drive  has  promoted  more  formalisation  of  the  economy  and financialisation of savings.

• What problems were created? As against the government's expectations on the impact the exercise would have on illegal money, the return of almost 99% of devalued currency raises doubts on the purpose of the drive.
• Specific impact : 
1. Banking : This is the first time since 1952-53 that reserve money for the whole year contracted by 13 per cent due to demonetisation impact. The RBI incurred a reduction in the profit made by the central bank on account of issuing currency. Also, processing and destruction of old Rs 500 and Rs 1,000 notes kept in various currency chests and regional offices of the RBI pose a challenge. It has cost the government around Rs 8000 crore for printing new notes.
2. Economy : Worsening business conditions are significantly bringing down private investment. Demonetisation considerably made a hit on the unorganized supply chains that were dependent on cash transactions. How efficiently were they able to rebuild after the economy was remonetizedis still doubtful. The figures and outlook on consumption, which has long been the main driver  of  the  economy,  is  also  not  very  optimistic  with  demonetisation impact. Overall, the growth prospects look dull due to the impact of demonetisation. 

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