I read the reports that called Demonetisation a Monumental Failure, Then I looked Deeper. Now I Know the Truth is Very Different

It has been nine months since the evening of 8 November 2016 when Prime Minister Narendra Modi announced a demonetisation drive, recalling all high-denomination currency notes. Projected and hailed as a bold move by the government aimed at rooting out tax offenders and striking hard at black money; the drive provided enough fodder for economists and arm chair experts on both sides of the divide to indulge in a passionate debate and unrelenting speculation analyzing the effectiveness of the drive to meet its stated objectives and its impact on the economy

The major objectives of demonetisation drive as stated by PM Modi was to gradually bring down the quantum of cash operating in the system, integrating the informal economy with the formal one which would boost the growth of India, reducing the quantum of black money so as to end corruption, eliminate terrorism and naxalism

From where I see most of the objectives have been met; and for those who remain skeptical, let’s take a walk through the numbers published by RBI in real sense i.e. looking at the numbers in a holistic manner and not in silos

Has the Quantum of Cash Operating in the system reduced in reality?

At the time of demonetisation, currency worth ₹ 17.77 Lakh crores was in circulation in the economy. Out of this, ₹ 15.44 lakh crores was in high denomination notes, which were phased out. ₹ 2.33 lakh crores remained in small denomination notes with a value of ₹ 100 or less. The value of banknotes in circulation declined by 20.2% over the year to ₹13,102 billion as at end-March 2017. But there’s a twist to this. Let’s analyze two scenarios

Scenario 1: If DeMonetisation wouldn’t have happened (Forecast)

Assumption: CAGR of Growth in Banknotes in Circulation w.r.t. Value (in ₹ Billion) from 2012-13 to 2015-16 was ~ 12.11%. So if Banknotes in Circulation would have increased in this rate it would have reached 18,403 ₹ Billion (approx.) by March 2017

Scenario 2: Reality with DeMonetisation (Source: RBI Annual Report)

Thanks to DeMonetisation the Indian economy is running with ₹ 5 lakh crores less cash than the amount that would have been present in the economy had demonetisation not happened which is a blessing in disguise. The direct implication is that the amount of cash stashed away by citizens has come down. This is advantageous to the growth of economy since just hoarding of cash delivers no value to the country’s growth (http://indiatoday.intoday.in/story/narendra-modidemonetisation-income-tax-revenue-digital-economy/1/962380.html)

Another aspect which needs to be analyzed is the status of HDN (High Denomination Notes) i.e. 500 & above; pre and post DeMonetisation

“HDNs with the public more than doubled from 34% in 2004 to 79% in 2010. The average annual rise in HDNs was 51% between 2004 and 2010 and the annual rise was 63% by 2013-14. The Reserve Bank of India noted that two-thirds of the ₹1,000 notes and one-third of the ₹500 notes — that is over ₹ 6 lakh crore now — never returned to banks after they were issued (Nov 2016). The unmonitored HDNs roaming outside banks began driving up the gold and land prices by black cash and the stock prices through Participatory Notes (PNs) — which are largely hawala transfers out of India — that came back pretending as foreign investment in stocks

HDNs outside banks took refuge in stocks, gold and land, produced capital gains-led growth and consumption. Had the HDNs circulated through the banking system, it would have multiplied through the fractional reserve model, reduced the inflation and interest, and funded the small-and-medium enterprises starved of organised funding

If the status quo of unmonitored HDNs were to last for another five-six years, the size of HDNs would have become so huge that no government may have been able to act against it — inevitably inviting a huge crisis, both internal and external” S Gurumurthy

(http://www.thehindu.com/opinion/op-ed/Not-a-tragedy-but-the-remedy/article16798081.ece )

The share of ₹500 and above banknotes, which had together accounted for 86.4% of the total value of banknotes in circulation at end-March 2016, stood at 73.4% at end-March 2017. So now I hope you guys can relate why checking the growth of HDN notes and bringing it back to Banking Channels was not only important but also necessary

Let’s also look into the Currency to GDP ratio since last few years (Source: RBI Annual Report)

At end-March 2017, CIC (Currency in circulation) amounted to 8.8% of GDP, down from 12.2% in the previous year. At this level, India’s currency to GDP ratiocompares well with a host of advanced andemerging market economies (such as Germany,France, Italy, Thailand and Malaysia)

Reduction in CIC, HDN notes and Currency: GDP ratio is a great start to tackle the menace of Black Money

Had DeMonetisation helped in integrating the informal economy with the formal one and is cashless (less cash) society becoming a reality???(RBI Annual Reports)

1. Deposits in the banking system increased around ₹ 3 Lakh Crore
2. The number of new taxpayers filing income tax returns from April 1- August 5, 2017 had “more than doubled” to 56 lakh as against 22 lakh returns filed in the same period last year
3. No of IT Returns filed increased by 24.7% as compared to 9.9% in the previous year
4. Advance tax collections of Personal Income Tax grew at 41.79% over the same period last year
5. Personal Income Tax under Self-Assessment Tax grew at 34.25% over the same period last year
6. More than 1 crore workers added to EPF and ESIC system post-demonetisation
7. Bank accounts opened for about 50 lakh workers to get their wages credited directly in their accounts
8. Thanks to demonetisation-led efforts, zero balance accounts under PMJDY (Pradhan Mantri Jan Dhan Yojana) declined from 76.81 % in September 2014 to 21.41% in August 2017
9. 91 lakh new assesses joined the tax base in FY 2016-17. In years gone by, the increase in the number of assesses has usually been in the range of 20-25 lakh
10. Growth in Digital Money Transactions:

• The payment and settlement systems continued its robust growth during 2016-17, withvolume and value growing at 55.7 % and24.8 %, respectively on top of an increase of49.4 % and 9 % in 2015-16. The shareof electronic transactions moved up to 89.0 percent in total volume of non-cash payments from84.4 % in the previous year
• RTGShandled 108 million transactions, valued ataround ₹982 trillion in 2016-17, up from 98 milliontransactions valued at ₹825 trillion in the previousyear
• NEFT handled 1.6 billion transactions valued at ₹120trillion, up from around 1.3 billion transactionsfor ₹83 trillion in the previous year
• During 2016-17, 1.1 billion transactions,valued at around ₹3 trillion and another 2.4billion transactions, valued at ₹3.3 trillion werecarried out through credit cards and debit cards,respectively
• Prepaid Payment Instruments (PPIs)recorded around 2.0 billion transactions, valuedat ₹838 billion. Mobile banking service witnessed strong growth of 151 % and 224 % in volume and value terms, respectively while the number of registered customers rose to 163million at end-March 2017 from 105 million at end-March 2016

Now whether DeMonetisation strengthened NaMo’s fight against Black Money   (http://www.narendramodi.in/)

1. Black money worth ₹25 lakh crore has been unearthed
2. 18 lakhs suspected accounts has been scrutinized
3. As per, the Income Tax department “Cash deposits of ₹89 lakh crore in 13.33 lakh accounts is under its radar”
4. Advanced Data Analytics tools have identified new 5.56 lakhs suspect cases
5. 4,73,300 suspicious transactions has been detected
6. Undisclosed income of ₹ 29, 213 crore has been detected and admitted into the system
7. Black Money worth ₹ 16,000 crore didn’t return post demonetisation
8. Transactions of more than 3 lakh suspected shell companies under the radar and 2.1 lakh shell companies have been de-registered
9. Around 450 companies (not shell real ones) have been delisted and 800 untraceable companies to be further delisted
10. More than 400 benami transactions have been identified and market value of properties of worth more than ₹800 crore has been attached

Big blow to Terrorism, Naxalism, Hawala Transactions as counterfeit currency was almost eliminated

1. Counterfeit Currency was the biggest sponsor of terror and naxal activities within the territories of India. The table (below from RBI) proves why DeMonetisation was a much needed step to blow these terror networks. Detection of counterfeit notes was 20.4 % higher than the previous year. Barring ₹100, the detection of counterfeit notes increased across denominations– notably, ₹500 and ₹1,000 during 2016-17
2. As per intelligence inputs by Maj General Gagandeep Bakshi, Pakistan was planning to unleash terror in India through the counterfeit notes of ₹500 & ₹ Intelligence Agencies had confirmed the Govt how DeMo was a blow to sponsors of terrorism by almost ₹700-800 crores in Nov 2016 (http://www.news18.com/news/india/demonetisationsets-back-terror-network-in-india-by-rs-700-800-crore-1313220.html )

(http://economictimes.indiatimes.com/news/defence/government-deals-a-blow-to-isis-fake-note-war-on-india/articleshow/55327386.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst )

3. As per Intelligence Agencies, Naxal extortion also took a hit by around ₹7500 crore in Nov 2016 (http://zeenews.india.com/news/india/demonetisationmove-will-cripple-naxal-activities-report_1950046.html )
4. Stone pelting events in Jammu & Kashmir went to a standstill for almost 2-3 months because of scrapping of HDN’s (Nov 2016 to Jan 2017)
5. DeMonetisation was also a deadly blow to Hawala Operators. Hawala transactions dropped by almost 50% post demonetisation (Jan 2017) (http://timesofindia.indiatimes.com/india/hawala-transactions-drop-by-almost-50-per-cent-postdemonetisation/articleshow/56380238.cms )

Other intrinsic benefits can’t be just overlooked

1. As a result of demonetisation the total amount outstanding with DisComs has substantially come down. DisComs collected more than ₹ 25,000 crore during the Demonetisation period, which is ₹ 4,500 crore more than what was collected in the same period of 2015
2. Demonetisation had brought the trafficking of women and girls for sex work to a grinding halt (₹ 20 Trillion trafficking industry), studies and rescue workers had highlighted during Dec-Jan 2017 (http://www.livemint.com/Politics/p9VrQTy6jY4Cs4H6CqpbZO/Note-ban-breaks-the-backbone-of-Rs20-trillion-trafficking-in.html)
3. Scrapping of ₹ 1,000 and ₹ 500 notes had brought illegal wildlife trade which banks heavily on cashto a grinding halt (http://www.indiatimes.com/news/india/another-benefit-of-demonetisationit-has-stopped-illegal-animal-parts-trade-says-activist-266341.html )
4. Even various Hindu Temples embraced digital modes for payments to Purohits and accepting digital payments. Some of the pioneers in adopting these modes were Puri’s Shree Jaganntha Temple, Mumbai’s Shree Siddhivinayak Temple and Gujarat’s Shree Somnath Temple

Is not earning dividend from RBI b’coz (as almost 99% notes returned to the system) a failure of DeMonetisation???

Now one of the aspects where people are debating is w.r.t. to dividend which Govt. would have earned through this exercise. Many of the financial experts from leading business dailies like Economic Times, Business Line, Indian Express were explaining how if after the exercise if certain amount of notes don’t return back, they will be no more RBI’s liabilities and could then be passed on as dividend to the Government of India. These kinds of reports (including certain internal assessment of Govt.) had raised expectations with common masses

But RBI in its notification on 7^th Dec, 2016 had clearly mentioned that it will not treat unreturned old notes as dividend for Govt. So the debate should have stopped there it self but MSM always wants some TRP some buzz (http://www.hindustantimes.com/business-news/rbi-says-it-will-not-treat-unreturned-old-notes-as-dividend-for-govt/story-RjMHzQ3xKTpub1BRrNcVfL.html )

Finally DeMonetisation was not a standalone step by NaMo to curtail Black Money and Corruption. Numerous steps have been taken starting from setting up SIT in the first cabinet meeting to “The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015”, signing up treaties with tax heavens, raising the issue in G20 Meet, amending the Prevention of Money-laundering Act, 2002, Political Funding to Benami prohibition law

“Fear of tough PM makes black money hoarders fall in line”: Vice President M Venkaiah Naidu

So from where I see I would definitely say it was a much needed step by PM to clean the mess which was a success indeed supported by almost 125 crore Indians leaving a few

Would be ending with what renowned economist political and economic analyst, S Gurumurthy said “It was the Financial Pokhran which was Not a tragedy, but the remedy”