Understanding Demonetisation: 99% currency coming back into banking system is actually measure of its success, not failure

Where the demonetisation debate turns bizarre is when self professed well-informed critics take a single data point, like return of 99 percent of devalued currency, and argue that this signifies "utter failure of the motive" and hence demonetization has failed.

This attempt to base a sweeping judgement on a single matrix is being done by that section of the elite upper class and / or leftovers - who suffer from a reflexive derision of Modi, and wouldn't budge from making a political point in the garb of economic prudence. Their problem with Modi is essentially that they are no match to him.

Let us analyse their core argument and see how it is flawed. First, nowhere did the government make any definitive claim that a huge amount of devalued currency would never return, much less mention a benchmark figure.

The closest that we come to such a figure was when the then attorney general Mukul Rohatgi told Supreme Court last December that the amount of money already deposited had exceeded the government's "expectations".

l image. Reuters

It is possible that the government's plan to catch the black marketeers unawares — which explains the absolute secrecy and suddenness of the move — was foiled because the govt. may have underestimated the extent of corruption in the network or didn't account for the ingenuity of black money hoarders.

Clearly, many of them devised newer and newer ways of pushing unaccounted wealth back into the system.

At one point during the currency exchange window, it became a cat-and-mouse game between the government and the hoarders who subverted the system to deposit their cash.

That there was a nexus between some bank employees and hoarders became clear when the government told the Lok Sabha in February 2017 that 208 bank employees were "under scrutiny" (197 from public sector banks and 11 from private sector) for violating norms and indulging in corruption. Many of these officials have since been suspended/ transferred/ sacked and cases have been lodged against them. And understand, these were the ones to have been caught.

There possibly therefore can be an argument, against the government's lack of preparedness or implementation but not its intent.

Plus, the biggest flaw of the argument — that cash returned equals lack of black money — is that deposited money is not automatically turned into white.

In fact, the bigger quantum of deposits in the bank is actually a good news because now the money will be scrutinised and the depositors — who have been inducted into the system — will have to answer for every penny of unaccounted money.

Let us now look at the figures released by RBI and analyse their meaning:

RBI Data is Out and should be carefully understood to know about the  Objective and accomplishments of #Demonetisation. 

👉 Rs 1000 Notes Demonetised
2015 - Rs 39.3 Billion [notes in market]
2016 - Rs 38.6 Billion [notes in market]
2017 - ZERO
Decrease OF Rs 38.6 Billion

👉 Rs 500 Old Notes Demonetised and New Design came
2015 - Rs 46 Billion [notes in market]
2016 - Rs 47.8 Billion [notes in market]
2017 - Rs 22.5 Billion [notes in market]
Decrease of Rs 25.3 Billion

👉 Increase in Lower Currency Note
Rs 100 - Rs 9.7 Billion (2016 to 2017) [notes in market]
Rs 50 - Rs 1.5 Billion (2016 to 2017) [notes in market]

👉 Introduction of Rs 2000
Rs 50.2 Billion [notes in market]

Hence If you see and can calculate:

The Difference between Introduced and Demonetized is - Rs (38.6 + 25.3 ) - (9.7+1.5+50.2) = Rs 63.9 Billion - Rs 61.4 Billion = Rs 2.5 Billion 

Here the Important Point to understand is there is difference of Rs 13.5 Billion in Higher and lower denominations which was actually the Goal.

Transferring Higher Denominations into Lower and Decreasing the Cash Usage. On Both Fronts Government has actually succeeded in its objective..
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Other Important Findings :
👉 762,072 pieces of counterfeit notes were detected. Detection rate was 20.4% higher than the previous year. Major Counterfeit Notes Never came back
👉 Rs 16,000 crore never come back - This was the Black Cash which never came back but those which came back via Banks through  Open Window Schemes is more than 60,000 crore and the amount of Black Cash which came into Bank led to De Registeration of over 1 lakh companies and 2 lakh Shell Companies.
Then the Government determined the Bank Data and sent IT Notices to many which led to 26.2% of Income Tax increase in Collection and approximately 1 crore New Tax Payer added in the same period.

👉At end-March 2017, Currency In Circulation amounted to 8.8 per cent
of GDP, down from 12.2 per cent in the previous year which is a Big achievement.

👉 Expenditure on currency printing rose to Rs 7,965 crore compared to Rs 3,420 crore in 2015-16 that means new notes cost us around 4545cr.

👉 Last but not the least - The major reason: In 2014 when Narendra Modi became PM, he stopped all printing of Currency Notes outside Country. Hence it was imperative to scrap the old Higher Denominations and bring new ones. Now we manufacture 100% Currency Notes with Different Paper Quality, Different Design, Different Size so that no Country can Counterfeit.

The government now has a much wider tax base. Demonetization has also squeezed the amount of currency into the system, and India's cash-to-GDP ratio now mirrors that of some of the developed economies.

According to the RBI report, "at end-March 2017, currency in circulation (CIC) amounted to 8.8 per cent of GDP, down from 12.2 per cent in the previous year. At this level, India’s currency-to-GDP ratio compares well with a host of advanced and emerging market economies (such as Germany, France, Italy, Thailand and Malaysia)."

There is no doubt that demonetization inflicted a deep shock on the economy from which India might take a few more quarters to recover. But in terms of formalization of the economy, bringing a part of the black market into the system (which explains the 99 per cent cash return) and pushing towards a less-cash economy, demonetization has delivered in a big way and has galloped past many stages of development.