demonetisation hits & misses: indian & international experience
TRANSCRIPT
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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.