DEMONETISATION

in
INDIA
Charan Singh

Tel: 91 9739993619
 The Wanchoo Committee, 1971:
The Direct Taxes Enquiry Committee.
• assessable non-salary income evaded
from tax for 1961-62 as Rs. 8.11 billion
• after required adjustments from Income
Tax Act, revised estimates
1961-61: Rs. 7 billion
1965-66: Rs 10 billion
Chopra’s Estimate:
• Tax evasion from non- payment/underpayment of
excise duty, sales tax, custom duties, substituting
agricultural income for non-agricultural income
• Estimated black money for 1960-61 as Rs 9.16
billion(6.5% of GNP) and for 1976-77 as Rs. 80.98
billion(11.4% of GNP)
High Black Black Money Committee Report, 2012:
•Global Financial Integrity Report,2008-
Money USD 1.4 trillion
•Swiss National Bank-end of 2010 Indian
Estimates in deposits in Swiss Banks were 1.945 billion
India but Swiss Francs. Bank deposits of Indians in
Swiss banks had decreased from 23373
always low crore in year 2006 to 9295 crore in year
2010.
recovery
NIPFP Estimate, 1985:
Rangnekar’s Estimate:
• 1980-81:20 per cent of GDP
Tax evaded income estimates were,
• 1983-84: Black income of Rs 367.84
• 1961-62: Rs. 11.50 billion
billion out of a total GDP at factor
• 1965-66: Rs 23.50 billion
cost of Rs. 173.42 billion
• 1968-69: Rs 28.33 billion
• 2008-09 to 2011-12: 42 per cent of
• 1969-70: Rs. 30.80 billion
total GDP
 Alternative Estimates of Black Income (As per cent of GNP or GDP)
Gupta and Gupta's Gupta and Mehta's Rangnekar's
Year Wanchoo Method Ghosh et. al's estimates NIPFP Estimate
Estimate Estimate estimate
(1) (2)* (3)* (4)# (5)* (6)* (7)#
1960-61 5.0 - - - - -
1961-62 5.0 - - - - -
1962-63 5.3 - - - - -
1963-64 5.2 - - - - -
1964-65 4.9 - 2.8 -
1965-66 5.1 - - - 9.8 -
1966-67 3.5 - - - - -
1967-68 4.9 9.5 - - - -
1968-69 5.0 13.6 - - 8.6 -
1969-70 5.8 14.9 - - 8.4 -
1970-71 4.8 22.3 - 7.6 - -
1971-72 5.1 28.7 - 7.8 - -
1972-73 4.0 31.9 - 7.8 - -
1973-74 4.9 27.1 - 7.4 9.9 -
1974-75 5.9 20.9 13.8 8.1 9.3 -
1975-76 5.6 25.0 - 8.4 10.0 15 to 18
1976-77 5.7 37.6 - 8.7 11.3 -
1977-78 - 38.4 - 8.7 12.1 -
1978-79 - 48.1 19.8 - 13.5 -
1979-80 - - - - 14.4 -
1980-81 - - - - - 18 to 21
1981-82 - - - - - -
1982-83 - - - - - -
1983-84 - - - - - 19 to 21
Source: http://www.nipfp.org.in/media/pdf/books/BK_14/Chapters/3.%20Black%20Income%20In%20India.pdf Note: *Columns (2), (3), (5) and (6) are computed as percentage of GNP at current market prices. #Column (4, 7) is computed as percentage of GDP at factor cost and 1970-71
prices. Source: Chopra (1982), Gupta and Gupta (1982), Gupta and Mehta (1982), Ghosh et. al. (1981), Rangnekar (1982) and Government of India, CSO, (1982).
 “Withdrawal of Legal Tender Status for ₹ 500 and ₹ 1000 Notes”

 Government of India vide their Notification dated 8 November 2016 have withdrawn the
Legal Tender status of INR 500 and INR 1,000 denominations of banknotes of the
Mahatma Gandhi Series issued by the Reserve Bank till 8 November 2016.

 The move was “necessitated to tackle counterfeiting Indian banknotes, to effectively

nullify black money hoarded in cash and curb funding of terrorism with fake notes.”

Source: RBI Press Release (Nov 9, 2016)

https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=38520
(Dynamic) Objectives of Demonetisation

Counterfeit Currency

Corruption

Fiscal Space

Interest Rate and Inflation Reduction

Less Cash Economy / Digitisation

 Total Notes in Circulation (per cent)
Per Cent of Total notes in Circulation
Year Total Notes in
(end-march) 50 100 500 1000 2000 Circulation

1974 - 52.7 - 0.6 - 100.0

1978 9.7 41.8 - 0.5 - 100.0

1988 21.5 56.5 0.5 - - 100.0

2001 15.4 50.9 24.9 1.8 - 100.0

2010 2.7 17.6 46.2 30.2 - 100.0

2016 1.2 9.6 47.8 38.5 - 100.0

2017 2.7 19.3 22.4 0.7 50.2 100.0

Source: RBI Annual Report
 History of Demonetization
• Rs. 1000 & Rs. 10,000 notes demonetised in January.
1946 • Demonetisation done under the British rule

• Banknotes with value of Rs. 1,000, 5,000 & 10,000 were

1954 reintroduced.

• Banknotes with value of Rs. 1,000, 5,000 & 10,000 were all
1978 demonetised in January.

1987 • Rs. 500 notes came into circulation in October.

2000 • Rs. 1,000 notes made a comeback in November.

 Percentage of Total

10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00

0.00
100.00

1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98

Source: RBI, Handbook of Statistics on Indian Economy

1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
All Other Currencies

2004-05
2005-06
2006-07
2007-08
2008-09
Rs. 500 Notes

2009-10
2010-11
2011-12
2012-13
Demonetised Notes as a % of Total (1987-2016)
Rs. 1000 Notes

2013-14
2014-15
2015-16
2016-17
 Percentage of GDP

10.00
12.00

0.00
2.00
4.00
6.00
8.00
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98

Source: RBI, Handbook of Statistics on Indian Economy.

1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
All Other Currencies

2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Rs. 500 Notes

2010-11
2011-12
2012-13
2013-14
Demonetised Notes as a % of GDP (1987-2016)

2014-15
Rs. 1000 Notes

2015-16
2016-17
 Contextualising the Size of Demonetised Currency
Percentage of GDP

₹500 and ₹1000 Currency with

Year M1 M3
Notes Public
2001 2.8 10.5 18.9 65.3

2006 7.3 12.2 24.3 80.5

2011 10.3 12.6 22.5 89.6

2016 11.5 13.0 21.2 94.6

Source: RBI Bulletin.
 Social Impact
• The economic and social potential of any nation depends on:
– Quality of its democratic institutions.
– Society’s attitude towards the laws of the land.

• The brazen methods to launder ‘black’ money into the banking system show:
– Utter disregard for law or the limited fear of the law in a section of the society.
– Ubiquity of corruption in the general society.

Demonetisation has brought in the Change

 Economic Analysis – Theoretical
Consumption

Investment

Government Spending

Money Supply

Inflation

Exchange Rate

Exports and Imports

Bank Credit

GROWTH
 Impact on Informal Sector
• Informal economy accounts for 54.4 per cent of India’s GDP and 82.4 per cent of the non-
agricultural employment.
• Large parts of the rural economy use cash for 80 percent of transactions.
• Money lender did have cash and the monthly rate increased from 3 to 5 percent.
• A more ‘facilitative’ attitude towards the informal sector to assist in the entry of the
participants from the informal economy into the formal economy.
• A large number of entities in small-scale manufacturing, services and trade and self-
employed professionals keen to make the transition.

Source: India's Great Rupee Fail (Mihir Sharma) & Going Cashless: is India ready for digital? (World Economic Forum)
https://www.bloomberg.com/view/articles/2016-11-16/india-s-strike-against-black-money-backfires
https://www.weforum.org/agenda/2016/12/going-cashless-is-india-ready-for-digital
 Impact on Micro, Small and Medium Enterprises
 Within the MSME sector, gems and jewellery, carpets, textile, leather, handlooms and handicrafts are highly labour
intensive sectors and more dependent on cash for their working capital requirements

 Contractual labour in wearing apparel and gems and jewellery sectors suffered as payments from employers
became controlled

 The cash shortage also negatively affected informal sources of finance

 These factors, export shipment of gems and jewellery, readymade garments, meat and dairy products, and
handicrafts and carpets either declined or recorded a lower growth in November 2016 as compared with October
2016

 While sectors such as readymade garments and cotton yarn exhibited an increase in exports in January 2017,
exports of sectors such as gems and jewellery, leather and leather products, and meat, dairy and poultry products
contracted in January 2017

 Farmers postponed their sales due to lack of cash, cotton arrivals dropped by 30 per cent in November 2016
Source: Government of India, Ministry of Micro, Small and Medium Enterprises ANNUAL REPORT | 2016-17
 Impact on Microfinance Sector
 Demonetisation upset repayment cycle of microfinance institutions that give small unsecured
loans for one or two years and to be repaid in weekly or monthly instalments.
 Fall in disbursals of MFIs more than 50 percent during November and December 2016. Since
borrowers could not repay their instalments in legal tender, MFIs did not have funds to disburse
to other borrowers.
 States in which microfinance was hit the most include Uttar Pradesh, Maharashtra, Karnataka
and Madhya Pradesh.
 RBI’s 60-day relaxation provision was wrongly reported as a loan waiver and misled people.
 Impact on Farming

• Farmers were allowed to use old notes to buy seeds which did not affect the sown area of
the rabi crops.
• However, in January, with cash shortages in full swing, demand plunged and food
prices collapsed.
• Incomes crashed and distress mounted among farmers, a group in India already affected
by high suicide rates because of mass indebtedness.
• Rural loans increased by only 2.5 per cent between October 2016 and April 2017,
compared with 12.9 per cent a year before.

Source: India and the Visible Hand of the Market (Kaushik Basu)
https://www.nytimes.com/2017/06/29/opinion/india-and-the-visible-hand-of-the-market.html
 Impact on Banking Sector

• The impact of demonetization on exchange rate and portfolio flows was fleeting.
• Amidst concerns over asset quality, credit intermediation by public sector banks has
retrenched.
• It did not affect the day-to-day functioning of the securities market given that transactions
are done through banking channels.
• The sudden spurt in banking sector liquidity following demonetisation and its consequent
impact on the government bond yield curve and money market rates had implications for
the management of liquidity and expectations.

Source: Financial Stability Report (June 2017)

https://rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=876
 Impact on RBI
• RBI’s credibility was most impacted.
• While the RBI began printing ₹ 2000 notes in September 2016, ₹ 500 notes were minted
only after November 8, 2016, limiting the pace of disbursements of new notes.
• ATMS had not been calibrated.
• Cash did not reach many branches
• RBI’s officers were arrested

Source: India’s Central Bank Denied its Big Payday as Demonetisation Flops and World Bank India Development Update (May 2017)
http://documents.worldbank.org/curated/en/107761495798437741/pdf/115297-WP-P146674-PUBLIC.pdf
https://www.forbes.com/sites/wadeshepard/2016/12/10/indias-central-bank-denied-its-big-payday-as-demonetization-flops/#705e59a54944
 Currency with the Public since Demonetisation - 2016
18,000.0
November 8: ₹500 and ₹1000
Notes Demonetised
16,000.0

14,000.0
(₹ Billion)

12,000.0

10,000.0

8,000.0

6,000.0
28-Oct

3-Feb
14-Oct

17-Feb

3-Mar

14-Apr

28-Apr
23-Dec

23-Jun

18-Aug
6-Jan

21-Jul
20-Jan

17-Mar

31-Mar

12-May

26-May
11-Nov

25-Nov

9-Dec

4-Aug
9-Jun

7-Jul
Source: Monthly Bulletin, RBI.
 Impact on Exchange Rate
Rupees to Dollar Exchange Rate
69

68

67
₹ per $

66

65 November 8: ₹500 and

₹1000 Notes Demonetised
64

63

Source: IMF Database.

 Inflation (All-India Combined Consumer Price Index)
7.0
2015-16 2016-17 2017-18 November 8: ₹500 and ₹1000
Notes Demonetised
6.0

5.0
Percentage

4.0

3.0

2.0

1.0

0.0
APR

AUG
JUN

JUL

SEP

JAN

FEB
OCT

NOV

DEC
MAY

MAR
Source: MOSPI, GoI.
 Forecasts - India’s Changing Economic Outlook – RBI (1)
Real Gross Value Added (GVA) Growth
Annual Percent Change

Publication Release 2015-16 2016-17 2017-18 2018-19

Monetary Policy Report Sep-15 7.4 7.8 -

Monetary Policy Report Apr-16 7.3 7.6 7.9 -
Monetary Policy Report Oct-16 - 7.6 7.9 -
Monetary Policy Report Apr-17 - 6.7 7.4 8.1
Monetary Policy Report Oct-17 - - 6.7 7.4
Note: Orange cells are projections.
Source: Monetary Policy Report, Various Issues.
 India’s Changing Economic Outlook – RBI (2)
Assessment of Survey of Professional Forecasters for 2016-17
Particulars Sep-15 Apr-16 Oct-16 Apr-17 Oct-17

Gross Domestic Saving (per cent of GDP) 31.0 30.8 31.6 31.5 31.2

Gross Fixed Capital Formation (per cent of GDP) 29.8 30.0 29.5 27.0 26.5

Money Supply (M3) Growth 13.5 12.7 11.5 7.5 10.6

Bank Credit of Scheduled Commercial Banks Growth 14.2 12.3 11.5 6.0 8.0

GVA Growth 8.0 7.7 7.6 6.7 6.6

Agriculture and Allied Activities 3.0 2.6 3.5 4.2 3.2

Industry 7.2 7.4 7.5 6.1 4.8

Services 9.8 9.1 8.8 7.6 8.1

Inflation - - 4.7 3.6 4.6

Source: Monetary Policy Report, Various Issues.
India’s Changing Economic Outlook – IMF & World Bank
Real GDP Growth Annual Percent Change

Publication Organisation Release 2015 2016 2017 2021

World Economic Outlook IMF Apr-16 7.3 7.5 7.5 7.8
Global Economic Prospects World Bank Jun-16 7.6 7.6 7.7 -
World Economic Outlook IMF Oct-16 7.6 7.6 7.6 8.1
World Economic Outlook (Update) IMF Jan-17 7.6 6.6 7.2 -
Global Economic Prospects World Bank Jan-17 7.6 7.0 7.6 -
World Economic Outlook IMF Apr-17 7.9 6.8 7.2 8.2*
Global Economic Prospects World Bank Jun-17 7.9 6.8 7.2 -
World Economic Outlook (Update) IMF Jul-17 8.0 7.1 7.2 -
World Economic Outlook IMF Oct-17 8.0 7.1 6.7 8.2*
Note: *Stands for 2022 projection. #Stands for 2019 projection. Orange cells are projections.
Source: World Economic Outlook and Global Economic Prospects, Various Issues.
 Trend Comparison – Macro Variables 2016 2017
Q1 Q2 Q3 Q4 Q1
Currency with the Public- Quarterly Growth Rate 6.4 1.0 -32.3 -6.1 31.5
GVA at basic Price 7.6 6.8 6.7 5.6 5.6
Consumption(Private Final Consumption Expenditure) 53.6 53.8 58.6 57.3 54.0
Investment(Gross Fixed Capital Formation) 31 29.4 29.5 28.5 29.8
Government(Government Final Consumption Expenditure) 11.3 12.8 10.6 9.4 12.6
Net Exports -0.9 -0.8 -0.7 -0.3 -3.2
Agriculture 2.5 4.1 6.9 5.2 2.3
Manufacturing 10.7 7.7 8.2 5.3 1.2
Electricity, gas ,water supply& other utility services 10.3 5.1 7.4 6.1 7.0
Construction 3.1 4.3 3.4 -3.7 2.0
Trade, hotels, transport, communication and services related
8.9 7.7 8.3 6.5 11.1
to broadcasting
Financial, real estate & professional services 9.4 7.0 3.3 2.2 6.4
Public administration, defense and Other Services 8.6 9.5 10.3 17.0 9.5
Note: As on 31.8.17
Source: http://mospi.nic.in/sites/default/files/press_release/PRESS_NOTE-Q1_2017-18_31aug17.pdf
 INDEX OF INDUSTRIAL PRODUCTION INDICATORS
Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug-
Trend Comparison 16 16 16 16 16 17 17 17 17 17 17 17 17
Currency with public 0.7 0.9 0.8 -46.3 -14.1 16.4 16.6 14.1 9.5 6.3 2.8 1.2 1.4

Mining -4.2 3.5 15.2 5.1 7.4 0.3 -3.4 15.6 -22.6 2.8 -2.8 -6.3 0.1

Manufacturing 0.2 1.2 0.2 -4.6 4.9 1.4 -2.8 10.9 -11.6 7.1 -4.1 -0.8 3.2
IIP
Sectoral
Electricity 0.7 1.5 -0.3 -7.0 2.1 0.8 -6.3 13.6 1.8 5.0 -6.8 3.0 2.4

General -0.3 1.5 1.8 -3.7 5.0 1.2 -3.2 11.7 -11.9 6.3 -4.2 -1.1 2.8

Primary goods -2.8 -0.2 8.6 -1.8 5.4 -1.1 -5.6 15.0 -12.1 4.6 -4.4 -0.6 1.7

Capital goods -2.9 4.4 -4.7 4.7 -1.4 1.5 3.1 32.2 -34.0 12.4 -0.6 -2.7 3.4

Intermediate goods 0.3 -1.9 0.9 -3.8 3.6 1.6 -2.6 11.1 -10.8 2.8 -1.5 -0.1 2.0
IIP-Use
based
Infrastructure/ construction goods 4.5 -0.2 0.1 -8.9 10.6 2.3 -4.7 10.6 -7.7 4.8 -1.7 -4.0 3.3

Consumer durables 2.4 10.3 -3.5 -9.5 -1.3 -0.1 -1.1 11.1 -6.6 4.7 -5.0 -0.5 5.4

Consumer non-durables -0.6 1.1 -1.5 -1.3 9.0 5.5 -1.4 -0.8 -8.8 13.8 -8.9 -0.5 2.8

Source: RBI, Bulletin and Database on Indian Economy.

 RURAL SURVEY- Findings
View on Demonetisation (percent)
Farmers Non-farmers
Good Bad Good Bad
Gender
Male 74.4 25.6 60.0 40.0
Female 75.0 25.0 71.8 28.2
Education
No formal education 72.2 27.8 80.0 20.0
Education below matriculation (1-7) 82.9 17.1 70.0 30.0
Matriculation/ Higher secondary (8-12) 68.7 31.3 63.3 36.7
Other Technical course (Diploma) 100.0 0.0 50.0 50.0
Graduation and above 100.0 0.0 71.4 28.6
Types of Farmer
Marginal Farmer ( Less than 2.49 Acres) 73.7 26.3 - -
Small Farmer ( 2.50 to 5.00 Acres) 68.3 31.7 - -
Semi-medium Farmer ( 5.01 to 10.00 Acres) 81.0 19.0 - -
Medium and Large Farmer (10.01 and more
91.7 8.3 - -
Acres)
Total Percentage 74.7 25.3 67.8 32.2
After Demonetisation, Role of Bank/SHGs/MLs (percent)
Farmers Non-farmers
Response
Self-help Money Self-help Money
Bank Bank
Groups Lenders Groups Lenders

Decreased very strongly 1.3 1.3 2.0 3.4 - 0.0

Decreased mildly 12.7 6.7 9.3 23.7 6.8 11.9

Same, No changes 56.0 49.3 20.7 50.8 50.8 16.9

Improved very strongly 3.3 18.7 11.3 0.0 18.6 6.8

Improved mildly 14.7 10.7 43.3 11.9 10.2 54.2

Don’t know 12.0 13.3 13.3 10.2 13.6 10.2

Percentage 100 100 100 100 100 100

Total Number 150 150 150 59 59 59

Was ample/sufficient money available in following institution during Nov. to
Dec. 2016? (percent)
During Nov.
Farmers Non-farmers
to Dec. 2016
Banks
Yes 23.3 16.9
No 59.3 71.2
Don’t know 17.3 11.9
Self-help Groups (SHGs)
Yes 21.3 30.5
No 56.7 49.2
Don’t know 22.0 20.3
Money Lenders (MLs)
Yes 33.3 37.3
No 56.0 50.8
Don’t know 10.7 11.9
Percentage 100 100
Total Number 150 59
 Observations on Demonetisation (percent) – Farmers and Non-farmers

Farmers Non-farmers
Observations
Male Female Total Male Female Total
Problem in standing in queue 4.4 3.3 4.0 5.0 10.3 8.5
Problem in three days and more
11.1 1.7 7.3 0.0 2.6 1.7
days stand in line

Problem related to getting loan 3.3 6.7 4.7 5.0 0.0 1.7

Control parallel economy 4.4 3.3 4.0 5.0 2.6 3.4

Poor people not affected 50.0 31.7 42.7 35.0 23.1 27.1

Business and Transaction problem 3.3 13.3 7.3 20.0 12.8 15.3

Others* 1.1 3.3 2.0 0.0 0.0 0.0

Total Number 90 60 150 20 39 59

Note: * family faced problems for wedding celebration

Note: Multiple responses, therefore, total may exceed or less 100 percent.
 Results from our Survey in Bangalore
(with my students – D. Zanzrukia; D.Katakdaunde; Ankit Jain; A. Alawadhi)
• A survey is also being conducted among various sections of society (bankers, jewellers, labourers
and general public) in Bangalore, Karnataka to study “Demonetisation”. Some of the findings
include:
 Consumption of Non-durable goods was affected and has been at low levels till date.

 Demonetisation has led to extended credit periods for borrowers in informal sector. The increase in digitalisation
has come mainly from formal sector and not from informal sector.

 There are instances of loss of jobs in informal sector due to demonetisation. Labourers were laid-off generally for
short periods for couple of months till sufficient cash was available for business.

 Cash management and ATM calibration remained the main issues for each branch which they couldn’t control.
Despite this, several banks managed inter-branch cash transfers.
 Survey in Karnataka, AP, Telangana - Impact on Gold
(with S Ananth for WGC))
• Only retailers who could take brisk business immediately after demonetization were those who had an
inventory of gold & the ones who accepted old denomination notes.

• In Hyderabad, premium for gold in old denominations - 10 grams of gold for Rs. 52,000

• However, initial rush to buy gold gave way to a subsequent collapse

• Impact was particularly hard on medium and small jewelers.

• In Vijayawada the business had declined by about 50 per cent since most of their customers usually paid for
purchases in cash.

• Small retailers’ business was almost completely paralyzed due to their inability to mobilize cash

• Slow business impacting social realm affecting philanthropy

 India‘s Dependency on Cash - 1

Composition of employment (%)

Organised Unorganised Total

Formal 45.4 0.4 8.1

Informal 54.6 99.6 91.9

Total 17.3 82.7 100

Source: CEIC, Kotak Economic Researchestimates

 Good mission, Endurable Pain –
Lesson from Demonetisation
• People are willing to endure pain, including death, because they are frustrated
with corruption. Anything for fighting rampant corruption – Anna Hazare.

• Interesting belief that rich are evil, wealthy are tax evasive, and anti-poor.

• People are ready for any more demonetisations. Litmus test for a ruling party is
electoral success. After demonetisation, achieving roaring success.

• Economists predicting fall of growth of 2 percent proven wrong. Peoples

sentiments are high. Economists need to factor that.