Why in news?
The Reserve Bank of India’s annual report has revealed the data on amounts retrieved after the recent demonetisation drive.
What are the highlights of the report?
- Rs. 500 and Rs. 1,000 banknotes were withdrawn as a means to combat counterfeiting, black money and the financing of terrorist activities.
- 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- This is around 99% of the total value of the withdrawn currency at the time of demonetisation.
- The bank has not received a part of the demonetised sum which is equal to Rs 16,050 cr.
- The final deposit figures could still rise with influx of money from District Central Cooperative Banks.
- This is because, these banks were very recently allowed to deposit withdrawn notes that they had accepted for a few days after demonetisation after which it was stopped.
- Also, RBI is in discussions with the government to further accept the demonetised notes held by citizens and financial institutions in Nepal.
What are the favourable outcomes of demonetisation?
- The whole process has brought more accountability to money and the anonymity with cash transactions is reduced.
- Big data analytics of deposits and increase in suspicious transaction reports have thrown better light on holdings of black money.
- The reports by banks are also helping in identification of shell firms and taking necessary actions against money laundering activities.
- This could possibly lead to an increase in future tax revenues with better tax compliance.
- 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.
- The drive has promoted more formalisation of the economy and financialisation of savings.
What are the contentious outcomes?
- 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.
- 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 during the period July 2016-June 2017.
- 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 remonetized is 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.
What lies ahead?
- The challenge now is to ensure that the creation of new black money is minimized.
- A committed government plus tax reforms such as the GST will be part of the solution.
- Government has to analyse the pros and cons of the demonetisation impact to take lessons for future reforms.
Source: Economic Times, Business Standard
