THE JURY IS OUT ON GAINS FROM THE NOTE BAN
As we approach its first anniversary, has demonetisation achieved its original objectives? On November 8, these were tackling corruption, counterfeit currency and terror-funding. Thereafter the Prime Minister added reducing dependence on cash.
Now that we know almost 99% of demonetised money has come back, the government’s estimates of how much black money would be extinguished have gone horribly wrong. First, the Attorney General told the Supreme Court he expected ₹4-5 lakh crore to be “neutralised”. Then, a Finance Ministry official told reporters ₹3 lakh crore would not return. In the end just ₹16,000 crore didn’t come back. Even that will shrink once deposits in cooperative banks and, perhaps, currency held in Bhutan and Nepal is counted.
This means previously unbanked money has been credited to bank accounts. As it yields returns it will be taxed and that’s a gain. If large proportions are proven to be black revenues will increase substantially.
The critical question is how much can the authorities establish is black? In his budget speech, Mr Jaitley revealed ₹4.9 lakh crore had been deposited in 148,000 bank accounts of a minimum value of ₹80 lakhs each amounting to an average deposit of ₹3.31 crore. At the time, Business Standard Chairman, TN Ninan, wrote: “It’s all but certain … this is black money unearthed by notebandi.” More recently, the Prime Minister has said 18 lakh accounts are under “scrutiny” and 2.10 lakh companies have been “closed”. This is a humongous number for the CBDT to scrutinise given it only investigates 3 lakh accounts annually.
On the assumption most black money is detected, the economist Surjit Bhalla has calculated the additional revenue in the first year as
₹2.5 lakh crore with a further
₹1.5 lakh annually in perpetuity. If that happens it’s a huge gain but ‘if’ is the operative word. Remember, the government’s claims will be contest- ed in court and the cases could drag on for years. For now, all we can say is some black money will be identified and taxed but what proportion that is of the total and what the gain will be is unknown.
Meanwhile, the objective of reducing counterfeit currency seems unachieved. In 2015 the National Investigation Agency established that at any point of time only ₹400 crore of counterfeit currency is in circulation. That’s 0.028% of total currency. Now, CNBC has calculated only 0.0007% of the returned thousand rupee notes are fake and only 0.002% of the five hundred notes. In value terms that’s just ₹41 crore. So either a lot of fake currency hasn’t been detected or didn’t exist. around ₹3500 a month, yet it is not the amount which is important, but the habit.
Many factors are driving this change. The steady up-move in the Indian stock market over the last three years has created a pull of its own. More crucially, other asset classes which were the mainstay of Indian household investors, are losing their sheen. Indian savers are risk-averse, as seen in the disproportionately large share of their savings that lie in bank deposits. A new generation of savers is beginning to realise that returns from bank fixed deposits do not create wealth. A one year bank fixed deposit today yields 6.5% — a post tax return of 4.25% — that barely beats our long term inflation rate of 4%, let alone making us rich in the long run.
The other asset that Indians have traditionally loved is gold. This too is losing its glitter. The annualised return on gold over the last three years NOV 5: The Mahajan Commission report on boundary disputes between Maharashtra, Mysore and Kerala, which was officially released here today (Nov 04), has rejected Maharashtra's claim to Belgaum and Mysore's to Sholapur; but Mysore has got Kasargod over Kerala.
In terms of tackling terror-funding the Finance Ministry said in August: “As a result of demonetisation of specified bank notes terrorist and Naxalite financing stopped almost entirely.” If true, this is a huge success but no proof has been provided. Till it is, this is just an assertion.Terror, meanwhile, has not been eliminated as the attacks on Srinagar airport, the Amarnath Yatra, Kulgam and Pulwama show.
Finally, have we reduced dependence on cash? Both in number and value, digital transactions increased sharply after November but dipped sizably thereafter. There were 671.49 million transactions in November, rising to 957.50 million in December before shrinking to 862.38 million in July. In value terms, it was ₹94 lakh crore in November rising to ₹149 lakh crore in March before declining to ₹107 lakh crore in July. Clearly the use of cash did initially diminish but, thereafter, it’s steadily increasing.
So you can’t say demonetisation has fulfilled its objectives. But there’s also the well-established economic cost in terms of growth, jobs and human suffering. Growth has collapsed to 5.7% and, perhaps, over a million jobs lost. This raises the deeper question: was demonetisation worth it? The Uttar Pradesh assembly elections suggested the initial answer was yes. But is that changing? We have 18 months before the next elections to find out.
MORGAN STANLEY EXPECTS A STAGGERING 500 BILLION DOLLARS OF SAVINGS TO FLOW INTO INDIAN EQUITIES OVER THE NEXT DECADE
is only 3.5%. While gold, for reasons of security and emotion, can never fade away completely from the portfolio of Indian households, savers are switching to financial assets for better returns. The sustained lull in the real estate market has turned investors away from investing in property. Real estate was never the most liquid of investments, now even returns have plateaued.
Equity is moving in, to fill these gaps. While the resurgence of interest over the last two years has been impressive, this may be the tip of the iceberg. Investment bank Morgan Stanley expects a staggering 500 billion dollars of savings to flow into Indian equities over the next decade. While this may truly be the dawn of a new era for stocks, it will not be without challenges. Volatility in the market is at all time lows today but it will not be, forever. Along the way, the patience of new investors will be put to test by violent corrections — an intrinsic aspect of markets. At such times, Indian savers will have to display the maturity that is the mark of true long-term investors. We can then be sure that the cult of equity investing is truly here to stay.
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