Opinion

Demonetisation: Bane or Boon

Mahesh Singhi Mahesh Singhi - 11th September 2017
Central bank of India’s long-delayed accounting, more than 99% of the cash in circulation has been returned. This isn’t surprising. Instead of the world’s best-planned attack on black money, India’s government had launched the world’s biggest legal money laundering scheme.
Demonetization pushed the Indian economy toward more formal ways of operating and saving and expanded the tax base. The direct tax base has vastly increased . India’s new goods-and-services tax is going to expand the formal economy and the tax base anyway.
When the currency exchange programme was announced, citizens rushed to exchange their old notes. The over-the-counter exchange of notes, however, was restricted in the early weeks due to shortage of new currency. This meant that most of old currency had to be deposited in banks and could only be withdrawn at a later stage.
Fearing a sudden surge in outflows when withdrawal restrictions were lifted, the central bank eased these curbs in stages. It was only in mid-March that all withdrawal restrictions were lifted. What has happened since then has surprised many, including bankers.
The actual proportion has surprised everyone.
Inflows into the insurance sector have picked up as well, although the pace of increase has been volatile for the sector. The stickyness of this money will be determined over a longer period of time when data on long term persistency becomes available.
The “excess” deposits in the months after demonetization have begun to be investigated. In essence, this means that India’s notoriously corrupt tax administration -- already being used by the government as a tool to attack the political opposition -- will be given a free hand. A “raid raj” isn’t just illiberal, it will further depress already weak business sentiment.
Enough voters bought the idea that demonetization may not have worked “perfectly,” but at least Modi tried. As long as that remains true, the government will surely be tempted to launch some other scheme soon that is equally unusual, unnecessary and counterproductive.


Mahesh Singhi
Managing Director - Partner,
Singhi Advisors Pvt. Ltd.


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