The demand destruction unleashed by the November 8 demonetisation drive saw the bank credit shrinking by a whopping Rs 61,000 crore, or 0.8 per cent, during the fortnight to November 25, show the latest RBI data.
But at the same time, the note ban also had a positive effect, as borrowers, including some default accounts, paid back as much as Rs 66,000 crore during the same period.
In sharp contrast, during the same fortnight, banks received huge inflows as people deposited as much as Rs 4.03 trillion into the accounts, which as of December 9 crossed Rs 12 trillion, putting all calculations of the Government into a tizzy.
Analysts supporting the cash recall move initially claimed that at least 20 per cent, or a little over Rs 3 trillion — out of the total Rs 15.4 trillion of the banned banknotes — would not come back to the banking system, helping the Government net a windfall from the exercise whose stated aim is to root out black money and curb corruption. This, they claimed, would be achieved by writing off a similar amount from the balancesheet of the central bank and then transferring the same to the Government as surplus. But with the near total return of the banned notes, all these calculations have gone out of the window.
The outstanding credit of banking system stood at Rs 72.92 trillion as of November 25, according to the Reserve Bank data. The year-on-year credit growth was just 6.6 per cent, down from 9.3 per cent a year ago. Bankers say there has been a sharp plunge in credit demand as the economy began to feel the adverse effects of the decision to withdraw legal tender status of old currency notes of Rs 500 and Rs 1,000.
This plunge in bank credit came after another Rs 59,000-crore dip in the previous fortnight to November 11, showing the initial impact of the November 8 announcement to decommission high value notes.
The deposits of banks rose by 4 per cent in the fortnight to Rs 105.177 trillion, pushing the annual growth to 15.9 per cent as against 9.8 per cent a year ago. In the fortnight to November 11, deposits grew by Rs 1.31 trillion or 1.3 per cent, according to the RBI data.
Hit on consumption to weaken state govts’ FY17 tax revenues
With consumption being affected by the demonetisation of higher currency old notes, tax revenues of the state governments for the current financial year is likely to be weaker than budgeted, according to Icra. The Centre on November 8 had announced to withdraw legal tender character of the old Rs 500 and Rs 1,000 notes. “We expect the tax revenues of the state governments in the financial year 2016-17 to be lower than budgeted in the wake of the ongoing cash crunch and its impact on consumption,” rating agency Icra’s senior vice president, Jayanta Roy, said.
The states may not be able to appreciably compress their revenue expenditure below the projected level, as a result of which their revenue balances may be weaker than they forecast, he said. Nevertheless, some state governments may choose to curtail their capital spending to an extent to ensure that the fiscal deficit remains in line with the cap of 3 per cent of gross state domestic product (GSDP), Roy said. He said due to the ongoing cash crunch, the consumption-oriented sectors, especially those which involved substantial cash transactions, such as trade, retail (including purchase of liquor), travel, tourism and gems and jewellery are likely to experience a temporary lull.
“Deferral of consumption would dampen the collections of sales tax and excise duty of the state governments in the third quarter of the financial year 2016-2017, before gradually normalising from fourth quarter onwards,” Roy added.
He said the slowdown in activity in the construction and real estate sectors would impact the stamps and registration collections of the state governments, with the negative impact on this tax revenue likely to be more prolonged compared to sales tax and excise duty. A majority of the revenue expenditure of the state governments comprises salaries, pensions, interest payments, and power and food subsidies, which tends to be sticky in nature. Variance analysis suggests limited scope for compression of revenue expenditure despite the expected shortfall in tax revenues in the current year.