Reports indicate that nearly 97% of the currency bills outlawed at the end of the deadline last year has been deposited into banks. Although the Reserve Bank of India has been hesitant to release figures of the amount of old currency deposited into the banking system from November 9 to December 30, 2016, credible reports indicate that banks received Rs 14.97 lakh crore of the Rs 15.44 lakh crore rendered worthless by the Prime Minister’s announcement. These figures undermine the prospect of any windfall gains accruing to the government arising out of a portion of the old currency remaining outside the banking system. Government-owned financial entities like the State Bank of India had argued that by the end of this demonetisation exercise, an estimated Rs 2.5 lakh crore may not return to the system. Experts supporting the government’s decision argued that this potential windfall will lead to massive gains for the state, with RBI’s liabilities significantly reduced. The government may use this money to improve its fiscal situation and provide income tax relief/loan waivers, recapitalise banks and kick-start lending. Other experts claimed that anywhere between Rs 3 lakh crore and Rs 5 lakh crore of black money will be "extinguished" by the demonetisation drive as it will not return to the banking system. It is imperative to note that neither the government nor the RBI has stated or asserted on what they intend to do in the event of a windfall. But with reports indicating that there would be no possible windfall, questions are bound to be raised about the cost and impact of the exercise of demonetisation spread over 50 days. One of the principal justifications issued by the government in recent days is that tax authorities will now be able to trace the transactions and tax black money hoarders since all that money has entered the formal banking system. They will now need to impose stiff penalties on those found violating the rules and closely tracking all the money that has been deposited into the system. Is the system capable of tracking all these deposits? Even in a country where merely 4% of the population filed income tax returns in 2014-15, the task of scrutinising these accounts is a mammoth task.
Despite the prime minister’s promises, the pains of demonetization will continue to persist well into 2017. New data indicates that the Indian manufacturing has suffered post-November 8. For the first time in 2016, the Nikkei India Manufacturing Purchasing Managers’ Index, which is an indicator of the economic health of the manufacturing sector, fell below the crucial threshold of 50 in December. The Index fell to 49.6 last month from 52.3 in November. The reasons for the plight of Indian manufacturing companies are clear. They are suffering from severe supply-chain disruptions and customers with no or little cash in their wallets. Production has either stopped or come to a complete standstill, and millions of workers remain out of a job. Yes, the cash crunch in metropolitan cities seems to have partially eased, with the government’s recent decision to raise the limits for ATM withdrawals from Rs 2,500 rupees to Rs 4,500. Major withdrawal limits, however, have not been changed with citizens allowed only to withdraw Rs 24,000 a week of their hard owned money or Rs 50,000 if one has a current account. These sums are clearly insufficient to keep supply chains running. Unless and until artificial limits are imposed on Indians in how much cash they can access, the situation will not return to “normalcy”. The Indian economy needs an urgent injection of cash. Reports indicate that banks will provide additional working capital to micro, small and medium enterprises (MSME) borrowers and extend the loan payment window for small companies and farmers. This may ease the pain a little, but will it make any significant difference to their plight? With banks already struggling under the weight of bad loans, such measures will only further strain. Meanwhile, the central bank seems to have reneged on the Prime Minister’s promise that banks will take old notes until December 30 and the RBI will take them until March 31. The RBI issued a statement after the December 30 deadline that only Indians who were abroad during November 9 to December 30, 2016, have been given a 3-month grace period till March 31 to deposit the defunct notes. It is the RBI’s fiduciary obligation to give the bearer of 500/1000 notes rupees in exchange, and all it can do is put a time limit on the exchange. It cannot keep changing the goal posts at its will or the government’s whims.