Demonetisation Hits & Misses: Indian & International Experience
•Download as PPTX, PDF•
25 likes•1,715 views
Key Note Address delivered at "National Seminar on Demonetisation" organised by SNGIMS, Coimbatore on Feb 20, 2017. The address focused on how the recent demonetisation in India is a turnkey step in the right direction, which has to be supported by a whole ecosystem of preventive & punitive strategies with 'transaction transparency aided by the digitisation' as the central theme to achieve its desired objectives.
Recommended
More Related Content
What's hot
What's hot (20)
Viewers also liked
Viewers also liked (17)
Similar to Demonetisation Hits & Misses: Indian & International Experience
Similar to Demonetisation Hits & Misses: Indian & International Experience (20)
Recently uploaded
Recently uploaded (20)
Demonetisation Hits & Misses: Indian & International Experience
- 1. Demonetisation Hits & Misses: Indian and International Experience 1
- 2. Why did different countries went for Demonetisation? Liquidity & Inflation Counterfeiting Black Market/ Money Laundering Organised Crimes/ Terrorism Other Economic emergencies 2
- 3. Countries that tried demonetisation and failed1 Soviet Union 1991 To Address : Black Economy; Inflation Failed to arrest Inflation, Collapse of the Union North Korea 2010 To Address : Control the economy; Black markets. Combined with a poor harvest- Severe Food Shortage, Prices surged Zaire 1993 Withdraw obsolescent currency Surge in inflation; Collapse in the exchange rate against dollar. 3
- 4. Countries that tried demonetisation and failed1 Myanmar 1987 ADDRESS : Black Market Deepening economic unease Collapse of the Government Ghana 1982 ADDRESS : Tax evasion, Corruption, Excess liquidity Reduced confidence in banking system; Investment in foreign currency or physical assets Nigeria 1984 ADDRESS : Corruption Failed to fix a debt- burdened and inflation- ridden economy 4
- 5. Countries that tried demonetisation and Succeeded2 European Union 2002 Introduction of common currency EURO Economic development of the region Australia 1992 & 96 ADDRESS : Black Money/ Counterfeits The first country to have polymer bank notes. Counterfeit resistant Zimbabwe 2015 ADDRESS : Hyper Inflation @ 231 mn% Inflation reduced to single digit . Economic Stabilisation 5
- 6. Countries that tried demonetisation and Succeeded2 USA 1969 ADDRESS : Black Money Stepping stone for Development of the American banking system 6
- 7. Demonetisation in India: 1946, 1978 & 2016 7
- 8. 8
- 9. Demonetisation in India: 1946 and 1978 Jan 12, 1946 Jan 16, 1978 Objective To curb the black money menace in India. To curb the black money & recover from the Emergency period problems. Motivation Steps taken by the Government of France, Belgium and United Kingdom. Earlier demonetisations including that of 1946. Action Rs.1000, Rs.5000 and Rs.10000 were demonetised and exchanged for Rs. 100 or lower denominations Rs 1000 notes were declared void. Result Partially successful. It mostly became a conversion scheme rather a demonetization scheme. A failure against 1946. Due to prior rumours black money hoarders converted money in lower denominations.9
- 10. Demonetisation in India Nov 8, 2016: The Rationale 10
- 11. Demonetisation in India: The Rationale 11
- 12. Demonetisation in India: The Rationale Counterfeits Black money & Corruption. Counterfeits to finance Drug Trafficking & Terrorism “Tuesday’s move could change the face of the Indian economy, improve the government’s fiscal position and tax compliance. The size of the cash economy will shrink, as will black money generation avenues, because of the better cash-flow trail.” Report by CRISIL. 12
- 13. • Currency in Circulation + Bankers’ Deposit with RBI + Other Deposits with RBI • Currency valued at 14631 bn was in 500 and 1000 bills. • DIRECTLY AFFECTED M0 (Reserve Money) • M0 + Demand Deposits with Banks • DIRECTLY AAFFECTEDM1 • M2 = M1 + Post Office SD • M3 = M2 + TD with Banks • M4 = M3 + Other Deposits with Post Office • Not Directly Affected • Affected via M0 & M1. M2, M3 & M4 Impact on Components of Money Supply 13
- 14. Impact on Components of Money Supply (INR in Bn.) (Source: rbi.org.in) 0.00 5,000.00 10,000.00 15,000.00 20,000.00 25,000.00 30,000.00 1 Apr 2016 1 May 2016 1 Jun 2016 1 Jul 2016 1 Aug 2016 1 Sep 2016 1 Oct 2016 1 Nov 2016 1 Dec 2016 1 Jan 2017 Axis Title M0 M1 14
- 15. All demonetised currency have to be DEPOSITED back Deposited currency to be ISSUED IN NEW DENOMINATIONS. THREE POSSIBILITIES: 1. Clean Money: Money will be exchanged 2. Unreported Money: Shall Attract Tax 3. Bad Money: Won’t be deposited Threat of CONVERSION Impact on Money Supply 15
- 16. Demonetisation • Withdrawal of >85% of currency (value terms) • Gigantic difference for a cash dependent economy Replenishment Challenge4 • Total ATMs ≈ 2 Lakhs • ATMs in Working Condition ≈ 1.2 Lakhs • Digital transfers are threatened by poor awareness level and lack of infra-enablers 16 Demonetisation: Hits & Misses
- 17. FAKE CURRENCY in 500 & 1000 bills4 • Volume share > 60% • Value share > 90% • Basically this money funds terrorism & anti social activities • Out of market in one stroke Reintroduction of 500 & 2000 bills5 • Zero sum Zero game • Cases of counterfeiting Rs 2000 notes reported within mere 5 days of banks issuing them. Demonetisation: Hits & Misses 17
- 18. • Broad basing of GDP • Larger Tax base • More liquidity • Ease in lending rate • INR 11.85 trillion out of INR 15.44 trillion is back in the system. • Helps in formation of capital • Investment Facilitation Capital Accumula tion Recovery of Junk Notes Merger of Parallel economy Enhanced Liquidity Demonetisation: Hits & Misses8 18
- 19. Combating Human Trafficking • Human trafficking industry reduced up to 90%.6 • Nobel laureate Kailash Satyarthi - “demonetisation would be effective in combating exploitation of children & trafficking.”7 Human Trafficking Back on Rise • However, 2 months later he expressed his disappointment on Rs 2000 notes being pushed into human trafficking in absence of other concrete steps.7 Demonetisation: Hits & Misses 19
- 20. •HIGHLIGHTS9 •469 Maoists have surrendered since the demonetisation •Maoists' ability to procure firearms, ammunition, medicines, commodities of daily use and pay cash to cadres badly hit •Developmental policies in affected areas also serving as an incentive to surrender Demonetisation leads to highest ever surrender of Maoists in a month Neeraj Chauhan| TNN | Updated: Nov 29, 2016, 08.20 AM IST Demonetisation: Hits & Misses 20
- 21. Kashmir sees sharp decline in stone-pelting cases • Zulfikar Majid, Srinagar: Nov 15, 2016, DHNS No stone pelting on forces in Kashmir after demonetisation move, says Manohar Parrikar • TNN & Agencies | Updated: Nov 14, 2016, 11.13 PM IST Terror hawala in Kashmir valley rendered trash, thanks to demonetisation • By Pradip R Sagar And Rakesh K Singh | Published: 12th November 2016 11:04 PM | Demonetisation: Hits & Misses 21
- 22. Zero-balance Jan Dhan accounts that swelled by over Rs 21,000 cr. in just 2 weeks.11 May have been used to launder black money. A total tax, penalty and surcharge of 50 % on voluntary disclosure. Higher taxes and stiffer penalty of up to 85% await those who don't disclose but are caught. 22 Demonetisation: Hits & Misses
- 23. 'Operation Clean Money‘ by Income Tax Dept.10 18 lakh people with 'suspicious' cash deposits have been asked for explanation. Over 1 crore accounts > Rs 2 lakh money deposits. Involves unique PAN of 70 lakh persons. All suspicious accounts are tracked. Data Analytics are hired. Ultimate beneficiaries even layered accounts to be identified. 23 Demonetisation: Hits & Misses
- 24. GST to replace all indirect taxes. Short term loss of Revenues of State govts. Demonetisation led Larger Tax Base may counter balance the loss. Facilitation of GST implementation 24 Demonetisation: Hits & Misses
- 25. 0.00 50.00 100.00 150.00 200.00 250.00 300.00 350.00 400.00 450.00 500.00 01/04/2016 01/05/2016 01/06/2016 01/07/2016 01/08/2016 01/09/2016 01/10/2016 01/11/2016 01/12/2016 Credit Card Usage at POS Debit Card Usage at POS Usage of Cards at POS3 (Value - INR in Bn) 0.00 200.00 400.00 600.00 800.00 1,000.00 1,200.00 1,400.00 1,600.00 Mobile Banking3 (Value- in INR Bn) 25 Demonetisation: Hits & Misses
- 26. 46.72 49.95 53.47 53.40 56.46 56.28 60.22 50.10 97.70 0.00 20.00 40.00 60.00 80.00 100.00 120.00 Prepaid Payment Instruments3 (m-wallets, Cards, Vouchers) Value- INR in Bn 26 Demonetisation: Hits & Misses
- 27. What called for Reissuance of High Denomination Currencies? Remonetisation with Generic Security features of bills of 2000 & 500 notes poses the threats similar to pre-demonetisation. India is yet not ready to go cash less: Low Infra penetration, Exclusions- Educational & Financial Reissuance of high denomination currencies are hence called for, till the time India matures enough to go cash free. 27
- 28. Reissuance of high denomination currencies would mean the same challenges. Leaving demonetisation as a mere game-changing strategy in interim. Applies a temporary brake on the volume growth of counterfeiting/ shadow economy/ trafficking. “It will not be enough just to do demonetization. It has to be matched with a better, more streamlined and integrated support system.” Jitendra Singh, Professor, Wharton 28 Demonetisation: Hits & Misses
- 29. Details of foreign bank account & asset holders, forex etc. Jewellery/ Precious Metal Conversions Benami Property/ Accounts Digitisation of Indian economy and Transaction transparency Transformation to a CASH LESS ECONOMY Way Forward 29
- 30. “The year 2016 has overall been ‘a good year’ for India. …. The biggest wild card in all of this, of course, is demonetization. …. Any impact on economic activity and GDP will be temporary, and the long-term benefits such as an increase in cashless activity will be more permanent.” Kartik Hosanagar, Professor in Wharton’s department of operations, information and decisions 30 Way Forward
- 31. The long term gains are in terms of 1. Reduction in the proportion of pure cash transactions, and 2. A Shift to digital mode of payment, 3. Leading to Recording of all transactions, and 4. Thereby helping to widen tax net. ….note ban cannot be a standalone measure to prevent further accumulation of black money as it depends on future policies of the government such as 1. Improved transparency in governance, 2. Revised tax structures and administration, and 3. Electoral reforms including funding for political parties. C Rangarajan, Former RBI Governor, 32nd Conference of All India Reserve Bank Employees Association, Hyderabad, Feb 17, 2017 31 Way Forward
- 32. 32
- 33. Are we on the Right Path? Clues from UNION BUDGET 2017 33
- 34. 34
- 35. 35
- 36. 36
- 37. 37
- 38. CONCLUSION 38
- 39. References 1. http://economictimes.indiatimes.com/slideshows/nation-world/countries-that-tried- demonetisation-and-failed/ghana/slideshow/55457330.cms 2. http://www.spellerstep.com/information/demonetization-can-successful-6-countries-proved/ 3. dbie.rbi.org.in 4. RBI annual report 2015-16 data 5. Hindustan Times, Nov 15, 2016 6. https://www.theguardian.com/global-development/2016/dec/22/india-currency-note-ban-sparks- dramatic-fall-sex-trafficking 7. http://economictimes.indiatimes.com/articleshow/56492015.cms?utm_source=contentofinterest& utm_medium=text&utm_campaign=cppst 8. http://economictimes.indiatimes.com/news/politics-and-nation/demonetisation-has-positive- impact-says-arun-jaitley/articleshow/57113478.cms 9. http://timesofindia.indiatimes.com/india/Demonetisation-leads-to-largest-Maoist- surrenders/articleshow/55675983.cms 10. http://timesofindia.indiatimes.com/business/india-business/cbdt-identifies-18-lakh-people-with- suspicious-deposits/articleshow/56893519.cms 11. http://timesofindia.indiatimes.com/business/india-business/Demonetisation-30-tax-10-penalty-33- surcharge-proposed-on-undisclosed-income/articleshow/55665693.cms 39
- 40. Prof. (Dr) Ansuman Chatterjee Institute of Management, Christ University, Bangalore. prof.ansuman@gmail.com 40
Editor's Notes
- Soviet Union On its last legs, the country under Mikhail Gorbachev in January 1991 withdrew large-ruble bills from circulation in a move to take on the black economy. The reform failed to halt inflation, and instead served mainly to accelerate a slide in public confidence in the government. As political infighting combined with economic collapse, Gorbachev faced a coup attempt that August which destroyed his authority and led to the Soviet break-up the following year. Learning lessons, Russia's 1998 redenomination of the ruble, when it removed three zeroes, went altogether more smoothly. North Korea In 2010, the regime of then-dictator Kim Jong-Il mounted a reform that knocked off two zeros from the face value of the old currency in an effort to tighten control of the economy and close black markets. Combined with a poor harvest, the measure left the country with severe food shortages, according to reports at the time. Surging rice prices stoked unrest that prompted an unusual apology from Kim, and -- reports suggested -- the execution of the ruling party's head of finance. Zaire Dictator Mobutu Sese Seko faced increasing economic disruptions in the early 1990s, when his administration mounted successive banknote reforms. A plan to withdraw obsolescent currency from the system in 1993 saw a surge in inflation and a collapse in the exchange rate against the dollar. After a civil war, Mobutu was ousted in 1997.
- Myanmar In 1987, the country's military junta invalidated as much as 80 per cent of the value of money in circulation, according to reports at the time -- as in other such initiatives, it was directed at curbing the black market. One result was the first student demonstrations in years. Deepening economic unease helped trigger mass protests across the nation the following year that led to a government crackdown that killed thousands of people. Ghana The country in 1982 got rid of its 50 cedi note to crack down on tax evasion, address corruption and mop up excess liquidity. The move eroded confidence in the banking system as people turned to foreign currency or physical assets instead. The black market for currency flourished. As rural dwellers had to walk miles to the nearest banks to exchange their money, and after the deadline passed, there were accounts of bundles of notes abandoned as worthless. Nigeria 16 Nov, 2016 In 1984, the military government led by Muhammadu Buhari instituted an anti-corruption crackdown that involved issuing new banknotes with a different color, forcing the replacement of old ones within a limited period. The move was one of a series that failed to fix a debt-burdened and inflation-ridden economy. Buhari, who is now in power again, was eventually ousted in a coup the following year.
- European Union – The countries which joined European Union in the beginning phased out their respective currencies and adopted Euro in 2002. In order to switch to the euro, authorities first fixed exchange rates for the varied national currencies into euros. When the euro was introduced, the old national currencies were demonetized. However, the old currencies remained convertible into euros for a while so that a smooth transition through demonetization would be assured. Australia – In 1996, Australia decided to replace its paper-based notes with polymer bank notes. This move changed all the currency in the country to a new type of banknote that was made of a different more durable material. The first plastic currency in the country was released in 1992 and by 1996, all the banknotes being produced were polymer-based. The notes released by Reserve Bank of Australia were the world’s first long-lasting banknotes. Also, the polymer base made them counterfeit-resistant. Since the purpose was to replace paper with plastic and only the material changed, it did not had any side-effects on the economy. Zimbabwe – Zimbabwe used to have $100,000,000,000,000 note. Yes, a one hundred trillion dollar note! In 2015, the Zimbabwean government demonetized the Zimbabwean dollar as a way to combat the country’s hyperinflation that was recorded at 231,000,000%. The 3-month process involved expunging the Zimbabwean dollar from the country’s financial system and solidifying the US dollar, Botswana pula, and South African rand as the country’s legal tender in a bid to stabilize the economy.
- USA The highest value of denomination currently in production is the $100 bill, but in decades past, the Federal Reserve has issued $1,000, $5,000, $10,000 and even $100,000 bills. In 1969, the United States of America under President Richard Nixon declared all bills above $100 null and void in United States of America to curb the existence of black money in the nation and restore the country’s sheen. The move was highly successful and is claimed to have been the starting of development of the American banking system. The $100 bill is the most widely circulated denomination till date.
- Back in 1923, B R Ambedkar in his book titled “Problems of Indian rupee” recommended that the Indian currency should be replaced every 10 years toend the menace of hoarding of rupees and checking inflation. He had received his doctoral degree from London School of Economics in 1927 for his dissertation “The problem of the rupee: Its origin and its solution” which is seen as a major contribution to the field of monetary economics.
- Firstly, the criticism is on the resultant operational jeopardisation of the economy due to the withdrawal of currency notes that accounted for more than 85% (in value terms) of the total value of currency notes in circulation. This makes a gigantic difference to an economy that is largely cash dependent. Further India which is considerably the largest market among the rising economies has its own challenge in replenishing the currency notes. Banks have initiated the planned intervention but obviously it couldn’t do magics overnight. Out of the 2 lakh ATMs across the nation, 1.2 lakh are running but they are out of cash within a few hours, for the size of population we have coupled with the frequenters. Usage of mobile transfers are on rise but the penetration in the city limits itself is meagre, let alone the far flung remote areas that are still deprived of basic infrastructure enablers.
- The argument in favour of demonetisation rests on the fact that the volume share of fake currency notes of 500 and 1000 denominations are more than 60% (out of total fake currencies in circulation) accounting for more than 90% of the total value of fake currencies (RBI annual report 2015-16 data) and it is basically this money that is used to fund terrorism and anti social activities. But the government’s plan of reintroducing new currency notes of 500 and 2000 makes it zero sum zero game and gives the critique their run for the mile. Even reportedly police have booked four people on charges of counterfeiting Rs 2000 notes within mere five days of banks issuing them (Hindustan Times, Nov 15, 2016).
- Within a month’s time since demonetisation nearly INR 11.85 trillion out of INR 15.44 trillion junked notes are back into the system, giving a big boost to the liquidity and meaning a merger of the parallel economy with the mainstream which would definitely broad base the GDP. The inflation rate is also tamed and brought below 4 per cent for November 2016 (14 months lowest rate). Both of this, increased liquidity & tamed inflation would facilitate easing of lending norms & rates leading to capital formation and investment at select areas resulting in acceleration of economic activities. This puts the RBI in ease to reduce rates in future as well, prolonging the continuation of growth supportive environment.
- India’s rupee recall had “a massive impact” on the country’s human trafficking industry, according to advocacy and rescue groups, with some reporting reductions of up to 90%. A day after demonetisation Nobel laureate Kailash Satyarthi said the demonetisation would be effective in combating exploitation of children as well as corruption and would be a great obstacle to traffickers. However, 2 months later he expressed his disappointment on Rs 2000 notes being pushed into human trafficking in absence of other concrete steps.
- The Demonetization has badly hit Maoist and Naxalites as well. The surrender rate has reached its highest since the demonetization is announced. It is said that the money these organizations have collected over the years have left with no value and it has caused them to reach to this decision. The move also reportedly crippled Communist guerrilla groups financing through money laundering.[163][164] According to Chhattisgarh Police demonetisation has affected the Naxalite activities. It is reported that insurgents have stashed more than ₹70 billion in the Bastar region.[164][166][167] While Manohar Parrikar claimed that the move has also helped in reducing the incidents of stone-pelting in the Kashmir valley,[168][169][170] his claim has been disputed.[171][172][173][174]
- Demonetization will place a temporary brake on illegal transactions in cash until operators figure out alternative ways of financing such transactions.