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      Ensure Full Remonetisation Of Banned Notes: Economic Survey’s 7 Warning Signs

      Credibility will be strengthened if demonetisation is accompanied by complementary measures. Early and full remonetisation essential.

      By - Sneha |
      Published -  31 Jan 2017 7:23 PM IST
    • Boomlive

      Ensure Full Remonetisation Of Banned Notes: Economic Survey’s 7 Warning Signs India's chief economic advisor Arvind Subramaniam gestures as he addresses the media during a news conference, in New Delhi, India, January 31, 2017.

      The Economic Survey 2016-17, a prelude to the budget was tabled by Finance Minister, Arun Jaitley today in the Parliament. And for the first time, the finance ministry’s economic team headed by Chief Economic Adviser Arvind Subramaniam has given a broad overview of the impact of demonetisation on the economy. While the survey has hedged its comments by projecting demonetisation and the subsequent remonetisation as work-in-progress, they have also warned that if the process of replacing cash is not substitutable, the impact will be greater.

      Here are 7 points that the Economic Survey revealed about demonetisation.

      1) GDP

      The survey says that the cash crunch due to demonetisation will have impacted 2016-17 GDP by reducing the growth rate by 0.25-0.50 % against the baseline of 7 percent. However, it does not give a clear estimate of the GDP growth rate for FY 2016-17. The survey has predicted a growth rate of 6.75% - 7.5% for FY 2017-18, given remonetisation happens by April 2017.

      It has differentiated demonetisation’s impact on the formal and the informal economy by saying the GDP estimate does not cover the informal sector. Contraction of the informal economy will reverse only by the year end when remonetisation happens in par with demand attributing to high cash dependence.

      In the long run GDP can increase only if corruption decreases and the economy get more formalized leading to lesser cash to GDP ratio.

      2) Currency In Circulation

      Cash circulation reduced by 25% towards November end and 35% by December end against market perception of 62% and 41 % respectively (this takes into account circulation of old currencies which was no more in circulation post December 30th).

      Proportion of estimated demand met by cash supply was 65% (Rs 10 lakh crore)by December end. It shall reach 86% (Rs 13.8 lakh crore) by February end, 96% (Rs 16.4 lakh crore) by April end. Prior to demonetisation, the currency in circulation was Rs 16.2 lakh crore.

      If by April end, full remonetisation happens and this is what the report suggests, then what was the purpose of demonetisation and the claims of Finance Minister that only a proportion of the currency shall be pumped back into the system.

      3) Taxation And Fiscal Account

      The impact of demonetisation on taxation is not clear but the survey predicts a redistribution of resources from private hands to the government. The government can benefit out of old currency / unaccounted cash that did not return to the banking system. It also perceives an increase in income tax collection as people were forced to deposit unaccounted cash in the banks. It also suggests an increase in tax payments as old currencies could be used for tax payment and arrear clearances.

      However, a clear picture is not drawn as the survey states these benefits have not yet been quantified and not weighed against the cost of printing new currencies and accessing exact tax revenues.

      The long run benefit of demonetisation can be reaped only if tax compliance and formalization of economy increases.

      4) Digitalisation

      The survey quotes Pricewaterhouse Coopers which reported India’s high dependence on cash in 2015. 68% of all transactions were in cash and 98% of the total value of transactions were in cash.

      However, it claims digital transactions have increased across income groups. The report claims that transactions through Rupay cards and Aadhar enabled payment system have increased which shows the entry of users who were earlier out of the digital system.

      However, the Rupay transactions decreased in the month of January 2017 when currency supply increased. This implies that the digital drive can be created only gradually and through incentives.

      5) Broader Economy

      Real estate prices have declined and would enable affordable housing for middle and lower income groups, says the survey. It suggests that for long term benefit, real estate should be brought under GST so that tax revenues from this sector increases.

      Demonetisation has indeed led to job losses especially in the informal sector and farm losses. However, the claim is that the effect of demonetisation is transitional and the situation shall stabilize with remonetisation.

      6) Black Money And Corruption

      Though the survey claims that stock of black money has fallen and some holders have come under the tax net, it also says that the issues of corruption and black money can be curbed only with follow-up policies that lead to tax compliance and formalization of the economy.

      7) Credibility Of RBI And Government

      At last, the report admits of economic uncertainty and lower economic activities of consumption and investment. For this, the report prepared by the Chief Economic Advisor and his team has suggested full remonetisation at the earliest and complementary measures such as reducing income tax rates.

      The survey has finally warned the government that tax arbitrariness and harassment could attenuate credibility.

      Tags

      Arun JaitleyArvind Subramaniambankblack moneycashcorruptionCurrencydemonetisationDigitalEconomic SurveyGDPIndiaRBIremonetisationUnion Budget
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