Demonetisation update 13 – some questions

One of the things that used to be said of Indian sportsmen and women and  teams is that they did not finish off what they started. In simple terms, it was about failing to convert an excellent opening and passses into goals, in football parlance. It could be said of limited over matches or badminton or tennis matches, etc. In other words, we were supposed to be good at plucking defeat from the jaws of victory. May be, it does not apply to Indian sportsmen and women anymore.

But, perhaps, it applies to policymaking. I am not saying that it does. I do not know honestly. But, I just thought that it was worth asking the question.

As this blog tagline says, there are only questions and no answers. I have many questions but no answers.

If 60% of all cash in circulation in the old 500, 1000 rupee notes had come back into the banking system and if it continues to the point that the entire stock of old ‘cancelled’ currency notes are deposited into banks, it means that all the black money had been successfully laundered. Of course, that is a big IF, if all the money would be ‘banked’.

(1) Does it mean that the government’s surprise announcement failed?

(2) If a surprise announcement still could not ‘punish’ illegal wealth, what more steps are needed?

(3) Or, was it worth all the trouble at all, if the money were laundered fully?

(4) But, is it the case that an implicit redistribution had directly happened from the rich to the poor except that it bypassed the government as many would have laundered their old currencies at a discount? In other words, it does not matter that the money had been laundered because they had already paid their dues via the discount at which they laundered it. Will that be the government line?

(5) Or, will the rich manage to collect it back from their servants, housekeepers, laundrymen and women, et al., whom they used to launder this?

(6) If they successfully laundered at a 20% to 40% rebate, why would the government’s new voluntary disclosure scheme succeed? That seems more expensive than what they can get away with. Plus, there are other concerns of being permanently on the radar of tax authorities.

(7) If the banking system were flush with deposits, they would be paying interest on them, even if the rate of interest is tiny. But, with CRR being imposed on the incremental deposit at 100%, their Net Interest Margin on the incremental deposit is negative. Of course, it is supposed to be temporary.

But, if is temporary, would it have been so bad had the call money rate fallen below the reverse repo rate for a temporary period?

(8) After all, banks collectively are not lending much. Non-food credit growth is growing at slightly above double digit rate. But, industrial loans are barely growing or even contracting. Only personal loans have been rising. So, if they were flush with deposits and the call money rate and the banks made some loans at potentially lower cost, would that have been a big problem?

(9) Or, am I violating my own self-discipline and asking too many questions too soon?

(10) Or, is it just that I am clueless or that the government is, or both?


In a recent missive (28 November 2016) to clients, Credit Suisse notes four negatives from the demonetisation exercise. Interesting. Would like to hear more on these.

● Continuing policy uncertainty: The market may continue to be apprehensive about further steps from the government to clamp down on black wealth.
● Lasting black economy currency shortages: The currency in the white economy may normalise in a few weeks. However, for illegal/tax evading transactions currency availability would remain an issue for much longer, likely more than a year. This may slow down the informal lending market as well as real estate demand which in-turn would affect the formal economy as well.
● Moral hazard risk: This exercise is a ‘force majeure’ that individuals/firms can use to renege on liabilities.
● Lasting damage to households/enterprises: Some of these may not be able to survive the stress from the 1.5-2 months of severe currency shortages.


2 thoughts on “Demonetisation update 13 – some questions

  1. Sir,

    After RBI’s latest demonetization status saying that 8.11 trillion amount of old notes being deposited and exchanges (, there appears to be a sense of cynicism about the success of this mammoth exercise.

    However, we are also not accounting the sharp increase in tax collection of various local bodies, municipal corporations and gram panchayats and those amounts being deposited in banks, this needs to be considered as black money from parallel economy getting into official economy.

    Overall, as you said there are more questions than answers? and we don’t know how to evaluate the exercise as there is not segregated data on this, as in

    1) How much money came back as tax collections –
    2) How much money came back as deposits from individuals, trusts, temples and business enterprises
    3) How much was exchanged over the counter by individuals and various entities

    Since the announcement of no exchange of old notes and only deposit into bank accounts is allowed, the queues at banks have vanished in last two days.

    Hope this helps to reduce noise around this topic.


  2. Sir,

    Most of the articles & commentators have considered the value of notes/money in circulation data as on Mar-16 from RBI’s annual report while analyzing the demonetization and somehow have missed the point that, RBI must have issued 500 & 1000 rupee additional notes in first seven months of FY17.

    As on Mar-16, total value of
    1) 500 notes in circulation was 7.85 trillion rupees vs. 6.56 trillion last year – 19.7% growth yoy
    2) 1000 notes in circulation was 6.32 trillion rupees vs 5.61 trillion last year – aprrox 12.7% growth yoy

    In order to get the realistic analysis, shouldn’t we account the circulation of additional notes being pumped into economy during Apr-Oct 16-17?



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