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Need to wait at least for three years to see benefits of demonetisation, says former RBI deputy governor

economy | Aug 29, 2018 10:16 PM IST

Need to wait at least for three years to see benefits of demonetisation, says former RBI deputy governor


The Reserve Bank of India (RBI) in its annual report said the total value of Rs 500 and Rs 1,000 notes in circulation was Rs 15.41 lakh crore, while the total value of demonetised notes returned from circulation is Rs 15.310 lakh crore.

The Reserve Bank of India (RBI) in its annual report said the total value of Rs 500 and Rs 1,000 notes in circulation was Rs 15.41 lakh crore, while the total value of demonetised notes returned from circulation is Rs 15.310 lakh crore.

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Just weeks after demonetisation, the then Attorney General Mukul Rohtagi told the Supreme Court the decision will wipe out 4 to 5 lakh crore worth illicit cash but that has not happened. The exercise has cost the economy with the RBI itself acknowledging the same by saying "there was a loss of speed in the real GDP"
The note ban exercise did have a significant impact on the GDP growth. India lost its status as the world's fastest-growing economy soon after the decision. The growth dropped from 8 percent in FY16 to 7.1 percent in FY17 and then to 6.7 percent in FY18. For this financial year, the growth is expected to pick up to 7.4 percent.
CNBC-TV18 caught up with Amit Mitra, finance minister of West Bengal, R Gandhi, former deputy governor of RBI, Jaimini Bhagwati, RBI chair professor at ICRIER, Arvind Virmani, former CEA, Gourav Vallabh, Congress spokesperson and Syed Zafar Islam, spokesperson of BJP to discuss the demonetisation data released by the RBI.
Amit Mitra: 
First of all let me submit that with half an hour of the announcement of demonetisation Mamata Banerjee responded intuitively saying that this is going to be very major anti-people action as she felt.
Today, the RBI's data vindicates what she was saying. The first question we are asking is where is the black money? The second question, can anyone speculate that someone knew that the black money by some people would be successfully converted to white in trying to pursue this.
You may say some investigations here and there but it is a very serious question - no black money was revealed and in the process, some people may have converted their black money into white successfully. The third question is, who are most badly hurt? The informal sector, small and medium enterprises, the agricultural sector, the youth, the relatively poor.
Basically, homemaker women, the poor, the middle class, those were legitimate entities of our society have been hurt.
May I ask what happened to GDP? Rs 2.5 lakh crore was extinguished. Economy was growing at 8.1 percent before demonetisation, falls to 7.1 percent, then falls to 6.7 percent, this involves extinguishing forever. Rs 2.5 lakh crore to the nation's wealth in terms of value added.
What happened to industries? Industrial growth declined by 20 percent, from 6.78 percent to 5.54 percent. What happened to manufacturing? It declined by 27.34 percent due to demonetisation. Agricultural growth declined by 50 percent, from 6.29 percent growth in 2016-2017, it came down to 3.37 percent.
These are indications that demonetisation followed by an absolutely unprepared GST has deeply hurt the Indian economy and no change in narrative is going to be of any help because everybody can see through this that there is something very uncomfortable happening which is costing the people of India."
R Gandhi: One expectation was that a portion would not come back, that has not been met but that does not automatically mean that demonetisation exercise was not a success, that is not the issue.
Even if the last piece has come back it is also equally a success because black money or black cash means unaccounted money, unaccounted cash. When every piece has come back to the account, that means it is accounted, so that is also equally a success. That is the position I have always maintained and today also I will maintain that position.
If you are measuring demonetisation by only one type of success, then that has not happened but it does not mean that it is a failure. Once all the cash has come on to the books of some account, then it is the duty of the tax administration, the government authorities to collate that information, analyse it and go behind the black money holders.
That is a long exercise, it is a question of some three years of exercise, just within one year, you cannot collate all those information's. So, for full benefits of demonetisation you have to wait for the medium term, that part also you have to note.
Second part of the impact on the economy, even at that time everybody considered that India for one or two quarters there will be a disturbance in the economic growth, that was well documented and accepted.
We are not here to judge whether demonetisation exercise was successful on that count or not, I am not expert in that area, you may have to post that question to somebody else whether that kind of cost to the economy was good or not good, for that part you have to wait.
Arvind Virmani: Let me start with your numbers first. They basically mean that 0.7 percent of the currency which was demonetised was in a sense didn't come back. If we look at the last demonetisation the number was about 1.8 percent. So, this is about 2/5th of the number in the earlier demonetisation so in that sense I would definitely say it was disappointing.
I can go into the reasons. I have a reason actually, but I will come back to that if you are interested in it. The planned objectives etc. I don't want to get into it because as I wrote within a week of demonetisation I would ever have done it.
I wouldn't expect a huge gain from demonetisation, so that is not the issue I am addressing. But I did say that there were two or three call it collateral benefits which I was expecting.
One was in terms of the discussion you just had in terms of the income tax compliance and so on. Both the economist who you just played out said that you should not attribute it all to demonetisation. I don't think any economist can attribute it all to demonetisation.
The question obviously becomes did it have a positive effect? I am clear that it had a positive effect. How much is due to that and how much is due to GST is an empirical question which will take at least two to three years. We don't know the effects of GST right now. That is number two.
The third point I would make is that in terms of black money there was a lot of discussion about real estate over the last four years. People were saying why are you not going, there is a huge stack of money in real estate and you are not doing anything about it. So, I expected some effect of demonetisation on the real estate sector the only evidence we have is a fall in prices about 30 percent in Delhi and Mumbai.
Now whether the effect of that will last? How long it will last, whether the conventional ratios of 60-40 have changed dramatically and will remain so one doesn't have the data to judge that in a permanent way. But I think there was some effect for a year or two."
Jaimini Bhagwati: "Let me put it this way that the costs were huge but the benefits potentially were also huge. Let me repeat a few numbers from the finance minister's speech of February 1, 2017. He said that they were 1.5 lakh deposits on average of 3.3 crore of cash that is roughly something like Rs 4.95 lakh crore.
Another number he gave which was 1.1 crore deposits of Rs 5 lakh each so that is another Rs 5 lakh crore. So that is roughly Rs 10 lakh crore with just these two kind of depositors. Now compare that to a total number of 1.7 lakh people who declare incomes above Rs 50 lakh per annum.
So, for me, the most important element of this exercise was to try and expand the direct income tax base. From February 1, 2017, till now I am somewhat dismayed to see is that the government did away with Rs 500 and Rs 1,000 notes, but introduced Rs 2,000 note.
Whether it is the United State, whether it is the Eurozone they have in fact done away with the high currency notes because as we all know high currency notes facilitates transactions in cash. Now we keep hearing this anecdotal stories in real estate transactions that in large cities a substantial amount is payed under the table in cash.
Now you can't do that in Rs 100 note. So, it was, for me, a dissonance between the stated objectives of the government and some of the actions they took. I think net-net whether it is Manmohan Singh or P Chidambaram on their capacities as finance ministers or in the case of Manmohan Singh as prime minister I didn't see them do much about widening the tax base, I didn't hear them talk much about real estate or other transaction which take place in cash.
This government has talked about these things, but have they walked the talk. Essentially, I would expect them now to walk their talk because of the department of revenue as the numbers.
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